September 04, 2014 - 8:59 AM
CONFLICTING LAWS, SHADY PENNY STOCKS, WILD HEALTH CLAIMS CLOUD MARKET; POT FOR YOUR PRIVATES?
NEW YORK, N.Y. - Legal or not, the business of selling weed in the U.S. is as wacky as ever.
The tangle of rules and regulations that govern whether and how it can be grown, bought and sold cause major headaches for marijuana businesses — and enticing opportunities for those who want to exploit it.
At the heart of the complexity lies a basic disagreement. The federal government views marijuana as an illegal narcotic like heroin, with "no currently accepted medical use." But 23 states and Washington, D.C., have legalized pot for medical purposes. In Colorado and Washington State, it can be bought for recreational use, just like alcohol and tobacco.
Laws differ from state to state and sometimes from county to county. A bumper crop of consultants and shady public companies have bloomed, promising to show entrepreneurs and investors how to navigate the twisted way to success and fat profits. Consumers have an array of high-quality, pot-related products to choose from — but they must also discern truth from hope in the many claims about the supposedly wonderful things pot can do.
"It's a grey market industry, that's just how it is," says Kayvan Khalatbari, who owns both a marijuana dispensary and a chain of pizza restaurants in Denver.
Khalatbari started his first pizza restaurant with a bank loan. Raising money for a new marijuana-growing facility hasn't been so easy.
Federally-regulated banks are afraid to serve a business the U.S. government considers illegal. Residency restrictions in Colorado prevent raising money from out-of-state investors in exchange for a share of a company — exactly what most investors want.
So, to build his 40,000 square-foot growing facility, Khalatbari teamed with an out-of-state investor who is lending money for construction while trying to establish residency in Colorado. When that comes through, the investor will get an ownership stake.
Once up and running, entrepreneurs face more twists. Khalatbari kept his bank account in the name of a management company, and he was careful not to pay pot-related vendors out of the account. Still, three successive banks dropped him after learning the management company had ties to pot.
Once open, a business can flourish. Would-be competitors face the same hurdles to getting started, so months, if not years, can pass before they challenge the established business.
Khalatbari's marijuana business boasts a profit margin 60 per cent higher than his pizza restaurants. Even after the legal headaches, it's easier to make a profit selling the bud of a plant for $200 an ounce than it is selling a meat lover's pizza (pepperoni, spicy sausage, Canadian bacon and mozzarella) for $19.99.
"It's much higher-risk," he says of the marijuana business. "But the reward is much greater."
"Everyone wants to be in the weed business," says Adam Bierman, managing partner at a marijuana consulting company based in Culver City, California, called the Med Men.
Bierman is one of dozens if not hundreds of consultants feeding off the complexity of the marijuana business and the desire of so many to make it big in pot. Some act as matchmakers, promising to connect investors with entrepreneurs. Others sell help navigating the licensing process, tips on how best to grow marijuana, or advice about how to manage a startup that must operate outside of the banking system.
Bierman had no experience in the business when he started six years ago. Now his firm knows its stuff, he says, but the industry is crawling with people who don't.
Pot investing is treacherous even for professionals.
"It takes a lot of time and energy to sort through the hyperbole and find the right, legitimate opportunities," says Brendan Kennedy, a former Silicon Valley banker who helped found Privateer Holdings, a marijuana-focused private equity firm.
Kennedy says few companies have worked out a long-term business plan that coldly assesses the market and the risks — and growing plants for profit isn't quite so simple.
"Ultimately it's a crop, it's a commodity, not very different from a lot of agricultural products that are out there," Kennedy says. "Would you invest in a winery? Or a strawberry grower?"
Investing in pot stocks is even scarier. Most are so-called penny stocks that trade outside of major exchanges. There are now a couple dozen of these companies, often with names that play on marijuana's scientific name, cannabis sativa, such as Advanced Cannabis Solutions or Cannabusiness Group. But many have tenuous ties to the marijuana industry, regulators say.
Canadian regulators issued a warning about marijuana-related stocks in June, following similar alerts from the U.S. Financial Industry Regulatory Authority last year and one from the SEC in May. Five times this year the SEC has suspended trading in shares of companies claiming to be in the marijuana business.
Instead of relying on possibly dangerous back-alley transactions, pot consumers can now shop openly for a wide variety of strains with different levels of potency, and they can buy pot in lotions, foods and drinks with precise doses.
But buyers still need to beware. Companies are using pot's new legitimacy to try to equate getting high with taking care of your body or curing any number of ailments.
"Because it's a drug that makes people feel good, marketers want to put medical claims on it," says Bill London, a professor of public health at California State University in Los Angeles and a health claim watchdog.
Some chemicals in marijuana have been shown to effectively reduce nausea and stimulate appetite in patients undergoing chemotherapy. Others may help control seizures and inflammation, or even treat some diseases. But others could be dangerous in ways that scientists and the public don't yet understand.
In a marketing pitch for one pot-based product, called Foria, a woman says: "Foria is potent medicine and the most healing way I have ever used cannabis." It's not clear that she had a medical problem, though. The product is a pot-based lubricant for women, designed to increase sexual pleasure by delivering a high through their private parts.
News from © The Associated Press, 2014