Already generating billions of revenue dollars annually, the cannabis industry is moving ever closer to the mainstream, and newly created companies are increasingly seeking out investor assistance to turn their ideas into realities. In this post, we present some issues to consider and measures to take when deciding whether to invest in a cannabis-related company that is seeking funding.
1. Make sure the company has truly obtained all required licensure
Each state has its own system for awarding licenses to grow or sell cannabis. It’s important to understand how far along the business is in the licensing process, and what its status means for your investment. It’s not unusual to invest in a company prior to its obtaining full licensure; however, before doing so, you should protect your stake by ensuring that there are procedures in place for the return of all or most of your money if the company fails to get licensed in a reasonable amount of time.
Make sure you verify with the proper authorities where the company truly stands, as it may not fully understand the nuances of the process, and could be incorrect about its position. Often, this information is public record. We’ve heard stories of companies that have represented themselves as fully licensed to investors, when, in fact, they weren’t.
2. Find out the professional cannabis-related experience of the business owners
Given its significant potential for growth, many are eager to get into this “hot” industry. But what quantifiable experience do the people with whom you’re investing your money have in growing and/or selling cannabis? We’ve been contacted by people who previously owned a flower shop or grew tomatoes in a hydroponic greenhouse, and believe that such a background qualifies them to establish a marijuana business. It doesn’t. This industry requires a wealth of specific, and often scientific, knowledge – simply being able to cultivate seeds in a controlled environment is not enough. Don’t be afraid to ask the principals what precise experience they have with growing the plant, creating edibles, and other related processes.
3. Verify that the company has a bank account
As obvious as this step may sound, to many, it’s anything but. The fact is, only a few small banks and local credit unions across the country have agreed to take deposits from cannabis-related businesses. As a result, many of these businesses are having difficulty opening bank accounts, and are forced to operate on a cash-only basis. Find out if the business has an established bank account that will accept cash deposits related to the sale of cannabis. Also, ask how the business plans to handle your distributions/returns on investment. Without a bank account, it may have to disburse your monthly return on investment in cash, as opposed to a check or a wire. Although cash may be “king,” due to federal banking laws, take under advisement that you will have difficulty depositing more than $10,000 into your account at one time.
4. You may have a full background check run on you
Most every state that permits the sale of cannabis requires business principals and other key personnel to submit to a full background check. Some states require the same of investors. Further, a company’s bank might require all (or at least the principal) investors to submit to background checks, as part of its compliance obligations. Any drug-related arrests, or fraud or embezzlement convictions, are generally considered to be disqualifying factors.
5. Be prepared that your investment may be illiquid
Relatively few cannabis-related companies are selling stock publicly, and those that are primarily do so on OTC markets. Most investments are made through private placements. As a result, if you decide to sell your investment at a later date, there may not be a public market for it. Investing in a marijuana-affiliated enterprise is generally seen as a long-term strategy.
6. Know how the differences between federal and state laws may affect you
The federal government doesn’t recognize the legal sale of cannabis products, despite the fact that more than half of states allow the sale of medicinal marijuana. This is perhaps the most confounding issue confronting the industry. While we perceive the risk to be minimal, at least with respect to medical marijuana, there is always the possibility that the federal government could intervene and shut down the industry.
Cannabis presents a number of exciting opportunities for both potential investors and entrepreneurs, and at least as many challenges as well. If you’re looking to “get in the game,” one of the best ways to safeguard your investment dollars is to stay up to date on changes in federal, state, and municipal regulations, and how they might impact you.