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This story was written in partnership with Crain’s New York, the trusted voice of the New York business community. 

When New York gave the sale and use of medical marijuana the green light, officially permitting it in 2014, the firms that vied for a spot as one of the state’s 10 vertically licensed operators envisioned the true golden ticket to be early entry into the eventual recreational cannabis retail market.

That expectation was amplified when the state passed the Marijuana Regulation and Taxation Act in 2021. Investment dollars poured in, and medical licenses traded at high valuations on the secondary market, bolstered by the idea that those who bought in early would be able to capitalize on both adult-use and medical retail sales, cultivation and manufacturing.

However, under draft regulations released in November, those companies will have to wait at least three years from the official launch date of adult-use sales just to apply for a recreational retail permit. Final rules have yet to be published.

“They were hit with a bait and switch by the state regulators,” said Tom Adams, principal analyst and CEO of Global Go. “You know, ‘Come to our state and help apply your expertise and your capital to building out this incredibly limited medical-­only market that you’re clearly not going to make any money at anywhere in New York.’”

- The Columbia Care medical marijuana dispensary near Union Square in Manhattan. / photo by Buck Ennis

So the multistate operators came.

The proposed rules, however, also established a two-tier system that prohibits growers and manufacturers from participating on the retail side—and vice versa. That means those same players who helped establish the medical cannabis industry “got sort of the back of the hand from regulators” and now must accept that they cannot implement the business models they’ve used in other states, Adams said.

Those who invested in medical operations in New York early on expected, if not “the first bite at the apple … at least a first bite at the same time as the other licensees for some of these retail adult-use licenses,” said Brandon Kurtzman, a partner at cannabis law firm Vicente Sederberg.

Both Adams and Kurtzman said the pivot now is to develop product brands through the cultivation and manufacturing side to sell to retailers and social consumption lounges.

Boxed in

The $138.9 million write-down Toronto-­based RIV Capital took after its acquisition of New York’s Etain, one of the 10 local medical cannabis license holders, illustrates the conundrum. RIV Capital agreed to pay $212 million in cash and $35 million in stock for the small, women-led medical cannabis company.

But instead of being able to capitalize on its existing business structure, Etain has been forced into a single channel. With heavy investment already sunk into cultivation, the company appears to be boxed into being a grower—the less lucrative side of the cannabis business.

The price paid for Etain was so troubling to RIV Capital’s largest shareholder, JW Asset Management, that the firm asked for a special meeting of shareholders to replace five of the seven directors on RIV’s board.

In New York, Adams said, having a brand on store shelves “is probably more valuable than anything else” an operator can do, as there is not much real brand dominance yet among the plethora of cannabis companies out there.

Despite the firms seemingly being last in line, nothing is completely set in stone.

“It’ll be very interesting to see what happens with these draft regulations, see what the comments look like and if there’s going to be any compromise between what they put out [and] what [medical operators] are looking for in this market,” Kurtzman noted.

“The goal here is to provide access to consumers,” he added. “I think you do that by allowing new licensees but also allowing the existing licensees to participate, because that’s more or less what you told them they were going to be able to do in the law.”

As Rec Sales Start, Medical Marijuana Firms Left Warming the Bench on Green Market Report.