Breaking the Black Market

This is a copy of the August 25th edition of our weekly Newsletter, which we have been publishing since October 2015.

Friends,

On Wednesday, WeedMaps, the technology company that helps consumers find products and dispensaries, issued a press release entitled “Weedmaps Takes Leadership Role Supporting Minorities in Cannabis and Encouraging Legal Marketplaces”. Sounds great, and it is, as it follows in the footsteps of many leading companies working to promote social responsibility initiatives in our industry.

Buried near the end of the press release was an interesting segue to a very controversial topic of how WeedMaps will now stop supporting illicit market operators:

“While helping social equity businesses get licensed, the company is also committed to helping licensed businesses thrive. Beginning later this year, US retail advertisers on Weedmaps will be required to provide a state license number on their listing. This requirement joins existing consumer information tools offered by the company, including surfacing lab data on product pages and a “Brand Verified” program that combats counterfeiting.

The company is also restricting the use of its point of sale, online orders, delivery logistics, and wholesale exchange software-as-a-service (SaaS) platforms to licensed operators exclusively. In addition, Weedmaps will explore ways to make it easier for patients and adult-use consumers to identify the license number on advertised listings.”

It has been extremely frustrating to observe WeedMaps aid and abet the illicit market in California and beyond. Many may not be aware, but very early into legalization in California, the chief of the Bureau of Cannabis Control, accused the company of violating state cannabis laws, sending WeedMaps a cease and desist letter. 18 months later, the company finally plans to quit its fight and will give up its millions of dollars of recurring revenue from illicit market advertisers. The company had put legitimate licensed operators at a competitive disadvantage solely for the purposes of lining its own pockets.

In other events, on its conference call Wednesday, Cresco Labs CEO Charlie Bachtell suggested that things are set to improve greatly in 2020 in California, citing enforcement measures beginning to have an impact. While Google and Yelp may still be helping the black market, we think the change of policy from WeedMaps along with more proactive enforcement bodes well. The state’s challenges are perhaps exacerbated by the existence of an illicit or grey market for many decades that was suddenly regulated. We interviewed the founders of Kiva Confections earlier this summer, and Scott and Kristi spoke at length about the challenges of the sudden transition at the end of 2017. California erred in moving too quickly to implement, with too few licensed retailers on January 1, 2018.

For California, and this will apply to Canada as well, it is important to not exert extreme enforcement against the illicit market until the legal market is functional and has the supply chain intact. California appears to be close to this point. The regulators must speed licensing in order for the legal market to stand a chance. Remember, the legal market pays taxes and has a substantial and costly regulatory burden that leaves it at a big disadvantage to the illicit market. In addition to more licenses and enforcement against illegal operators, the state should make the regulatory burden as easy as possible to meet and should be cognizant that the higher the taxes are the less level the playing field is.

Ultimately, the legal market will have to win on the quality, safety, convenience and cost of the product. If WeedMaps were truly committed to being a responsible leader in the industry, it wouldn’t have played the role it did in crippling the roll-out of legalization. With their pending exit from these disappointing “profit-first” practices by year-end, the supply chain building out and enforcement kicking in, we expect that the world’s greatest cannabis market will improve in 2020 after a very challenging two years.


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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:


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Sincerely,
Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online communities 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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