The Prairie Wellness Fund, brainchild of Michael Griffin, veteran of the hedge fund service provider HedgeACT, seeks to offer credit financing for medical-marijuana entrepreneurs whether their personal energies be devoted to cultivation or to setting up and running a dispensary. On the investors’ side, PWF offers access to what some see as a new gold rush, through the comforts of the familiar private-equity structure.
Griffin has partnered with Thomas Cronin and Chadwick Meyer for this project, looking to take advantage of the opportunities created by the Illinois legislature. Yes, that legislature has, in its Compassionate Use of Medical Cannabis Pilot Program Act, allowed for the legal possession, sale, and use of medicinal marijuana. But at the same time it has created a daunting set of restrictions and requirements for those who want to enter the market.
Meyer was quite frank, in a recent discussion, in his observations on the risks and the opportunities that this circumstance has created for the PWF.
The state has just begun reviewing applications – both from would-be qualifying patients and from would-be providers. Though under the law the pilot program officially began last January, the “pilot” seems to be having trouble getting its sea legs.
Barriers to Entry
The legislators don’t want slackers with nothing but time on their hands to just start growing and selling marijuana. As Meyer put it, their legislation created barriers to entry into this field precisely “because they wanted people who are serious about this. And that’s what they’ve gotten. We’ve been very impressed by the applicants we’ve met, who are savvy in everything from business plans to horticulture.”
Among the barriers: the prospective operators of a cultivation center must pay a $25,000 non-refundable fee to the Agriculture Department. Potential dispensaries must pay a $5,000 non-refundable fee. Even the patients have a fee to pay, $100 per year for a medical marijuana card.
A separate issue is that phrase “pilot program” in the very title of the act. That suggests that, after the four years roll around, the state will go back to the drawing board to decide whether to renew. Investors don’t like that sort of uncertainty. Building a business, both the nuts and bolts of it and the brand, the good will that comes with a long-functioning business, often requires a time horizon longer than four years (or the three-and-change that is left).
Is the PWF worried about the uncertainty inherent in calling this a pilot program? What happens to their investors if their debtors all go broke because the state closes down the market?
Meyer wasn’t much concerned about that when we talked. “What is behind the pilot program in Illinois, from the legislature’s point of view, is tax revenue,” he said. When the “pilot program” wraps up, Illinois will still need the money, “and there will be an industry in place visibly providing medicine to the seriously ill.”
A related issue: what about cheating? Critics of such plans have always argued that medical and recreational uses of marijuana are not readily kept separate and that whatever the safeguards proposed, allowing the former suggests games that people can play to facilitate the latter. Heck, there was an episode of South Park about precisely this point. So: is it a concern that games playing will occur, and that this will incite a backlash against the pilot program, the attraction of the revenue notwithstanding?
The Future and the Feds
Meyer reminded me that the Illinois program is somewhat more recreation-resistant than that of some of the other states. In those other states, he said, chronic pain is a qualifying condition and that “serves as a loophole you can drive a truck through. In Illinois, on the other hand, the conditions for patients are fairly narrow.”
There is another worry, though. This arises from the simple fact that changes in law at the state level cannot change federal laws or regulations, or the practices of the bank-supervising authorities.
Presumably a change in the prevailing winds in Washington could bring a crackdown on these experiments, at the expense of those who had relied on state authorization. That is a concern, but it hasn’t kept many investors from seeing the medical marijuana field as a gold rush. There are always risks with a gold rush. There are also always those who do the rushing, and those who want to lend them their travel expenses or offer them various services at the trading post.
Into that context steps the Prairie Wellness Fund. It follows a debt rather than an equity model, and it plans to charge interest of roughly 24 percent. That is a rate in the neighborhood usually charged by personal credit card companies because, as is the case with credit cards, the transaction depends on the personal word of the borrowers. Neither the license nor the inventory of the entrepreneurs will be available as collateral if things go badly.
Meyer observed that entrepreneurs in this area “have trouble even opening a bank account, much less receiving bank loans, given the fact that the business violates federal laws. Community banks, operating at the state level, are more inclined to assist the entrepreneurs with bank accounts, but they aren’t a conduit for investment money.”