Following New York’s cannabis injunction, what’s going to happen to the Chicago Atlantic social equity fund?

This post was originally published on this site.

Join NY Cannabis Insider for our next full-day conference on Sept. 21 at the Pearl Street Grill & Brewery in Buffalo. Tickets will sell out.

The firm that bankrolled the state’s social equity fund will continue to invest in building out turnkey store fronts, but according to sources, will taper its investment until a recent lawsuit –– which has crippled New York’s nascent cannabis industry –– is resolved.

Chicago Atlantic confirmed to NY Cannabis Insider that they plan to continue investing in the state’s Social Equity Investment Fund and were optimistic about the future of the program, despite multiple setbacks.

“The process can be messy – lawsuits and delays are to be expected. We certainly anticipated such challenges here, and we are proud to support CAURD licensees,” said Chicago Atlantic Managing Director Peter Sack, referring to the equity license. “We continue to focus on how we can support these entrepreneurs now and to hit the ground running once the court lifts its injunction,” Sack said.

If the lawsuit — in which a judge halted all new cannabis dispensaries –– drags on, Chicago Atlantic will be forced to slow down its investment or completely divest from the fund, according to a source familiar with the deal.

While the term sheet for the agreement between the Dormitory Authority of State of New York and Chicago Atlantic was not made public, the company agreed to invest in the social equity fund in increments instead of in full. So far, only $19 million of the total $150 million investment into the fund has been transferred to state coffers, according to Chicago Atlantic’s most recent earnings call.

Chicago Atlantic fulfilled the state’s request earlier this year to be the private market lender for the social equity license program, but a lawsuit filed in Ulster County Supreme Court earlier this month puts that program in danger and raises questions as to whether the state can legally continue to open new dispensaries –– which were already delayed in opening.

“Chicago Atlantic is in a better position than if they had deployed all that money. The harm is mitigated by the fact that they haven’t put too much money to work yet,” said Jeffrey Schultz, a partner at Foley Hoag, where he represents cannabis industry operators, investors and ancillary businesses.

“Suffice it to say, I don’t think that they’re going to be deploying capital at the rate that they perhaps were prior to this (lawsuit) because it’s just extremely risky. And they are on notice; Chicago Atlantic is a fiduciary, they are spending other people’s money,” Schultz said.

The investment company, which has offices in Chicago and Miami, has invested in around 20 stores that are currently under construction, and will continue to fund them until they are complete. The company paused around 40 leases that were in negotiations as they waited for the result of the lawsuit, according to sources.

In May, Chicago Atlantic agreed to bank the struggling social equity fund which promised loans and turn-key store fonts to license holders that decided to opt into the loan program. CAURD license holders were also allowed to forgo the program after the state initially had trouble raising money and securing real estate for the storefronts.

Speaking anonymously in order to more freely share information, a source familiar with the investment said Chicago Atlantic is optimistic about the court case but the company is prepared if the program is delayed due to the injunction. “There are a lot of reserves in place, this wouldn’t be an issue for years,” the source said.

Because Chicago Atlantic is not an equity stakeholder in the state’s fund — insteading, turning a profit by collecting interest on loans –– they will operate at a loss unless stores can be filled with tenants that can make loan payments.

In the event that the CAURD program is completely struck down, stores that are already under construction using money from the Social Equity Investment Fund will likely be sold as regular recreational dispensaries to general license holders.

In the lawsuit filed this month, judge Kevin Bryant issued an injunction, pausing progress on all new stores, after a small group of service-disabled veterans sued the state claiming New York violated the law when it exclusively awarded licenses to applicants with previous arrests, instead of opening up licenses to all applicants at the same time.

Social Equity Impact Ventures, the fund’s manager, did not immediately respond for comment. DASNY also did not respond.

An unexpected result of the lawsuit is that capital for CAURD licensees who hoped to open stores outside of the social equity fund has dried up because investors are unsure if licenses awarded during the past year will be valid next year.

“It was pretty clear from the order that the judge thinks that it’s extremely unlikely that the state is going to prevail, extremely unlikely that the decision here is going to be that the CAURD program is in fact constitutional,” said Schultz. “Where does that leave all these other licensees – probably 400 plus of them?”

“The immediate implication is that very few reasonable investors will invest in a CAURD license recipient that may or may not have a valid license,” he said.