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Sean ‘Diddy’ Combs Hopes To Build The ‘Diageo Of Cannabis’ With $185 Million Deal
The deal will help the hip-hop mogul foster more Black and Brown entrepreneurs in the industry.
The Right Puff: With the $185 million purchase of cannabis operations in three states, Sean 'Diddy' Combs has added to a business portfolio that includes fashion, spirits and entertainment.
Sean “Diddy” Combs, the Harlem-born hip-hop mogul and businessman once known as “Puff Daddy”, may need to dust off his old moniker.
As the Wall Street Journal was the first to report on Friday, the 53-year-old Combs has agreed to buy cannabis retail stores and production facilities in New York, Illinois, and Massachusetts from Chicago-based Cresco Labs and New York-based Columbia Care for $185 million.
In doing so, Combs will become chairman and CEO of the largest Black-owned cannabis business in the $25 billion (2021 annual sales) industry once the transaction closes next year. Among his motivation for getting into cannabis is to help diversify a mostly white-owned industry. About 80% of legal weed businesses are currently owned by white people, while only 2% of businesses are Black-owned.
“The purpose is bigger than the moment,” Combs says from his home in Los Angeles. “When I looked at the staggering statistics, [Black people] get arrested four times the rate of white people. And when it got legalized, we only owned 2% of it, while 80% was owned by the people who incarcerated us. It inspired me and invigorated me to go fight as the scales are so unbalanced.”
Part of his plan will include hiring formerly incarcerated people, convincing lawmakers to create better social equity programs, and mentor and fund Black and Brown entrepreneurs.
“We don’t just want our fair share; we want what’s rightfully ours,” says Combs. “I honestly think that because of the impact that [cannabis prohibition] has had on our communities, something more fair would be 70% to Black and Brown owners and 30% to everybody else.”
Combs Enterprises will operate a total of nine dispensaries, with locations in Manhattan, Brooklyn, and Chicago, and three cannabis cultivation and production facilities in Illinois, Massachusetts and New York. Legal cannabis sales in the U.S. are expected to hit $65 billion by 2030, according to Cowen.
This marks Combs’ first investment in the marijuana industry, but
he’s not the first hip-hop mogul who believes there’s money to be made
in cannabis. . .
Combs has been a serial entrepreneur for several decades. In the early 1990s, he started his music label, Bad Boy Records. One of his biggest stars was Christopher “The Notorious B.I.G.” Wallace (aka Biggie Smalls), the Brooklyn hip-hop artist known for hits like “Juicy.” Combs also started his own clothing company, Sean Jean in 1998, and five years later partnered with Diageo to launch his vodka brand, Ciroc. He recently launched a new R&B record label called Love and his own media company, Revolt.
MORE FROM FORBESHow The Cannabis Industry Can Begin Interstate Commerce- LegallyBy Will Yakowicz
Combs sees the new cannabis venture as something bigger than nine dispensaries and three cultivation facilities. He wants to build it into a Black-owned cannabis conglomerate known for its suite of brands.
“My mission is to become the Diageo of cannabis,” says Combs, “where I'm able to give people of all colors and races an equal opportunity to be entrepreneurs in this space.”
READ MORE Road to Nowhere: Because of cannabis prohibition, companies can only do business in one state at a time
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How The Cannabis Industry Can Begin Interstate Commerce— Legally
A federal ban on marijuana and several state laws make selling and transporting weed across state lines illegal. Here’s the road map for changing that.
"If Jonathan Elfand is good at anything, it’s shipping weed across borders. In the 1990s, he smuggled cannabis from Mexico by sealing it inside empty salsa cans and packing them on a truck headed to San Diego. The cannabis, totaling a few tons over seven years before the feds caught him, made its way to Florida, New Jersey and New York.
