As Illinois marches toward legalizing recreational marijuana under Gov. J.B. Pritzker, market pioneers who shelled out big money to gain an early foothold in the state's medical cannabis program are trying to keep the much larger recreational, or adult-use, business to themselves.

Companies that won Illinois' 21 medical marijuana licenses in 2015 are lobbying for a clause in a forthcoming legalization bill—which many believe will pass this spring—that would deny new cultivation licenses. Such a provision would box out new competitors just as marijuana blossoms into a full-fledged consumer market.

"There's a necessity for a slow rollout to see how adult-use market demand is able to be met," says Mark de Souza, CEO of Revolution Enterprises, which won two medical cultivation licenses and owns downstate greenhouses. The former futures trader and self-described "free-market finance guy" insists constraints are necessary as the industry finds its footing. He argues no new licenses should be issued for 12 to 18 months after the recreational law takes effect, which would likely mean a moratorium through at least part of 2021.

Others see little more than an attempt to monopolize what is estimated to be a $1.6 billion Illinois recreational market. They say lawmakers who appease these companies in order to pass legislation quickly and begin collecting tax revenue are shortsighted.

"To have 21 licenses for the entire state of Illinois is an oligopoly," says Dan Linn, executive director of the Illinois chapter of the National Organization for the Reform of Marijuana Laws, or NORML. "The path of least resistance is to give a handout to current licensees—but is that the best way to bring in the most tax revenue and create the most jobs?"

Lawmakers and lobbyists in Springfield are considering a plan to issue provisional recreational licenses to medical marijuana licensees, who have already completed a rigorous vetting process. Provisional licenses would allow them to ramp up cultivation quickly and start sending tax payments to the state. Formal licensing would follow.

Linn doesn't mind allowing licensed medical cultivators to begin growing for recreational use immediately, but says new entrants should be allowed to start the application process right away so they can plant crops by summer 2020. He contends allowing more cultivation licenses will squeeze out illegal players and stimulate economic activity in rural parts of the state.

The entrenched players, however, may have an ally in state lawmakers who are cautious about new cultivation licenses as they attempt to please law enforcement and others wary of legalization efforts.

"I'm not certain there's going to be any need for additional cultivation licenses," says state Sen. Heather Steans, who is crafting the recreational bill along with state Rep. Kelly Cassidy, a fellow Chicago Democrat. "We definitely don't want an oversupply because we don't want to encourage diversion" of marijuana across state lines to places where it remains illegal. Steans plans to commission a supply-and-demand study to determine how many licenses are needed.

BIG INVESTMENTS

A big reason why incumbents are so keen to delay competition: None of the 16 companies that won the 21 Illinois medical marijuana cultivation licenses issued in 2015 are anywhere close to recouping their investments. Some—including Chicago-based Cresco Labs, Green Thumb Industries and Revolution—have spent tens of millions of dollars, beginning with a long license application process and continuing through the construction of growing and processing centers across the state. Meanwhile, only 52,365 of Illinois' 12.7 million residents have enrolled in the medical marijuana program.

Medical marijuana cultivation licensees estimated that each growing site would require an investment of between $5 million and $7 million, according to Pamela Althoff, a former state senator and new executive director of the Medical Cannabis Alliance of Illinois. "Most have spent well over twice that," she says.

"We did put a big investment in" to "a somewhat fledgling medical program," acknowledges Sam Dorf, co-founder and chief growth officer of Chicago-based Verano, a holding company with several cannabis operations, including Ataraxia in Illinois. As a result, "the majority of us operating here have a lot of capacity to expand."

NORML's Linn counters that risk comes with any investment and no one should be shielded. "Nobody forced these investors to invest in the medical cannabis industry," he says.

Dorf and other owners fear a repeat of what happened in Oregon, which has licensed more than 1,000 growers since 2016, with nearly 1,000 more applications in process. Bumper harvests in 2017 and 2018 sent prices plummeting and left product to rot, putting some farmers out of business. By January, growers reported inventory that could fulfill 6½ years of theoretical supply, according to the state's cannabis tracking system.

But Colorado, another state that led the country in broadly legalizing cannabis, approved 1,000 cultivation licenses without generating a glut. It requires growers to prove they've sold 85 percent of their crop before allowing them to expand, according to Beau Whitney, a senior economist at Washington, D.C.-based New Frontier Data, a company that analyzes marijuana market data.

Another way to open the market involves creating new "craft growing" licenses for growers who cultivate less than 7,000 square feet of space, which requires less capital than larger operations. Verano's Dorf says craft licenses also could help bring minority entrepreneurs into a business currently dominated by investor-class white men. As an example, he points to Maryland, which uses a point system to evaluate license applications and gives extra points to minority and female applicants.

"We believe adding craft grow licenses is the best way to satisfy both the state and the general public's desire to expand the program," he says.

But Whitney points out that smaller operations tend to have higher unit costs, which must be passed on to consumers. And craft growers have suffered the most in states where recreational legalization triggered price drops. "A key learning that could be bestowed on Illinois is to not get too far out over your skis on issuing craft growing licenses," he says.