The Potential of Cannabis in Business

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Medical marijuana is legal in 20 states including New Jersey as well as Washington D.C.. Two states – Colorado and Washington – have approved sales of the drug for recreational use. Other states including New York have unveiled plans to allow medical marijuana sales.

The commercial promise of cannabis is not just in selling the drug – estimated to be a $40 billion a year underground industry – but in building businesses around cannabis, from consulting firms to marketing companies to device makers to security firms.

Some warn the industry is not ready for prime time. Marijuana is still illegal under federal law. Banks have been wary about accepting deposits; deep-pocketed investors are taking a pass. And potential scams and investment bubbles lurk in the form of penny stock schemes.

Some continue to think legalizing marijuana is simply bad public health policy. “This is big tobacco redux,” said Kevin Sabet, director of the Drug Policy Institute at the University of Florida and a former Office of National Drug Control Policy official. “They know the only way to make money is to create addiction.”

Still, combining capitalism with cannabis is what a majority of Americans say they want. A Gallup poll recently showed that 58 percent of U.S. citizens favor legalizing marijuana for recreational purposes and an even larger percentage approve of it for medical purposes.

Last August, the U.S. Justice Department said it will not interfere with retail sales in Colorado and Washington as long as the states strictly regulate the industry. The Financial Crimes Enforcement Network, a unit of the U.S. Treasury Department, has issued guidance to banks as to how to do business with legal cannabis operations.

These developments lead some to believe that this largely underground industry will finally come to the surface.

Others are less sanguine about the immediate potential. “The door is slightly ajar, but it isn’t enough to let the horse gallop out,” said Jeffrey Miron, an economist at Harvard University and a senior fellow at the Cato Institute who favors decriminalizing marijuana. While Miron believes that the cannabis industry should resemble the liquor market, he said that cannabis’ legal status is a serious hurdle.

Many investors say they are not deterred. “There’s a whole world of product-making that goes beyond selling plants,” says Taylor West, deputy director of the 430-member National Cannabis Industry Association. Ms. West points to cannabis-infused food and drinks, cannabis oils, and cannabis butters.

Regulatory demands will spark other opportunities, such as labs to test for purity and systems to track inventory from seed to sale.

However, some investors could end up getting fleeced. On the less-regulated, thinly traded parts of the U.S. stock market, shares of cannabis-connected companies have been sky-rocketing. Some companies on the OTC Bulletin Board have quadrupled in value in a matter of months. Some of these companies appear to be employing the tactics of penny stock pump-and-dump schemes.

FINRA has said it found a number of concerns among public cannabis companies, including one with a former CEO who was once indicted for a Ponzi scheme and another company whose CEO has served nine years in prison.

Private placements have been more solid marijuana investments in most cases than these penny stock start-ups. See privateplacementadvisors.com and regDconsumersreport.com.

About Douglas Slain

Doug received a JD from Stanford Law School, a MA from the University of Chicago, and a BA from DePauw University (Phi Beta Kappa). After practicing real estate and finance law at then Pillsbury, Madison & Sutro, he founded four national monthly law reporting titles now owned by Thomson-Reuters. He served two consecutive terms as chairman of the American Bar Association’s General Practice section’s Professional Responsibility Committee. Slain was an ABA-appointed rule of law consultant to the Ministry of Economy for the Republic of Latvia as its secured transactions adviser. He taught briefly at Stanford Law School as an adjunct clinical law professor. Slain has been the managing partner of Private Placement Advisors since August 2009. In January 2013 he founded Outliers Network.

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