The enterprise eventually earned Elfand some time in prison for distribution, but he also spent a lot of time reading federal and state laws—and he began putting his unique arguments into action. After reading New York’s marijuana law, Elfand opened Empire Cannabis Club in 2021, a marijuana dispensary chain with locations in Manhattan and Brooklyn—all without a license. By using membership fees, Elfand believes he’s operating legally according to the letter of the law. New York lawmakers have said he is breaking it, but they have also introduced legislation that, if passed, would make his business model explicitly illegal—hinting that he might have actually found a loophole. Now Elfand is waiting for the chance to test another legal theory he’s been mulling over for years, one that got him into trouble the first time—shipping cannabis across state lines.
While cannabis is banned at the federal level, recreational use is now legal in 19 states, with five more on the ballot this November. But every state that has legalized weed has also passed laws banning interstate commerce, meaning every cannabis market is restricted to the state. What that means on an operational level is that cannabis companies can only sell products in the state in which the cannabis is grown, even if that company has a facility in another state where cannabis is legal.
Put another way, imagine if Florida orange juice could not be sold in California or if bourbon produced in Louisville was banned in every state but Kentucky. Now some legal experts believe a national marketplace is coming soon to the cannabis industry, thanks to a federal appellate court ruling in August based on how the Dormant Commerce Clause, a doctrine in the U.S. Constitution, applies to the marijuana industry.
Robert Mikos, a professor at Vanderbilt University’s law school who has written about how the Dormant Commerce Clause could bring an end to these state bans on interstate commerce, says there is a legal pathway for cannabis companies to do business across state lines.
“State bans, I think, are plainly unconstitutional,” says Mikos. “And therefore, if somebody wanted to take product from one state into another state, they could do so.”
In a 2-1 opinion, the 1st Circuit Court of Appeals ruled that Maine’s law barring nonresidents from owning medical marijuana companies violates the U.S. Constitution. The Dormant Commerce Clause, which was at the heart of the ruling, prohibits states from passing legislation that favors its citizens or businesses at the expense of noncitizens conducting business in that state. The doctrine is supposed to prevent states from creating protectionist policies that discriminate against interstate commerce.
MORE FROM FORBESPresident Biden Says It's Time To Change America's Cannabis LawsBy Will Yakowicz
The ruling is significant because it could affect the entire industry. Currently, almost all states that regulate marijuana have enacted laws that ban the import and export of cannabis. (California Governor Gavin Newsom signed a bill in September that would allow interstate commerce if federal law changes. Oregon passed a similar law.)
But Mikos says a company could potentially ship cannabis from one state to another by waging a series of lawsuits. . .
We’re going to get companies that take the plunge,” says Mikos, who estimates that a legal challenge will hit the federal court system in the next 12 to 18 months. “If one company wins, it’s a victory for everybody.”
Mikos says there is a certain level of risk because the Dormant Commerce Clause doesn’t apply to the federal government and marijuana is still illegal. “The chances you’d actually be prosecuted are vanishingly small,” he says. “I just don't see the federal government lifting a finger to try to stop this.”
Not everyone agrees with Mikos’ theory. Andrew Freedman, who made history in 2014 when then-Colorado governor John Hickenlooper appointed him as the first cannabis czar in the first state to legalize recreational weed, is one of them.
“No, I don't think this is a backdoor loophole to total federal legalization,” says Freedman. The only way to allow for interstate commerce is if Congress removes marijuana from the Controlled Substances Act and regulates it like alcohol and tobacco, he says. If a state were to allow for the import and export of cannabis, Freedman believes that another doctrine in the U.S. Constitution, the Supremacy Clause, would take over. The Supremacy Clause establishes that federal law generally takes precedence over state laws.
As for Mikos’ theory about how a company could get an injunction to import into a state, he also disagrees. Freedman, the executive director of the nonprofit Coalition for Cannabis Policy, Education and Regulation, thinks a court would uphold the state’s ban because there is no federal consumer protection system.
MORE FROM FORBESWeed vs. Greed: How America Botched Legalizing PotBy Will Yakowicz
Sam Kamin, a professor at the University of Denver Sturm College of Law, says if companies focus on interstate sales and production in legal states that share borders, “it’s a possibility” that the federal government wouldn’t intervene. And once this happens, cannabis, which is currently stuck within state markets, will slowly transform into a national market, like alcohol and tobacco. . .
