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New York’s Cannabis Control Board recently passed a long-awaited slate of regulations that, in part, put strict limits on which people or entities can hold a financial interest in certain weed businesses.

These “True Parties of Interest” rules (TPIs) were designed to prevent monopolies in New York’s cannabis industry, and set rules prohibiting certain financial interests among both sides of the state’s two-tier market – the supply tier and the retail tier.

But while the Office Of Cannabis Management is holding businesses to stringent standards, the state appears to be giving itself a fair amount of latitude in its funding agreement with asset management firm Chicago Atlantic – the sole private lender to New York’s $200 million social equity fund for Conditional Adult-Use Retail Dispensaries (CAURDs).

That’s because Chicago Atlantic owns at least 15 million shares – or a little more than 10% – of Vireo Health, a vertically integrated multi-state medical cannabis company currently operating in New York, while at the same time, the firm is now heavily involved in the state’s conditional retail program.

“We’ve visited every single site that’s been chosen so far” for the CAURD program, said Chicago Atlantic Managing Director Peter Sack in an interview with Green Market Report. “We need to create and pick locations and build out locations that are going to be successful for our main client.”

New York State’s Dormitory Authority (DASNY) is overseeing the complicated setup and implementation of the social equity fund, which has several components:

  • Chicago Atlantic is the main lender, along with New York State, which kicked in $50 million.
  • Social Equity Impact Ventures, run by former NYC Comptroller Bill Thompson, NBA Hall of Famer Chris Webber and entrepreneur Lavetta Willis, is the designated fund manager.
  • CBRE, a global commercial real estate services and investment firm, is contracted to find and vet potential locations for fund leasing.
  • And 10 different firms were selected last year to design and renovate the retail locations.

According to DASNY, this relationship with Chicago Atlantic doesn’t violate TPI standards because the firm is a lender to the entire fund, rather than to individual CAURD businesses.

“Chicago Atlantic is a lender to the New York State Cannabis Social Equity Investment Fund and the Fund is a lender to CAURD licensee businesses,” DASNY said in a statement. “Neither the Fund nor Chicago Atlantic are TPI, equity investors, or have an ownership interest, direct or indirect, in CAURD licensee businesses.”

Experts say the setup doesn’t appear to violate recently passed regulations, but add that the OCM has posted TPI guidance for CAURD businesses that contains stricter language than the regulations that allow for the Chicago Atlantic deal.

In short, regulators appear to be engaging in the same financing behavior that they are discouraging within small businesses, which already struggle to find investors in an industry that’s still federally illegal.

It’s difficult to say whether the deal offends NY’s two-tiered structure, said Lauren Rudick, a cannabis attorney in New York. But it’s likely allowable under OCM’s regulations, she said.

“I want to just see consistent application of clear rules, and right now we have no clear rules and we have no real precedent,” Rudick said.

The two-tier system and TPI restrictions are designed to benefit small businesses, Rudick said, and the rules are meant to prevent a few large corporations from acquiring a large number of smaller weed businesses.

However, she noted that dealing with these wider-angle concerns on the front-end can block small companies from business deals that could save them from financial ruin right now.

“It’s a long game, and in the short term, everyone needs access to more capital,” Rudick said.

Former OCM Chief of Staff Axel Bernabe, the architect of the two-tier system who used New York’s alcohol industry regulations as a template, has repeatedly extolled the benefits of preventing monopolistic behavior by limiting the number and types of weed businesses a single investor may hold.

“The two-tier market works. It creates an independent tier of retailers that can carry products from small brands,” Bernabe said during a CCB meeting in May.

“There was a discussion about whether folks would get financing and money as retailers because of the two-tier system,” Bernabe said.

“The good news that we’re getting right now from our retailers is that they are getting approached by investors.”

According to the regulations adopted last week, a person or entity becomes a TPI in a cannabis company if they:

  • Own a 5% stake in a licensee whose shares are publicly traded.
  • Own a 10% stake in a non-publicly traded RO license and microbusiness license.
  • Or if they receive from a company each year 10% of the company’s gross revenue, 50% of the net profit, or $250,000. (These are just some of the TPI provisions.)

According to a prospectus released this year by Vireo’s parent company, Goodness Growth, Chicago Atlantic holds 15 million shares.

This, according to public filings, means Chicago Atlantic owns approximately a 10% stake in Vireo, a publicly traded company listed on the Canadian Securities Exchange.

Given this information, Chicago Atlantic is “definitely” a TPI in Vireo, Rudick said, and the firm cannot participate in the CAURD program. What’s unclear is whether serving as a financial institution to CAURDs while holding an interest in Vireo technically violates the rules.

The state is actively resisting the disclosure of the contract between DASNY and Chicago Atlantic, saying that those “agreements are between two private entities” – Chicago Atlantic and Social Equity Impact Ventures – and are not subject to public requests for information.

Social equity fund terms to CAURD licensees are also kept hidden.

In any event, the rules allow the OCM to declare whether someone is a TPI. These rules create certain cutouts for financiers and financial institutions, and give the OCM ultimate authority to decide whether a person or entity – like Chicago Atlantic – should be considered a TPI.

But OCM guidance for CAURDs uses stricter language.

“There is guidance that says a licensee or TPI in a supply tier cannot be a financier to a CAURD but does not mention ‘financial institution,’” Rudick said. “That very same provision doesn’t appear in the proposed regulation.”

“I’m not seeing it so black and white in the regulations – I’m seeing it in the guidance that was issued to the CAURDs,” Rudick said.

In a statement to NY Cannabis Insider, the OCM said the agency’s standards on TPI are intended to increase equity in New York’s legal weed market. OCM staffers will carefully oversee financial relationships, especially those involving large companies, the agency said.

“OCM will be conducting rigorous analysis of all applications by Registered Organizations and individual applicants to ensure compliance with all requirements, including those regarding holding interests across the different sides of the market,” an OCM spokesperson said.

“Any applicant found to be non-compliant with the Law at the time of assessment will not be issued a license to operate.”

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