Interested In Investing In Cannabis? Options and Risk for Various Marijuana Based Investments
It seems like everyone is trying to get involved in the Cannabis Industry. Marijuana is considered a growth industry - a sector of the economy which experiences a higher than average growth rate as compared to other sectors. In Canada, analysts project that marijuana sales will have an annual growth rate of 55% with estimations that sales will jump to $5.4 billion by 2022. So, it is not surprising that US investors are chomping at the bit to get their piece of the marijuana industry’s potentially high-speed return on investment.
However, such a lucrative prospect is not without risk. The primary risk of a marijuana investment is that marijuana is still classified by the federal government as a schedule 1 substance making it a crime to buy, sell or distribute. Thus, at any time, the federal government has the authority to intervene and shut down state-based cannabis businesses despite marijuana’s legality within the state.
Despite the risk, the industry is thriving across the country and marijuana investment options span public and private economic sectors. It is becoming more and more difficult to speak to angel investors, family offices or venture capital professionals without some discussion of marijuana investments. However, unlike traditional industry sectors, there is no public market in the United States for cannabis. It is not as easy as opening an online trading account and buying shares of the county’s busiest cannabis grower. That leaves privately held companies as the option for investors looking to cash in on the emerging market in the United States.
So, what should the curious cannabis investor do?
First off, as with any investment, a potential investor must do his or her due diligence. In a typical scenario, we would look for prior operating history, team member qualification, potential return on investment from similar operations etc. However, in this situation, it is next to impossible to have accurate statistics from which to base an investment decision. While it is extremely important for any cannabis operation to have experienced operators on board, the experience that they may not be applicable or even relevant for every state. A successful dispensary in Colorado does not insure success in Illinois. Further, anyone who claims to be an expert in Marijuana law and operation in a state which recently passed legislation is just not being honest. No one can truly be an expert in something that is this brand new.
What we look for from anyone courting our clients as investors is a true plan for applying within any given state; the team assembled including operators, lawyers and lobbyists and a plan for use of funds prior to application as well as shortly after approval. Depending on the state, applications can be up to 1,000 pages requiring a vast amount of information and qualifications. The time and money required to complete the application itself cannot be overlooked. After applying and hopefully winning a license, the business actually has to start operating or it may risk losing the license. If the team is not well equipped and a plan for both pre and post application is not in place, red flags are officially raised.
Understanding the political landscape for each applicant is equally as important as having the proper team in place. A lobbyist with relationships that go from the state capital all the way down to the alderman, mayor and local government level can make or break an application. Determining who will lead this charge for an applicant is a key part of the diligence process.
We are seeing a lot of other potential investments that have a close relationship with the marijuana industry but are not officially growers or dispensaries. Companies that are looking for better security options for growers and dispensaries as well as consumables that can easily make the switch from CBD to THC are great examples of potential growth entities that may actually be safer investments as compared to direct cannabis production or sales.
An investor should always be extremely careful when deciding where to put his or her hard-earned money. When you are dealing with a new industry with new laws and conflicts with federal laws, the risk is obviously increased. Working with professionals that have navigated similar waters in both the cannabis industry as well as other similar “new growth” industries (alcohol, gambling, crypto-currency) is always a smart move. We are here to help guide you in this ever changing but extremely exciting market.