READ MORE
Weed vs. Greed: How America Botched Legalizing Pot
Thanks to overregulation and overtaxation, the U.S. government has blown the easiest revenue opportunity ever—legalized drugs. But it’s not too late to save the $72 billion cannabis industry from the perils of prohibition.
". . .
Cannabis legalization was supposed to make a slew of entrepreneurs rich—including “legacy” operators, a coy euphemism for what used to be called drug traffickers, dealers and illegal growers. It was supposed to take something used widely and erase the criminal element from it. But of course, America’s politicians are blowing it. Thanks to overregulation, overtaxation and state-by-state inconsistencies, the biggest no-brainer in the history of capitalism—legalizing the world’s most popular illicit drug—is turning into a massive market failure.
Some 95% of California cannabis cultivators operated at a loss last year, according to Jonathan Rubin, CEO of New Leaf Data Services, an institutional-grade wholesale price tracker. With the wholesale price of pot per pound in California down 52% since 2017, the year before legal recreational sales started in the state, squeezing out a profit is nearly impossible. The trouble boils down to simple supply and demand. It’s easy enough to get a permit to grow marijuana, a crop that proliferates abundantly if you know what you’re doing. Many farmers therefore began growing it in search of green riches. But gaining approval to sell it is complicated for retail outlets. First, there’s Nimby-ism: Even in weed-friendly California, nearly two thirds of municipalities have refused to allow legal dispensaries within their borders. Second is regulation: Many states make dealing with weed more complex than handling weapons-grade plutonium. Third is the continued federal ban on marijuana, which makes building a business extremely difficult and limits access to the mainstream banking system. As such, most dispensaries are cash-only—a dangerous absurdity in an increasingly cashless world.
One result is that California is home to just 1,000 dispensaries—one for every 40,000 residents. With so much pot chasing so few retail outlets, a lot of the extra weed funnels into the black market, which was supposedly going to be eradicated when marijuana went legit. Thus, legal prices are plummeting—by 35% in California in the second quarter alone compared with the year before. In the United States’ largest cannabis market, consumers spent $5.1 billion on legal weed last year—and an estimated $15 billion on illegal bud. The numbers nationally are similarly tilted toward the black market, with $25 billion worth of pot sold legally last year and almost twice that much moved the old-fashioned way, according to research from investment bank Cowen Inc.
Despite the fact that 60% of Americans support legalization for recreational use and 91% for medicinal purposes, the Drug Enforcement Administration recorded 6,606 marijuana arrests in 2021, a 25% increase over the prior year, with Black and brown people making up a majority of those arrested. So much for “legalization.”
Amid collapsing prices, the legal weed industry shoulders a tremendous tax burden that its illicit competitors don’t. State taxes on retail sales are as high as 37%. And although marijuana remains illegal under federal law, Uncle Sam still holds out his hand for a big cut; pot companies are not allowed to take most normal business deductions, leaving them with an effective tax rate of 60% or more.
STREET VALUES
Despite legal and regulated markets in 38 jurisdictions, the illicit cannabis business still dwarfs legal sales. . .
“We legacy folks, over the course of 50 years, built a market which was fair, which was resilient and which served everybody in the market very well,” says DeAngelo, who founded Oakland-based Harborside Health Center, one of the country’s first licensed cannabis dispensaries. “And now we’ve had this hand of government intervention completely disrupt it.”
Compare the difficulty of working within a state, across multiple states and amid a thicket of tax regimes with the established black market, which has to deal with none of that, and you can see why the typical person smoking a joint probably obtained it illegally. “There’s an economic disincentive to participate in the legal market,” says Emily Paxhia, who cofounded Poseidon, a San Francisco cannabis investment firm with $200 million in assets under management.
In the middle of this mess, the lines blur. Many companies in the legal industry regularly divert product into the black market, and vice versa. “There is cannabis flowing in both directions all the time,” says Rubin, the industry tracker at New Leaf.
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