New York’s cannabis regulators know out-of-state brands are breaking the rules – but agency won’t enforce until 2024

This post was originally published on this site.

Join NY Cannabis Insider for our next full-day conference on Nov. 16 at the Sonesta White Plains.

It’s no secret that New York State’s nascent cannabis industry is under fire from large out-of-state corporations champing at the bit to enter what’s expected to become one of the nation’s largest legal marijuana markets.

However, a NY Cannabis Insider investigation has found these same companies are breaking state regulations to secure market share while also boxing out the Empire State’s small farmers and brands through flush deals, or by offering large amounts of money in a market currently starved for cash.

Additionally, our investigation has found that the Office of Cannabis Management, the agency responsible for regulating the market, is aware of the problem – but has decided not to enforce against these companies out of fear of disrupting the supply chain, according to a leaked audio recording of a top OCM official.

“No one should be above the rules,” said John Vavalo, president of the Association of New York Cannabis Processors. “And the only people who are not playing by the rules are, frankly, winning.”

Vavalo’s opinion isn’t unique.

For months, New York’s small farmers and brands have complained of the state’s nonexistent enforcement of cut-throat business tactics prevalent among out-of-state brands.

These tactics include selling cannabis through both legal and illegal channels, sourcing products from other states, and offering overly generous terms to dispensaries.

It’s frustrating for small New York brands that are watching “every regulation being broken, and big brands gaining all the market share, while they sit by patiently waiting for enforcement to begin,” said Allan Gandelman, president of the Cannabis Association of New York.

Gandelman added that enforcement “really needs to happen immediately, or we risk small operators going out of business.”

Interviews with legal growers, processors and retailers, along with in-person visits to unlicensed stores in lower Manhattan, found Packwoods and Cookies to be among the most common offenders.

These brands are being sold in New York City sticker shops and through websites of unlicensed stores, yet they’re also on legal dispensary shelves.

Within a half-mile radius of CONBUD, the newest legal dispensary on the Lower East Side, at least five separate sticker shops were selling Cookies or Packwoods products on Nov. 14, 2023 – with two of the shops selling both brands.

Packwoods and HPI, the New York-based processor that brought the brand to market, did not respond to a request for comment.

A spokesperson for Cookies told NY Cannabis Insider that unlicensed stores are carrying counterfeit versions of Cookies products, and that the company does not offer dispensaries unlimited terms, products on consignment, or engage in other practices that break state rules.

Gail Hepworth of Hepworth Farms, the processor that brought Cookies into New York, said in an emailed statement that the company is “proud to have been selected by a number of leading cannabis brands as their partner to cultivate and manufacture” products.

Hepworth did not address questions about Cookies being on unlicensed store shelves.

These out-of-state companies are squeezing an already strained supply chain and overshadowing smaller farmers and operators who are struggling from the slow pace of dispensary openings.

To date, only 27 stores serve over 300 conditionally licensed farmers and processors.

Damian Fagon, OCM’s chief equity officer, acknowledged in a recording obtained by NY Cannabis Insider that the agency is aware of brands illegally sourcing product (known as “inversion”) and offering dispensaries unlimited time to pay back their invoices – all actions that fly in the face of state regulations.

“We didn’t really expect it,” Fagon said.

As a result, the agency didn’t create ways to combat these tactics, he said.

In the recording, Fagon also said OCM was not enforcing against these bad actors out of fear of creating disruptions in a supply chain already bludgeoned by the lack of retail opportunities – even though officials realize the practices are corrupting dispensaries while hurting farms and local brands.

“We’re not going to start a full-fledged crackdown,” Fagon said. “We’d have to lose half of our dispensaries, probably, and it would further cripple the market.”

Fagon said the agency will institute a crackdown “probably” in early 2024.

Of note: this is the second recent instance of OCM delaying enforcement mechanisms – the agency recently paused its administrative trials following raids on unlicensed shops.

OCM spokesperson Trivette Knowles told NY Cannabis Insider that any brands engaging in noncompliant behavior, such as “paying slotting fees, offering consignment sales, and breaking marketing and advertising rules,” will be prohibited from operating in New York’s market.

As it stands today, out-of-state brands are not required to seek OCM approval to bring a product to market. They need only pair up with an existing processor or distributor.

Under general regulations, which are set to take hold next year, out-of-state brands will be required to register with and be approved by the OCM via branding licenses — making it easier for the regulatory body to pull licenses and punish bad actors.

“OCM is taking the necessary steps to protect market integrity by requiring brands entering New York’s market via white-label agreements to obtain their own licenses, and putting their operations within the purview of the Office,” Knowles said.

An uphill battle

Industry stakeholders say the state’s starved-for-cash marketplace has created an environment where out-of-state brands can hold more sway and claim significantly more shelf space than smaller, local brands that are struggling to get by.

A practice that’s become somewhat prolific among out-of-state brands is offering New York dispensary operators unlimited terms with products on consignment. This means a brand will offer the dispensary unlimited time to pay back the invoice while agreeing to buy back any products that do not sell.

The practice is prohibited under OCM regulations.

Jenny Argie, a Hudson Valley-based Adult-Use Conditional Processor who specializes in gluten- and sugar-free products, said she’d recently been turned down by a dispensary owner for not offering rolling or extended terms — a practice she can’t compete with.

Argie addressed these and similar concerns during a New York State Senate Subcommittee on Cannabis hearing on Oct. 30, 2023.

During the hearing, Argie highlighted certain brands sourcing products illegally and a lack of communication from OCM. “We both currently have illegal products in the legal market and the illicit market selling,” she said at the time.

At the hearing, Senator Liz Krueger asked Argie how she was aware of inversion taking place in the market. Argie pointed to a lack of oversight in the state’s track and trace system, saying, “We are having some product that is coming underneath the radar. Until regulations are enforced and BioTrack is put in place, we can’t say exactly what’s happening, can we?”

Fagon from the OCM also highlighted the prevalence of operators sourcing products illegally in the audio recording.

Argie told NY Cannabis Insider that she has turned down investment offers just to keep her company, Jenny’s, New York-focused. She remains a 100% owner of the company, she added, and has had to take out a second mortgage on her home in Brooklyn to make ends meet.

“I’m not asking for much, only asking for a fair playing field,” Argie said.

Eli Emery is the general manager at Elevate ADK, a Conditional Adult-Use Retail Dispensary that has committed to carrying only New York brands. He said he’s received several cushy offers from out-of-state companies.

These have been items offered on consignment, hundreds if not thousands of dollars of free samples, and – at one point – robo-calls from fake customers asking if he carried a certain out-of-state brand that was hoping to come to market, he said.

“It’s not necessary to let predatory, money-grabbing people into our industry, and allow them to capitalize on the mess that our market is – and the lack of enforcement that our market has – because New York’s dropping the ball,” Emery said.

“There’s so many great people and there’s going to be so many great brands,” he said. “It’s like, why settle for the Walmarts of cannabis?”

Joseph Calderone, vice president and co-founder of the Cannabis Farmers Alliance, said that out-of-state brands could help support small farmers, buy their crops, and create healthy competition. They just need to play by the rules.

But he doesn’t see many CFA members engaging in those relationships at the moment, he said.

“The negatives outweigh the positives,” said Calderone, referring to the cut-throat practices brought by out-of-state brands, many of them from California.

“If the Cookies and Stiiizys of the world start to come into New York with their celebrity and marketing power, I think it will be a race to the bottom, and it won’t be about quality, it will be about brand,” he said.