Denver broke new ground in October 2022 when it pledged to provide $15 million in tax revenues from marijuana sales to invest in minority and women entrepreneurs over three years through the Herman Malone Fund.
The venture capital firm that the city hired to oversee those investments, the Domestic Emerging Market Investments or DEMI Fund, sued the city this week, alleging it was left holding the bag for nearly $800,000 in unreimbursed expenses. Denver has only provided $6.9 million of the $15 million contractually promised and the firm said it was told the Malone Fund has run out of money.
The goal of the fund, named after a prominent Black Colorado executive who died in 2021, was to help 1,000 disadvantaged businesses with capital investments and support services. Returns on those investments were expected to create a sustainable pool of venture funding, upward of $50 million.
But the innovative program melding private investment and public benefits has faced problems from the start, culminating in the Denver-based firm suing the city in Denver District Court.
Denver’s failure to meet its obligation has caused the DEMI Fund to lose out on at least $6.5 million in additional investments, according to the complaint.
Denver donated its funds to the nonprofit Impact Charitable, which would act as the limited partner in its place. That arrangement also allowed the venture fund to comply with federal securities laws.
In 2022, the DEMI Fund received $1.06 million of the $5.7 million it requested. In 2023, it received $5.86 million of $8.9 million due from new and unpaid requests. This year, DEMI hasn’t received any funds and is owed $6.8 million, according to a complaint filed in Denver District Court.
The lawsuit alleges the city is not honoring its contractual obligations by creating a pretext for not paying.
“I appreciate the opportunity, but we do not have a comment to offer at this time,” Melissa Sisneros, a public information officer in the City Attorney’s Office said in an email. Two City Council members and the City Auditor didn’t respond before deadline.
A review of city budgets shows that city estimates of what its original 3.5% tax on marijuana retail sales would generate have fallen sharply. In 2022, when the investment program was launched, Denver forecasted $21.46 million from that tax, with $6.1 million to go to the Malone Fund.
In 2023 revenue estimates fell to $15.26 million and this year’s budget expects $13.18 million, leaving the Malone Fund with only $3.75 million in new funding. Absent another revenue source, the fund can no longer meet the $5 million a year the city had pledged back in 2022.
DEMI is looking to recoup nearly $800,000 in outstanding invoices under its contract, as well as additional damages, attorney fees and associated expenses arguing the city’s actions, or lack of action, have put minority and women-owned enterprises at risk of failing.
“Something bigger is going on with that department,” she said.
