Will New York be Able to Control Its Underground Market?

With the issuance of the first-ever recreational marijuana retail permits in New York on Monday – and the launch of adult-use sales inching ever closer – a major question remains: Will the state’s thriving underground market undercut legal sales, as it has in California?

The answer is nobody yet knows for sure.

New York authorities do appear to be launching a crackdown so that the upcoming legal market will flourish in place of unlicensed sales, but some industry insiders say it may already be too little, too late.

“I do think that now that licenses are coming out and New Yorkers are going to have a legal supply of cannabis that they are going to start to crack down, but the job is too big for the workforce,” said Joe Lustberg, the founder of cannabis investment firm Upwise Capital in New York City.

Lustberg, who partnered with his brother on one of the 903 CAURD retail applications filed in New York, said he’s skeptical that the state will actually be able to get the gray market under control.

If it isn’t controlled, it could upend the entire new market, the same way unlicensed cannabis dealers have been the bane of Los Angeles for years. A common analogy used to describe the problem in L.A. is the whack-a-mole game, because the penalties for lawbreaking cannabis retailers is typically civil fines instead of serious jail time. That in turn leads to illicit shops getting busted and shut down, and then the same operators reopening in a different location.

“(New York authorities) need to create a specific task force or police unit to shut down these operations, and if they don’t, they’re going to thrive like they do in California, and the whack-a-mole analogy is going to come to fruition,” Lustberg said, adding that it’s impossible to go more than two city blocks in Manhattan without encountering a smoke shop selling marijuana.

“If it’s a slap on the wrist, these guys are making huge profits,” Lustberg said. “You’re talking about hundreds of thousands, if not millions of dollars a month, in revenue. A small fine is not going to affect these guys. It has to be some sort of jail time and a criminal offense.”

It’s also unclear, Lustberg said, whether many that are already selling in the gray market will eventually be able to make the transition to the fully regulated and licensed retail game. Many are relying on legal advice that relies on an interpretation of state law under which “gifting” cannabis is perfectly legal, Lustberg said, and added he knows operators that are likely willing to take that argument to court if necessary.

The takeaway for entrepreneurs looking at the New York landscape, Lustberg said, is essentially there’s intense competition from all corners, particularly gray market dealers who are connected to and supplied by California cannabis sources, since West coast weed is still in very high demand in the Big Apple.