Marijuana: A “Budding” New Investment Class – 3 Fast Facts for Beginners

Recently, California, Maine, Massachusetts and Nevada have joined the growing number of states legalizing the recreational use of marijuana. Along with Arkansas, Florida, and North Dakota, states that recently passed medical marijuana legislation, and the total number of states (plus the District of Columbia) that allow some form of legal marijuana has jumped to a whopping 33!

Widespread legalization has led to a massive influx of investors and would-be entrepreneurs in the marijuana industry. Those interested have a diverse range of potential marijuana-related business ideas to choose from, including the obvious choices like cannabis producers, processors, retailers and distributors. How lucrative is this “new” (i.e. legal) cannabis market, and is it just a passing trend? Greenwave Advisors’ new numbers point to marijuana business profit moving at super-speed, with current retail sales from 20 U.S. jurisdictions reaching $6.5 billion – and by 2021 that number is expected to reach $30 billion.

Have you found yourself with a craving to enter the emerging marijuana retail world? In light of the continuing expansion of legality and the monetary value of the industry, there’s never been a more opportune time. Tread carefully, however, as this industry is fraught with several issues:

Taxes Can be Quite High

Of course, Uncle Sam is going to want his cut of this booming new industry! Alongside cannabis legalization comes laws taxing its sale and some of the rates can be quite high. California, widely considered the leader of the pro-marijuana boom alongside other West Coast states Washington and Oregon, utilizes a three-fold tax strategy: 15% gross receipts tax on retail sales, in addition to a flat $9.25 per ounce on flowers and $2.75 per ounce on leaves.

At the federal level, the IRS imposes the 280E code that can hit marijuana retailers with paying up to 70% federal tax thanks to a draconian law from the 1980s meant to deter street sellers. Another taxing issue from the IRS? Even if your home state has legalized marijuana, Uncle Sam still considers retail marijuana the illegal sale of drugs at the federal level.

Compliance is a Total Buzzkill

State laws governing retail cannabis are strict and ever-changing (you can check out a list of state laws here), which can make owning and operating a marijuana-based business very complicated. Many start-ups enter the business without fully understanding the complex state rules and laws that govern the industry, leading many to be shut down due to an inability to keep up with compliance. Local laws also add to the patchwork of rules and regulations that make running these kinds of businesses difficult.

Finding a Place to Call Home Is Difficult

Again, those pesky federal laws make finding real estate to set up shop not as easy as you’d think. Because of federal asset forfeiture laws, landlords can lose their properties if they choose to rent space to marijuana-related businesses. Banks can also make the decision to foreclose on properties if a marijuana retailer moves in, thereby violating the mortgage/note. All this leads to a general hesitance for many property owners/managers to lease to cannabis-based retailers.

Of course, when one does discover a property willing to lease to this type of business, a proprietor’s enthusiasm may quickly be mellowed upon discovery of a school or daycare within 1,000 feet, rendering it ineligible to host cannabis sales under state or local law.

How to Plant Your Investments

What’s the view of this industry from an investor standpoint? There are two main routes to go with investing your money in the marijuana business. First, you can buy stock in companies cultivating and distributing recreational and medical marijuana. The second option is to invest in pharmaceutical and biomed companies doing research and developing cannabis-based medicines. There’s nothing wrong with mom-and-pop shops, but the later option has the least risk and most sustainable long-term investment potential. Why? Because big pharm companies have huge revenue, incredible market impact potential, bankruptcy protection and a law team ready to deal with the constantly shifting legal landscape of the industry.

A Word to the Wise, Man

Regardless of all these hoops and hurdles, are you still jonesing to break into this billion-dollar industry and create or back a potentially highly profitable business? Maybe your business offers an advantageous new angle to help large medical companies distributing cannabis products. Before hopping on board make sure you partner with an expert in the screening industry to minimize your risk on the background side – the last thing you need as you navigate the complexities of this new investment sector is a business partner gone sour because of information you wish you’d had beforehand.

There are so many unknowns and potentials for risk as this industry continues to expand. Who you do business with or invest in within the sector doesn’t need to be one of them.