on the black market to support
the legal side.” To his point, in a
November 2019 raid on a legal,
licensed warehouse facility in
Los Angeles, police seized
7,200 illegal vape cartridges
worth $21 million.
This leads to a vicious cycle:
The more legal companies get
squeezed, the more their prices
rise—creating even more oppor-
tunity for illegal dealers. “Over
the past eight months, the prices
have been going up, so now the
black market is strong again,”
says the dealer. “I think it would
be great if it were regulated and
people knew it didn’t have any
shit in it. I just don’t see that as
being a full reality.”
IF ANYONE has a solution, it’s
going to come from one of two
places—the government or
the burgeoning legal industry.
And lately, the industry has
been pushing the government
to step up.
Under pressure, the
California Department of
Justice led an effort to pull up
nearly a million plants from
345 illegal farms last year. And
in December, California reg-
ulators seized $8.8 million in
cannabis products from 24 ille-
gal dispensaries.
However, law enforcement
doesn’t seem to be spooking the
black market much. Dealers
say that the benefits of ille-
gal sales are greater than the
potential punishments—and
law enforcement seems out-
matched. “Our investigators
can make arrests and confis-
cate product and cash,” says
Alex Traverso, a spokesman
for California’s Bureau of
Cannabis Control. “Then the
next day, or week, the place is
back in operation.”
So increasingly, people in the
industry are coming to favor a
different strategy. They want
local governments to issue
more licenses. If illegal oper-
ators have a legitimate path to
compliance, the thinking goes,
then they’ll take it. And once
they’re taxed and regulated, the
playing field levels out.
In a white paper published
last year, Weedmaps, a company
that runs a database of weed
brands and develops software
for legal shop owners, analyzed
2016 data to show that in citieswhere legal stores went up, the
illegal ones went down.
According to the analysis,
Phoenix had just one dispen-
sary per 52,000 people, and
illegal dealers captured three
out of every four weed dollars.
But Denver, on the other
hand, had one store per 3,200
people. There, the illegal
dealers took only one in four
weed dollars.
The paper makes the point
that when cities limit the mar-
ijuana supply chain with over-
regulation, they leave more space
for illegal retailers to operate. In
California, only one in four cities
actually allows weed sales. That
leaves a total of 1,187 licensed
sellers to meet the needs of
26 million Californians.
“We’re starting to see the
more forward-thinking licensed
operators pushing local govern-
ments to issue more licenses,”
says Chris Beals, CEO of
Weedmaps. “Even some who
once fought for restrictive
licensing— they’re starting to
realize that, ultimately, we
need to stand together on this.”
Because when consumers don’t
have legal distributors nearby,
they’ll just buy from the unregu-
lated, untaxed dealer.of the Kingpen vapes, was tak-
ing a different approach. The
company sent out more than
220 cease-and-desist letters to
illegal shops selling Kingpen
counterfeits. Company reps
blanketed the state, visiting
legal dispensaries to explain
that the brand was committed
to fighting its attackers. Then
Loudpack hired De La Rue, aBritish security company that
produces banknotes, pass-
ports, and anti-counterfeiting
solutions. After eight months
of R&D, Kingpen relaunched
inside new, bootleg-proof
packaging.
Where Kingpen used to sell
vapes in “flimsy cardboard
boxes,” the brand is now hit-
ting shelves in custom tins with
bamboo inserts and doob-tube
holders, pieces that all come
from different manufacturers
to foil would-be bootleggers.
But more significantly, buyers
can now verify the authenticity
of their purchase with a trio of
security features: a scannable
QR code, a lottery-style scratch
pad, and an eight-way holo-
gram. Counterfeiters would
have better luck tr ying to print
actual currency.
All this comes at a cost.
The packaging upgrades cut
Kingpen’s margins by about
half, says Corral. And as part of
the relaunch, the company had
to destroy more than $2.5 mil-
lion of old product. “But we built
an iconic brand, and the last
thing we wanted to do was let
the illegal bootleg market take
us out of it,” he says. “We wanted
to send a message, and we did.”This became clear in January,
after Weedmaps completed
a site-wide purge of the ille-
gal weed dealers who’d listed
their services on the site. “We
received some blowback from
that,” says Beals. “For some peo-
ple, we removed what was their
only means of getting their med-
icine.” And it’s unclear what
effect banning the illegal sellersw ill ultimately have: Many of the
brands ejected from Weedmaps
have already launched their own
e-commerce sites, says Beals. “I
think we’re seeing a whole new
level of whack-a-mole that regu-
lators are going to have to face.”AS LAWMAKERS struggle to fix
the problem, some entrepre-
neurs are devising solutions of
their own.
In late 2018, John Mueller,
then CEO of Acres Cannabis,
hatched a plan to fight the ille-
gal sellers near him in Nevada.
He began selling a product he
called Black Market Killer, or
BMK—a low-price, low-potency
cannabis in the 17-to-20 percent
THC range. Mueller put up five
billboards around Las Vegas, at
a total cost of $12,500 a month,
imploring drivers: “Ditch your
dealer, stop into a dispensary.”
The goal was not only to pro-
mote BMK but to draw consum-
ers to legal sellers in general.
“Part of the reason the black
market still exists is that people
are used to it,” says Mueller. “It’s
just easy when you’ve been buy-
ing from the same guy for the
past decade.”
While Mueller was putting
up billboards, Loudpack, maker58 / ENTREPRENEUR.COM / March 2020
The Canna-business
PEOPLE IN THE INDUSTRY WANT LOCAL GOVERNMENTS
TO ISSUE MORE LICENSES. IF ILLEGAL OPERATORS
HAVE A LEGITIMATE PATH TO COMPLIANCE, THE THINKING
GOES, THEN THEY’LL TAKE IT.