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The Basics Of Investing In Cannabis.

Written by Meghan Grabow | Apr 25, 2017 4:39:00 PM

"Marijuana, known otherwise as cannabis, (or more accurately, cannabis sativa or cannabis indica) is a naturally occurring plant that produces a wide variety of chemicals impacting people in a myriad of ways. Most of us know the most common impact – 'getting high,' as well as a few of the others, getting hungry, feeling relaxed, or becoming tired. But here's another we can add to the list: getting rich."

Last Thursday, we celebrated 4/20. Each year, the day's acknowledgment becomes more mainstream, with big brands such as Red Bull and Uber becoming visibly involved in the festivities. That consumer brands are becoming more willing to associate themselves with cannabis is no coincidence; it's symbolic of the industry's promise. At a base level, it's about money. These brands are making investments, banking on increased legalization and increased opportunity. And serious investors are certainly taking notice of investment opportunities in this market as well.

Canopy Managing Director Micah Tapman marked the holiday with an op-ed piece featured on CNBC, providing the basics around marijuana investment strategy. We've summarized the piece into four tenets:

1. First, avoid publicly traded marijuana companies (they're all over-the-counter) such as Medbox (OTC:NGBL) which ended up settling with the SEC for securities fraud. There are very few solid businesses in the space and finding the right one to invest in is extremely difficult. Your best bet is to invest in privately-held companies, which means you need to be an accredited investor, per SEC guidelines.

2. Second, look for companies with solid management teams teams. Yes, this is somewhat obvious, but it's particularly important in a community where "stoners" are still rampant. If someone is getting high at a meeting, that can ruin negotiations and negatively impact the company.

3. Avoid interacting directly with cannabis to side step a lot of risk. A smarter way is to find ancillary companies such as IoT technology firms, business intelligence solutions and next generation marketing platforms that provide the tools to help grow and distribute the plant. Examples include Flowhub, an innovative software company servicing cannabis businesses, Front Range Biosciences, which helps research the cannabis plant, and BDS Analytics, the industry's authoritative market research firm.

4. The last factor to consider when investing in the cannabis industry is the navigation of state-by-state intricacies. Market characteristics include open or closed regulatory frameworks, population size and demographic diversity, urban versus rural distributions, and even seasonality. Franchises or other licensing-type arrangements may be manageable but we predict many entities will stay focused on just one or two states for the next few years while the industry matures and the supply chain evolves.

Tapman concludes with this:

"So again, play it safe and focus on the services and technologies that empower and facilitate the success of these new cannabis companies. As the industry grows, so will the need for these products and services regardless of specific regulatory hurdles."

Read the entire Op-Ed piece on CNBC.com.