The Potent Problems Investing in Oklahoma’s Cannabis Industry

If you want to invest in the Oklahoma cannabis industry, there are no shortage of people willing to take your money. A simple Google search will unveil hundreds of companies anxious to help you part with your hard-earned cash, in return for a rainbow-painted picture of future riches.

There’s just one problem... It doesn’t really work that way.

Every cannabis company in Oklahoma must be 75% owned by a native Oklahoman, which means, at the most, the company can sell 25% of its stock. That is why, not coincidently, you can find many solicitations for investors, offering precisely that amount of equity.

Unfortunately, Oklahoma is still the wild west when it comes to cannabis investing, and it’s certainly no place for beginners or outsiders. There are an untold number of examples of investors being fleeced, and the local Okie courts are hardly sympathetic to the outside carpetbaggers trying to get rich in their state.

As reported in Benzinga, Jacob Gurley, national sales director of cannabis vaping brand Spherex, said the state's lax restrictions open the door to business failure.

"Oklahoma opened the door for this scenario by making the barriers to entry so minimal that almost anyone with a few thousand dollars could buy any type of license: grower, processor or dispensary," Gurley said. He added that the current situation makes it unsustainable for many shops to survive.

Now in its fourth year, the Oklahoma cannabis industry even has industry regulators shaking their heads.

“Ever since the initiative petition passed (in 2018) it’s been in a relative state of triage – the industry grew so explosively, and a few issues came with that,” said Barrett Brown, chief of staff at the Oklahoma Medical Marijuana Authority, as reported by The Journal Record.

Fleecing Investors

Irving Lin, a jovial entrepreneur in his late 60s, wanted to share a once-in-a-lifetime opportunity, a near-miraculous way out of the economic devastation wrought on Southern California by the pandemic: the gift of marijuana.

As reported by The Oklahoman, Lin told a group of potential investors that they could make a fortune in Oklahoma. The return on investment is as high as 1,200%, Lin explained eagerly. Finance one greenhouse, and you’ll walk away with $300,000. Three greenhouses will make you a millionaire.

“The demand is huge and growing, and so are the profits,” he assured his audience. “All you have to do is hand over the money, and our team will take care of the rest.”

Unbeknown to most of those potential investors, just a month earlier, Lin’s previous venture had come to a screeching halt when federal agents raided a string of black-market cannabis greenhouses built across 400 acres of the Navajo Nation in New Mexico.

That raid, dubbed “Operation Navajo Gold,” was among the largest in the country, according to the U.S. Drug Enforcement Agency, netting over 60,000 pounds of illegal marijuana. A federal investigation is also looking into allegations of human trafficking and worker exploitation.

Things were different now, Lin promised.

The Black Market

Much of the weed grown in Oklahoma is illegal, according to the Wall Street Journal, which can put investors at enormous risk. The Sooner State has become the biggest source of black-market weed in the country, the Oklahoma Bureau of Narcotics estimated.

“You don’t even have enough dispensaries in the state of Oklahoma to dispense as much marijuana as we’re producing,” said Donnie Anderson, director of the Oklahoma Bureau of Narcotics. “That marijuana is gonna go somewhere and it’s going out of state.”

Of course, transporting marijuana across state lines is illegal under federal law.

Bad Investment Leads to Murder

In Logan County, north of Oklahoma City, Sheriff Damon Devereaux said the situation is getting worse.

“It really is the Wild West,” Sheriff Devereaux said. “I worry that what we’ve seen in Kingfisher County is just a small part of what’s to come.”

He was referring to the sensational murders of three men and one woman at a pot farm in Kingfisher County. The suspect in the killings, Wu Chen, was apprehended by police, and prosecutors, who have charged him with murder, said in court papers that he had demanded he be paid $300,000 as a return of a portion of his investment in the marijuana production before opening fire.

Getting Rich On Outsiders

Mark Woodward, with the Oklahoma Bureau of Narcotics, said the agency is currently investigating about 2,000 farms on suspicion of having obtained their grow license through fraudulent means, according to the Wall Street Journal.

Under the law, grow operations have to have 75% local ownership. Still, many foreign and out-of-state investors simply pay an Oklahoma resident to be the majority owner in name only, Mr. Woodward said.

“That’s what’s so frustrating, you have local people getting rich off this license structure that brought many of these criminal groups to our state,” Mr. Woodward said. “And we’re only scratching the surface.”

In fact, according to The Frontier, laws governing medical marijuana grow operations have led to hundreds of cases of ghost owners — in-state residents who are owners of companies on paper only. The practice has opened the door to out-of-state and foreign-backed companies and individuals to control large portions of the state’s marijuana market.

The Bad Guys Aren’t Just Criminals, They’re Lawyers, Too

In one case, a paralegal for a Tulsa-based law firm, had an agreement with her bosses that she would be listed as the majority owner of a cannabis business on paperwork submitted to state regulators, but she was not entitled to a share of the profits, could not make business decisions or claim ownership of any company property. In exchange, each company would pay her $3,000 a year, for the duration of the contract, NPR Radio reported.

She was eventually listed as the majority owner for 300 medical marijuana businesses in Oklahoma.

Her former bosses at the law firm reportedly told her it was legal to sign the ghost owner agreements. But that advice would ultimately get her arrested.

The paralegal was forced to forfeit the licenses, which caused a tidal wave effect throughout the industry.

One couple moved from California to start a marijuana grow operation. Drawn by the relatively cheap price of land, the low-cost barriers to entry into the Oklahoma market, and assurances from the law firm that the in-state resident majority owner requirement wouldn’t be a problem, they decided to try to stake their claim in the state’s booming marijuana industry.

They spent more than $50,000 to set up three greenhouses and a plant nursery, and paid the law firm around $15,000, but the license was lost in the meltdown around the investigation.

The California couple is now part of a lawsuit along with nearly two dozen other marijuana businesses that claim they lost their licenses.

“I think there are crappy lawyers that didn’t stop to think about the safety and benefit of their clients,” said Donald Gies III, an Oklahoma City attorney who represents several clients who have gotten caught up in the cannabis cultivation crackdown.

“They were just worrying about the bottom dollar and saying, ‘Hey, maybe this is a once-in-a-lifetime, million-dollar thing.’”

Lawrence Pasternack, a philosophy professor at Oklahoma State University told Politico that this was all foreseeable.

“You would have thought that somebody from law enforcement would have said to the state, ‘This is what’s going to happen, everybody. You’re going to have every criminal enterprise in the world coming to Oklahoma to grow,” Pasternack said.