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Growing Pains Part 2: Back to the Underground

Instead of welcoming the cannabis industry into the light, Oakland's new rules are putting many out of business, while others are disappearing into the illicit market.


Brian Edwards stashed his company's equipment inside a storage facility until he can find a new location from which to operate. - PHOTO BY LANCE YAMAMOTO
  • Photo by Lance Yamamoto
  • Brian Edwards stashed his company's equipment inside a storage facility until he can find a new location from which to operate.

Ask the people who grow, manufacture, and sell cannabis about the end of prohibition and you'll hear two stories. One is that legalization is ushering a multibillion-dollar industry into the light. Opportunities are boundless and green-friendly cities like Oakland are going to benefit enormously. There will be thousands of new jobs, millions in new tax revenue, and a drop in crime and incarceration.

But increasingly you'll hear another story. The state of California and the city of Oakland blew it. The new state and city cannabis regulations are too complicated, permits are too difficult and time consuming to obtain, taxes are too high, and commercial real estate is scarce and expensive. As a result, many longtime cannabis entrepreneurs are either giving up or they're burrowing back into the underground economy, out of the taxman's reach, and unfortunately, further away from the social benefits legal pot was supposed to deliver.

Both stories happen to be true.

Legalization is playing out as a drama of contradictions, opportunities, and ironies for the people who built the cannabis economy up from what was once a purely outlaw culture to today's fully state-sanctioned, unabashedly capitalist green rush.

The new legal market is producing winners and losers by the bushel. Big investors are positioning themselves to dominate cannabis operations, from seed to sale. Simultaneously, in places like Oakland, lots of small, minority-owned businesses are getting an unprecedented chance to enter the legal market thanks to the city's equity program. But at the same time, many of the cannabis industry's existing businesses, especially small- and medium-size operators, are being squeezed out of the game because they lack the capital necessary to play by the new rules, or they don't qualify for subsidies meant to help the little guy and victims of the War on Drugs.

Consumers are fleeing the new legal market, too. Recent price spikes due to layered taxes and strict regulations are driving buyers away from permitted dispensaries and delivery services. Instead, people are purchasing pot directly from growers and dealers who are operating subrosa and happily profitable.

And Oakland's Measure Z cannabis clubs and collectives, many of which opened more than a decade ago and now operate in a legal gray area without official city or state permits, are continuing to flourish.

Finally, what's most contradictory and upsetting about the new legal era is that cops are still arresting some people for smoking and selling weed. Mainly, it's Black men getting busted for possessing and selling small amounts.

It turns out that legalization is producing all these contradictory outcomes at once. But some fear that legalization's successes so far could soon be overshadowed by bigger problems. Some industry insiders predict that unless regulators act quickly to streamline permitting and reduce taxes, there will be a crash.

Lots of companies — like edibles and topical makers, delivery services, and small growers — will be shut down or bankrupted. Prices will spike. More consumers will turn to the black market for goods. Cities and the state will crack down harder on these unlicensed pot dealers, and legalization will fail to deliver on what it promised.

What happened
to Brian Edwards is a case study in how legalization has affected small cannabis business owners. The 25-year-old New Jersey native moved to California partly to escape the East Coast's draconian drug laws, but mainly, he migrated west to take part in the new weed economy. Five years ago, he started what would become HigherVeda, an Oakland company that makes infused cannabis oil snacks out of raw, vegan, and gluten-free ingredients.

"We made them in our kitchen, packaged them in the house, and drove them over to the dispensary," said Edwards.

Patients loved the stuff. By 2015, HigherVeda's bars were in 30 different retail shops across the state, and the company was growing. Edwards was intent on expanding and hiring employees. And HigherVeda was already paying taxes to the city.

"We had a city of Oakland business permit," said Edwards, who estimates that he probably paid as much as $25,000 in taxes over several years. "Our intention was to be as regulated as possible."

2016 was their best year ever. They jumped from $80,000 in sales the prior year to about $200,000. Edwards was focused on complying with the recently passed Medical Cannabis Regulation and Safety Act, which marked the state's entrance into regulating medicinal marijuana. On the horizon was Proposition 64, the Adult Use of Marijuana Act. Although he was worried about the complex regulations the state would impose with this sweeping law, Edwards also viewed it as providing the certainty that the industry needed for long-term growth.

Voters passed Prop. 64 in November 2016, ushering in new rules that went into effect Jan. 1. Key among them is dual-licensing. Marijuana businesses must obtain both state and city permits in order to operate.

Oakland officials used their authority under the dual-licensing system to put in place an equity program intended to prevent the city's cannabis market from being overrun by big, out-of-town companies to the exclusion of locals harmed by the drug war, especially Black people who reside in heavily policed parts of the city. To accomplish this, Oakland only hands out one general permit for every one equity permit it issues. To qualify for an equity permit, someone has to have lived for 10 of the past 20 years in a police beat area that experienced a disproportionately higher number of cannabis arrests, or prove they're an Oakland a resident whose income is less than 80 percent of the city's median average, or show they've been convicted of a cannabis crime.