Written by: Jacob Ellman – Marijuana Observer
As marijuana has become legal for medicinal or recreational purposes in 33 states and Washington D.C., many publicly-traded U.S. multi-state cannabis operators have risen to valuations north of $1 billion USD.
With an estimated market potential of $55 billion USD in the United States, this sub-sector of the cannabis space has drawn attention from investors ranging from the hedge fund billionaire Leon Cooperman to the actively-managed marijuana-focused ETF, the AdvisorShares Pure Cannabis ETF (NYSE:YOLO).
Now, subsidiaries or affiliates of two of those MSOs, Acreage Holdings Inc. (CSE:ACRG.U) (OTC:ACRGF) and Harvest Health & Recreation Inc. (CSE:HARV) (OTC:HRVSF), have come under fire in the State of Ohio for allegedly violating rules under the Buckeye State’s strict medical marijuana program.
Now, neither one of them can open any more Ohio dispensaries until the matters are addressed, and potential punishments could range “from fines to revoking licenses.”
With highly skilled leadership at the helm, as well as public listings and vast treasuries, multi-state operators, a.k.a. MSOs, have been able to experience rapid growth through aggressive M&A strategies and complex owner-operator agreements that have offered a back door into oligopolistic domination that in most cases are seemingly 100% legal on paper.
Back in the Fall of 2018, the MedMen Enterprises Inc. (CSE:MMEN) (OTC:MMNFF) mega-acquisition of PharmaCann, LLC was brought into question due to the fact that the combined entity would end up controlling eight New York dispensaries – four more than the state’s limit.
Beyond Massachusetts and New York, Maryland has been yet another land of opportunity for corporate cannabis, where a simple loophole has allowed Harvest, iAnthus, and Green Thumb Industries Inc.(CSE:GTII) (OTC:GTBIF) to own more than the state’s limit was meant to allow.
In most of the cases above, we can hardly blame the pot profiteers from taking advantage of sloppy legal language to gain a better footing in any given state. However, what one of the cannabis companies above was recently alleged to have done in Ohio, would be nearly unforgivable if proven to be true.
As the 7th largest state in the U.S. by population, the Ohio marijuana market represents a major opportunity for early movers. In efforts to lock down their pieces of the Ohio pie, Greenleaf Apothecaries LLC and Harvest of Ohio LLC may have cut some major corners, according to breaking news from the Cincinnati Enquirer.
Acreage affiliate Greenleaf Apothecaries, operating under the name The Botanist, supposedly “transferred ownership without state approval and/or misrepresented facts submitted with its dispensary application last year.”
“The company, which was awarded five dispensary licenses, announced in December 2018 it had a management agreement with big cannabis company Acreage Holdings, headquartered in New York. State rules prohibit ownership transfers until after one year of operation.”
Erin Reed, the Ohio Board of Pharmacy’s attorney, told the Cincinnati Enquirer that “the agency has allowed dispensaries to make small changes in ownership for certain situations, such as adding a new employee with a financial interest in the company.”
While it seems like this transfer of control happened too quickly, the State’s conclusions surrounding Harvest’s Ohio affiliate are far worse from the surface.
Alongside its findings regarding Acreage Holdings’ Ohio operations, the Ohio Board of Pharmacy also said that Harvest of Ohio LLC does not qualify as an “economically disadvantaged group” as defined and claimed in its application to the Board.
Harvest of Ohio LLC, which was awarded three Ohio dispensary licenses in Columbus, Athens, and Beavercreek, “claimed in its applications that 51 percent of the company was owned by Ariane Kirkpatrick, an African-American businesswoman in Northeast Ohio.”
The funny thing is, Harvest of Ohio LLC was actually based in Arizona and “the addresses listed for Kirkpatrick and the other nine owners are for a business suite in Tempe, Arizona.”
Harvest won these Ohio licenses through a carve-out in the state’s laws requiring that 15% of licenses be awarded to “businesses majority-owned and operated by someone from one of several “economically disadvantaged” groups: African-Americans, American Indians, Hispanics or Latinos, or Asians.”
According to the Cincinnati Enquirer‘s expose, “Harvest’s minority-majority ownership meant the company was given preference over higher scoring applicants.”
Requests from the Cincinnati Enquirer to release the notice from the Board of Pharmacy have been met with headwinds, as Harvest filed a motion in court to block its release. According to the court briefing, Harvest says that the notice notes private details about Harvest’s “unique way of organizing an LLC” with “ownership that is only minimally from an economically disadvantaged group.”
That doesn’t sound very good.
In addition to halting any new Harvest dispensaries from opening up in Ohio, this investigation has forced the Ohio Department of Commerce to put a freeze on the company’s Ohio cultivator license. Ariane Kirkpatrick is also listed as the majority owner of Harvest’s Ohio cultivation entity.
Harvest’s issues with state regulators don’t end in Ohio.
In April, Pennsylvania Department of Health officials opened an investigation into Harvest, its Pennsylvania subsidiaries, and CannaPharmacy Inc. “to determine if the companies misrepresented themselves to win permits to grow and sell medical marijuana.”
Despite regulations banning the transfer of cannabis permits and capping permit ownership at five per entity, “Harvest won seven permits by applying through different firms with slightly different names.” Also, due to Harvest’s acquisition of CannaPharmacy Inc., it gave the company “control of two marijuana grow facilities in Pennsylvania, one more than the state law permits.”
According to Harvest’s recent press release, “Subject to completion of announced acquisitions, Harvest will have the largest footprint in the U.S., with rights to more than 210 facilities, of which approximately 140 are retail locations” spread across 17 different states.
While the Supreme Court of British Columbia recently granted final approval over Harvest’s mega-merger with Verano Holdings, it seems as if the company has a handful of issues to work out in its actual home country first.