Everything You Need to Know About Investing in Cannabis

There’s a lot of hype cropping up about the cannabis industry’s earning potential.

Does that mean you should invest in a hydroponic rig and start taking botany classes? No. What it does mean is that there are myriad ways to invest in cannabis smartly, safely and legally.

Heed these guidelines and you won’t go the way of Tommy Chong.

Just how much money is the industry cultivating? New Frontier Financials, a big data analysis firm, projects market capitalization of $15.2 billion by 2020, with $3 billion generated in April 2015 alone. Legal sales of marijuana spiked to $2.7 billion, up from $1.5 billion the previous year.

The ArcView Group, an investment and research firm that focuses on the cannabis industry, invested a total of $41 million into 54 particular cannabis-related companies. Of the 300 publicly traded marijuana companies, 40 of them generated $95 million in seed money.

Okay, so this is another gold rush. Are there any serious investors with real stakes? The industry has recently opened itself up to large-scale institutional investment. For example, billionaire Peter Thiel’s Founder’s Fund — which backs Airbnb, Facebook, Spotify, Lyft and SpaceX — has a multi-million dollar stake in Privateer Holdings, which absorbed $82 million for its cannabis businesses. This includes Leafly, a social platform for reviewing strains; Tilray, the first federally licensed American-owned commercial cannabis production facility in Canada; and Marley Natural, late singer Bob’s line of THC-engineered products. Other investment firms going green include ArcView and Green Growth Investments.

Any way for me to butt into this circle? Besides the numerous marijuana commodity firms publicly traded, there’s an entire ecosystem of cannabis-themed companies investors are pouring their money into, including advanced lighting, property investment, biotech, medical devices, packaging, analysis, dispensaries and retail organizations. Potential investors are best served by looking into investment firms that support a robust network of these businesses, which gives investors access to exclusive information, networking opportunities with founders and investment support.

Alright. But really, how risky is this? Leslie Bocskor, a former investment banker and founder of Electrum Partners, a consultancy firm that specializes in assisting businesses in the cannabis arena, says, “The cannabis industry is no different than the internet back in the ‘90s. It all depends on someone’s risk tolerance. This is not the birth of an industry but the deregulation of an existing industry.”

Bocskor advises looking into companies that already have some sort of substantive asset, ideally technology. For example:

GrowBlox, a research and development company that utilizes high-tech agribiology for cannabis
Terra Tech Corp, a vertically integrated agricultural company
MassRoots, a social platform for cannabis enthusiasts
Or Eaze, the Uber of pot delivery.

Aaron Herzberg, a partner in CalCann Holding Corporation, also cautions that “most of the marijuana stocks are penny stocks and have plummeted in value when issued because they’ve been exaggerated. I encourage people to look at marijuana investment as a long-term play if they’re willing to be personally involved. I discourage those who expect to double or triple their money in a year.”

I don’t want my money going up in smoke. Are there investment options without touching the plant? Bocskor suggests looking into Canadian alternatives such as Aurora Cannabis, a Canadian marijuana producer and distributor. There are 26 licensed producers in Canada and half of them are publicly traded. Also, “Look into DigiPath Labs (a biotech company that conducts diagnostic testing on cannabis): they own laboratories, but they don’t cultivate it, produce it or distribute it.” Merrill Lynch produced a 45-page report a couple months ago detailing the laboratory sector as one of the most bullish investments.

Also: real estate. “Probably one of the safest investments,” says Herzberg. “If you have an opportunity to purchase a cultivation campus or space and lease it or flip it when the market is right then there’s real value created.”

Am I going to have to live like Edward Snowden to invest in this? If you want to establish a business, there will be obstacles. First off, entrepreneurs still don’t have full support from the banking system, so they have to deal in cash. This means they have to employ security vendors or construct criminal-proof vaults at a high price-tag.

In 2014, the federal Treasury and Justice Departments released what is known as the Cole Memorandum outlining banking policy for banks that do business with legal cannabis businesses. Essentially, local banks are allowed to deal with these enterprises as long as they follow certain protocols, but nothing guarantees that banks won’t be charged with financial crimes. (There are around 105 banks in the country that have accounts associated with cannabis enterprises.)

Not only that, but businesses have to deal with I.R.S. code 280E, which bans all tax credits and deductions from illegal drug trafficking. But … dispensaries are legal enterprises. So cannabis companies have to pay an exorbitant amount of taxes, which can affect their profits by up to 70 percent.

Drug policy also comes into play. Cannabis sativa is a Schedule 1 drug under the 1971 Controlled Substances Act, which will continue to logjam the industry until it’s lowered to a Schedule 2 drug (for medical use).

Herzberg sums up the mess with a discerning insight: “Legalization is one the biggest misnomers out there. California was the first state to legalize medical marijuana, but for the last 20 years there wasn’t an infrastructure to support it — it wasn’t legal to have a cultivation facility, you couldn’t sell it or have a dispensary to operate out of. Three bills were recently introduced and signed by the governor last October, which was a robust, comprehensive framework of regulation and taxation. That’s legalization.”

Will Uncle Sam ever join the party? This year’s election cycle is crucial for the cannabis industry, with many states that have full legalization on the ballot, including California, Massachusetts, Arizona and Nevada. Electrum Partners predicts that “by the election of 2020, this will become a major issue, and between 2020 and 2024, we’ll probably see the government deschedule cannabis and treat it like alcohol or tobacco.”

—Eric Brown