So you want to invest in the legal cannabis industry?

Legal cannabis is one of the fastest growing industries in the world, with the U.S. economic impact estimated to reach $29 billion by 2019 (a particularly conservative estimate as well). All of this is happening while the plant remains illegal in the majority of states and at the federal industry.

The industry has barely been around 6 years, and adult use (aka new word for recreational) far less. This situation leaves a huge market with no 1,000 lb. gorillas in the industry. Hard not to sound appealing, so what are 2 questions should you ask yourself and potential investments prior to writing that check?

1: What are the legal constituents for investing in this state for an ancillary product and/or if it "touches" the plant?

Investing in Colorado is vastly different than Oregon or Washington, and each state has its own nuances. Colorado has particular laws surrounding non-resident investment which can limit the structure and businesses available to investors. There are also variances for ancillary products vs. direct investment and "touching" the plant. The law is ever changing, and the most important thing is to make sure you work with knowledgeable business partners who are up to date on the local, state, and federal laws.

Working with the right people who are immersed in the industry will allow you to see all options, potential and risk. The biggest misconception is that just because someone is a lawyer, they know all the current regulation surrounding a legal cannabis related investment. Talk to someone local and in the industry, work with your business partners through any legal concerns, and do your diligence on whoever is pitching their investment. 

2: Are you wanting to invest in a public OTC company or private investment?

There are a lot of pink sheet legal marijuana companies these days. Most get a significant amount of hype out the door, and tend to under-perform expectations. Just because a company is publicly traded doesn't make it better, more stable, or less risky than a private investment. Make sure to ask why is this company accessing public markets for capital? How does this company make money or plan to monetize? How liquid is this investment (i.e. if I change my mind and have 1 million shares, is there any market?). 

Private investment opportunities in the legal cannabis space are coming out every day. It's a huge market, lots of untapped potential and no industry leaders so every idea is the next "pot unicorn". In reality, it's not that simple. Like most industries, the majority of new businesses fail. Yes, the market potential is enormous and has unique barriers to entry. This fact doesn't mean every idea is a winner. Just like any investment, do your diligence. How will this company make money? Who are the founders and why do I believe in this idea? Particularly in this industry, it is important to consider the financial aptitude and transparency of the company. Do they know their numbers, have believable and conservative base case assumptions, do they have an exit strategy? Most private investments are highly liquid, and you need to asses your own willingness to have that investment out of your hands for at least a few years. The best way to ease this worry is through communication with your business partners about regular financial reporting, transparency on growth projects, and general responsiveness. 

Overall, the legal cannabis industry is ripe with opportunity and has many ways to invest. Knowledge is power in this market, so take time to meet the founders, do your diligence, and consult the right people. The next billion dollar company is out there somewhere...

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