Can Marijuana Industry M&A Activity Help Social Equity Entrepreneurs? (Op-Ed)
“It is essential that policies are designed to encourage a more equitable marketplace and reduce the risk of the cannabis industry becoming an oligopoly.”
By Ari Hoffnung, Bridge West Consulting
Merger and acquisition (M&A) activity in the New York cannabis market is at an all-time high. Four of New York’s ten vertically integrated medical cannabis companies are actively seeking regulatory approval to sell their New York license. While the terms of each acquisition differ, analysts have estimated that the value of a New York cannabis license may be worth as much as $300 million.
There are many variables driving these blockbuster numbers—including the value of the company’s real estate assets and intellectual property—but the most valuable aspect of these vertically integrated licenses is their scarcity. Simply put, the fact that New York, a state with a population of 20 million people, has only awarded ten vertically integrated licenses and has opted to prohibit vertical integration for any new adult-use licensees, makes these ten licenses extraordinarily valuable.
At the same time the medical companies are cashing in on their licenses, New York cannabis regulators, who intend to award 50 percent of adult-use licenses to social equity businesses, are seeking novel solutions to provide these businesses with the estimated $1 billion of startup capital required to successfully launch these businesses.
At first glance, M&A activity is not likely to be viewed favorably by social equity entrepreneurs and other stakeholders. Nine figure transactions raise serious concerns regarding the ability of smaller players to effectively compete against much larger and well capitalized operators. That’s why it’s important to find some way to ensure that these mega transactions are used to help smaller operators succeed.
To this end, I propose that New York implement the country’s first Cannabis License Transfer (“CLT”) fee on license sales of $10 million or more. The CLT fee would be a percentage-based fee levied on the transaction amount. This fee would help recapture a portion of the value that the state government created by issuing a limited number of licenses, rather than the operators themselves.
Here’s an example of how the CLT fee would work: if an entity with a New York cannabis license sold for $300 million and New York adopted a CLT tax rate of 10 percent, the state would levy a $30 million transaction fee on the buyer. These funds would then be used to help finance social equity businesses through state loan and incubator programs.
To be fair, the CLT fee could allow for certain deductions. For example, if the $300 million sale included $50 million of real estate assets, equipment and inventory, this amount could be deducted from the purchase price. Only the “net license value” of $250 million would be subject to the CLT fee, generating $25 million of revenues from the state.
While no similar license transfer fee seems to currently exist in the cannabis industry, there is precedent for taxing assets at the time of transfer to generate revenues for the state. For example, New York City levies a Taxicab License Transfer Tax of 0.5 percent on medallion sales and New York State levies a “mansion tax” at rates ranging from 1 to 3.9 percent on real estate transactions.
State policymakers would need to determine the appropriate CLT fee rate. Doing so would require a careful balancing act. On one hand, if the rate is set too low—say at 1 percent—the fee would not be able to generate meaningful revenues for the state. On the other hand, if the fee is set too high—say at 20 percent—the fee could discourage cannabis license transfers.
I estimate that if New York levied a CLT fee at a 10 percent rate, somewhere between $50 to $100 million of new revenues could be generated for the state over the next 12 months. In other words, the CLT fee is a mechanism by which M&A activity could be used to help social equity entrepreneurs succeed.
To be clear, I believe the CLT fee should not only be levied on sales involving the ten vertically integrated licenses, but also on sales of any future cannabis licenses issued by New York. Doing so will help create an ongoing revenue stream for social equity businesses and ensure that entrepreneurs who have benefited from a state license help ‘pay it forward’ to those who follow in their footsteps.
Each M&A headline ought to serve as a reminder that we must embrace policies, like a CLT fee. It is essential that policies are designed to encourage a more equitable marketplace and reduce the risk of the cannabis industry becoming an oligopoly. Otherwise, David’s Craft Cannabis on Main Street stands no chance competing against the Goliath Cannabis Company on Wall Street.
Ari Hoffnung is the Founder of the Opportunity Grows Cannabis Accelerator, launched in collaboration with SUNY Binghamton’s Koffman Incubator, to help social equity entrepreneurs succeed. He is the CEO of Bridge West Consulting and formerly served as the CEO of Vireo Health of New York and New York City’s deputy comptroller.
Medical Marijuana Legalization Linked To Reduced Drunk Driving And Safer Roads, Study On Auto Insurance Data Suggests