Billions of greenbacks could go to pot

America's state-based legal marijuana industries operate outside of federal law, but Washington chooses to turn a blind eye. That lack of regulation places billions of dollars at risk of a style blow-up.

There is a budding industry taking off in the US which is confounding investors, business and governments.  In as many as 20 US states, plus the nation’s capital, Washington DC, it has become legal to manufacture, distribute and purchase marijuana for medical purposes. Unsurprisingly, it was the Californians who started the green rush in 1996 by passing the first of those laws. At the federal election last year, Washington state and Colorado took things a step further and voted in favour of legalising recreational use of marijuana, so those over 21 can grow up to six plants for personal use or buy up to 28 grams (an ounce). But the deal is that you can no longer just hit up an old university friend, you have to purchase it from a licensed seller.

There are about 2000 legal medical marijuana dispensaries across the US making an estimated $US1.5 billion a year – a figure tipped to quadruple by 2018. Washington and Colorado are getting high on hopes that they can turn some of the $US20 billion that Americans spend every year in the illegal pot market into increased revenue. And for the first time ever, the Pew Research Centre found in April that the majority of Americans (52 per cent), support national legalisation.

To placate those who have concerns about governments encouraging people to spark up, Washington has earmarked 80 per cent of the estimated $US500 million in additional taxes from legalising marijuana towards health initiatives and $US110 million annually for substance abuse programs.

Investors are starting to see the smoke signals too. Growlife, Cannabis Science, Medbox and Medical Marijuana are all publicly traded companies on the OTC Bulletin Board securities exchange.

Diego Pellicer's Jamen Shively talks up the prospects of “Big Marijauna” in the US. He has raised $US10 million because he says he wants to make his company the “Starbucks of Pot.”  He plans to establish dozens of Diego Pellicer-branded weed stores across Washington and Colorado.

Then there are Yale graduates Michael Blue and Brendan Kennedy of Privateer Holdings, who have just raised $US7 million to expand their cannabis-focused business. 

Privateer owns, a website described as the Yelp or Web.MD for weed smokers. It has 2.3 million monthly visitors who can read reviews of more than 500 strains of marijuana and investigate which are better for medical conditions, like anxiety, PMS, or nausea, or simply which is most likely to give them the giggles. More importantly for the company, generates $US100,000 a month in advertising revenue.

But before investors start dreaming of a green utopia, there is one slight downer in the fact that marijuana is still illegal to purchase, distribute and grow under US federal law.

Steve Fox, co-founder and chief lobbyist for the National Cannabis Industry Association, said the future of marijuana should become clearer on September 10, when the Senate Judiciary Committee tries to resolve the conflict between the federal and state positions.

“In the short term what you are likely to see is a tight leash position where they give the states the ability to move forward but sternly warn them if any evidence is found of marijuana crossing state lines then they may have to take action,” he said.

Fox has reason to be optimistic. US President Barack Obama has said he feels that the courts have “bigger fish to fry” and has indicated that the federal government won’t come after recreational pot smokers. Perhaps not a surprising stance from a president who, in Washington Post editor David Maraniss’s book  Barack Obama: The Story, was recalled by college friends as having a habit of “intercepting” joints out of turn and proposing “roof hits”, which involved arcing your neck in a smoke-filled car to get a final high once the pot had run out.

Ultimately, it is US Attorney General Eric Holder who gets the final say on how to resolve the federal versus state law conflict.

If the state law is allowed to prevail, or at least be guaranteed some protection, then some experts fear that a bubble could inflate in the marijuana industry.

“Anyone looking to invest in the cannabis industry needs to think long-term. This is an industry that is going to grow over time but people need to know that they aren't going to make money overnight,” said Fox.

The Financial Industry Regulatory Authority has already expressed its concern about marijuana snake-oil salesmen failing to deliver on promises.

Last week it warned that investors should watch for red flags and classic “pump and dump” con artists who talk up the price of stocks and then sell their shares at a peak.

“Investors considering investing in a heavily touted, thinly-traded company should question why a total stranger would tell them about a really great investment opportunity. In reality, there is likely no true opportunity,” said Gerri Walsh, FINRA's Senior Vice President for Investor Education.

In November, Medbox, a company that has created a machine which weed dispensaries use to store pot, saw shares rise from $US6 to $US205 in a week on the back of the Washington and Colorado decisions to legalise recreational pot use, only to witness a sharp sell-off to $20 a day later.

Bruce Bedrick, chief executive of Medbox, said the company “never engages in promotions or solicitations to sell their stock” and has supported FINRA shining the spotlight on scammers.

"Unfortunately, there are companies and individuals that prey on investors looking to enter this fast-growing market," he said. "We want these fly-by-night operations out of our industry, and support any regulatory authority in calling attention to the problem."

The Obama administration has a big decision to make. If it allows the states to continue being weed sellers then it will also need to ensure that there is appropriate regulation is in place. Otherwise it is investors who will see their money go up in smoke.

Mathew Murphy is a Walkley Award winning journalist based in New York.

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