In 2023, Roland Conner became the first person with a criminal conviction to open a licensed cannabis dispensary in New York, making him the face of a $200 million effort to turn people once prosecuted for marijuana offenses into flagship sellers.

Retailers like Mr. Conner, who already owned profitable businesses like gyms and restaurants, were recruited by state regulators with the offer of a head-start reaping legalization’s windfall. Gov. Kathy Hochul had promised that the initiative, to be financed primarily by private investors, would provide 150 businesses with turnkey storefronts, low-interest loans and extensive support.

But that didn’t happen. Just 22 stores have opened, financed by loans that cost more than officials told borrowers to expect and that came with unusual terms stripping owners of control over key business decisions, like construction costs that they’re now on the hook for. In interviews, the owners of nine shops said they were pressured into a debt trap.

Now, the state inspector general’s office is investigating the program, called the Cannabis Social Equity Investment Fund.

The situation exposes how an experiment in reparations that sought to lift people disproportionately harmed by prior enforcement against marijuana not only failed but also helped derail the rollout of legal cannabis in New York.

Essentially, Governor Hochul made big promises based on an unrealistic expectation that investors would be willing to take lopsided risks even as the cannabis industry struggled elsewhere. Instead, the rush of investors never materialized, causing the legal market in New York to lose ground to the rapid proliferation of illicit dispensaries. And even when the fund attracted a sole lender, Chicago Atlantic, the restrictions attached to the investment served to strangle the fledgling market, shop owners said.