With interstate commerce banned in cannabis, many brands rely on illicit operators to market their products across the country.
In early June, inside Empire Cannabis Club, an unlicensed dispensary on Eighth Avenue in Manhattan, the shelves are filled with cannabis products made by popular brands like AbsoluteXtracts, Jeeter, Stiiizy, and Kiva. These products were made legally in states like California, Colorado and Massachusetts, but without federal legalization, there is no legal avenue for these goods to cross state lines.
Jonathan Elfand, the founder of Empire and a legacy cannabis entrepreneur who served 10 years in prison after getting nabbed in 1998 for operating one of the city’s largest cannabis grows in Brooklyn, says the products are legally made and lab-tested elsewhere. When asked how they wind up in New York, a state that legalized recreational marijuana but hasn’t launched state-approved sales yet, he’s coy. “Hey, magic happens,” Elfand says in a July interview at a hotel bar near the San Francisco airport.
In the $72 billion cannabis industry, which is composed of a $25 billion legal sector and a $47 billion illegal economy, market forces often rule over federal law. Elfand’s unlicensed dispensary, which operates as a private club, has been a thorn in the side of New York regulators, but he believes he’s operating legally thanks to a loophole in the state law that legislators accidentally created. But more than anything, Empire acts as a marketing tool for some of California’s biggest brands that hope to become household names.
“Everybody is participating in the [legal and illicit market],” says Elfand. “There is no ability to market yourself without it or make enough money without it.”MORE FROM FORBESWeed vs. Greed: How America Botched Legalizing PotBy Will Yakowicz
Scott Palmer, who founded San Francisco edibles brand Kiva with his wife Kristi, says he doesn’t know how his legally produced products wind up in states illegally, but he says it’s a symptom of the cannabis industry being broken into two distinct industries by regulators—a legal one and an illicit one—but that distinction really doesn’t exist in the market. “I don’t think it’s any secret that there’s one market with two faces,” says Palmer, who says he has too much to lose to divert product into the illicit market. “If demand is there, the market will find a way. Until we have unified, national regulations, this will continue.”
When it comes to compliance, Palmer says he doesn’t want to see his products made in California leaving California. (Kiva has expanded legally into other states like Massachusetts, but product must be manufactured and sold in the same state.) But if he has ambitions of building Kiva into one of the country’s best-known THC edibles companies, he’s smart enough to know that seeing his products on the gray and illicit markets will only help. “We have plans to [expand legally] to New York, but of course, it’s good brand exposure, and it’s a good sign that the brand has carried itself across the country,” he says.
For most cannabis industry insiders, the fact that the legal and illicit economies work together is an open secret. Jonathan Rubin, CEO of New Leaf Data Services, an institutional-grade wholesale price tracker, says it’s important to understand that the illicit and legal markets are “bi-directionally porous.”
“There’s illicit-market cannabis that makes its way into legal chains and there’s legal cannabis that makes it into illegal channels,” says Rubin.
There are many opportunities for the two markets to do business. First, with ultrahigh taxes and onerous regulations, legal operators have a difficult time turning a profit, so diverting into the black market is financially attractive. Second, there’s plenty of “wiggle room,” Rubin says, to divert from the legal market to the illegal market thanks to loopholes in the industry’s seed-to-sale tracking system and a lack of enforcement and auditing in the testing, distribution and delivery sections of the supply chain.
Nicole Elliott, the director of the California Department of Cannabis Control, is well aware of how the two sectors of the cannabis industry interact. “We consume something like a fifth of what we produce historically,” says Elliott. “California has historically fed the rest of the nation when it comes to cannabis, and I don’t think that a few years is going to change that. I do think it’s a longer process.”
The DCC is trying to curtail California’s illicit market. In the last year, it has seized more than half a million pounds of cannabis, eradicated 1.2 million plants and arrested nearly 200 individuals. But Elliott says California alone cannot fix the problem. It’s thought that for every pound of pot produced in the state, three pounds are shipped to other states. In October 2021, California Governor Gavin Newsom appealed to Senate Majority Leader Chuck Schumer and Senators Cory Booker and Ron Wyden, who introduced a bill last month that would regulate cannabis like alcohol and tobacco, outlining the importance of allowing interstate commerce.
For the time being, the two markets need one another. Berner, the hip-hop artist and cannabis entrepreneur who’s the co-founder and CEO of designer cannabis company Cookies, says his trapping days are over but he still relies on practices he honed during his illicit days to market legal products. During a recent trip to New York, he brought two ounces of a new “fire strain” and handed out a gram to everyone he met.
“Let the streets taste it first—create that hype, create that buzz before it hits the white market,” says Berner. “I want the dope boys selling herb to come buy my shit in the store. That’s how you really twist the game. That’s how you keep it going.”
The interplay between the two markets is unlikely to stop without tax breaks and federal legalization. Steve DeAngelo, a longtime cannabis activist and entrepreneur who opened one of the country’s first licensed dispensaries, says basic economics, not laws, is the only way to regulate an industry, especially one that has been operating unregulated for decades.
“You cannot set up a system that the human mind cannot figure out how to evade,” DeAngelo told Forbes in an interview at his home in Oakland, California. “If there’s one lesson that prohibition has taught us, it’s that you cannot rule the market with brute force. The only way that you can rule the market is by using market forces.”
In the cannabis industry, like any other industry, supply and demand reign supreme. “The law of supply and demand is a law that you cannot break–sooner or later, it will catch up with you,” says DeAngelo.