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.
“I am out of pocket for nearly $800,000 of my own money to pay other subcontractors,” said Danielle Shoots, managing director and founder of the DEMI Fund. “I need to be reimbursed to keep the overall work going.”
Even though marijuana tax revenues continue to flow to the Malone Fund with Denver’s 2024 budget estimating a $3.7 million expenditure allocation this year, Shoots said reimbursements and new funding stopped in November.
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.
The Denver Economic Development & Opportunity office hired the New Community Transformation Fund, which does business as DEMI and is led by Shoots, the former chief financial officer of the Colorado Trust.
Denver contracted to provide $15.2 million through June 2025, adding to the $9 million Shoots raised from other investors including Xcel Energy, Bank of America, and the Colorado Housing and Finance Authority.
When Denver officials requested bids, they failed to realize that the city couldn’t act as a limited partner in a venture capital fund because it would put taxpayer funds at risk, Shoots said, so she created a workaround.
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.
Limited partners normally take a passive role, and even though it was one step removed, the Denver Economic Development & Opportunity office started requesting what Shoots described as “unnecessary” contractors, reducing how much money could be invested directly in businesses. Around half of the city’s money has gone to venture capital and investment financing.
Things came to a head when DEDO asked that DEMI hire a subcontractor based in Houston, which Shoots refused to do.
She argued that supporting an out-of-state firm was a misuse of Denver tax dollars and violated the terms of the contract. Making matters worse, the contractor in question was a relative of a city employee, Shoots said.
After that confrontation, which included an open records request, the city began claiming insufficient documentation for reimbursement requests, even though hundreds of pages of documentation accompanied each invoice, Shoots said.
Shoots said she hoped Mayor Michael Johnston would revere course, only to be told that the Malone Fund was out of money.
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.
Shoots added she would like the city to issue a public apology around language saying DEMI’s invoices lacked proper documentation and that an investigation be opened into contracting practices at the city’s economic development office.
“Something bigger is going on with that department,” she said.
