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Top 10 Questions Investors Ask About Marijuana Investing

Posted by Patrick Rea on Jul 15, 2016 12:19:24 PM
Patrick Rea
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In our work at Canopy, we interview hundreds of investors each year and answer thousands of questions about cananbis investing. Here are the top 10 questions we field and short versions of our answers.

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  1. When will the US legalize cannabis federally?
    • “In about 5 years,” is the standard answer we consistently hear from industry leaders, but every year, it’s the same answer, “In about 5 years!”.  Kind of like the answer to what day of the week most diets begin….”tomorrow”.  Likely, the most honest answer is that the cannabis legalization movement is moving faster than we ever imagined in the U.S. and worldwide.  
  2. What are the unique risks of investing in the cannabis industry for investors?
    • Businesses that “touch the plant” i.e. cultivators/growers, extractors, manufacturers of infused products (edibles), distributors and dispensaries are still federally illegal. Ancillary products and services could be considered aiding and abetting an illegal industry. Practically, both businesses types operate in a gray area between federal and state law. History will show the larger your investment grows and the closer it operates to the end consumers, the more likely you are to be targeted and made an example of. At Canopy, we like racetracks as opposed to racehorses. Infrastructure, data, software, and tech focused on business to business needs are businesses we always like to invest in. Read more about how to Pick Your Niche to refine your investing strategy.
  3. What is IRS Code 280E?
    • IRS Code 280E is the bane of the existence of many dispensary owners and other businesses that “touch the plant”.  Section 280E says that cannabis growers, processors and dispensaries can NOT deduct expenses from their income, except for Cost of Goods Sold (COGS).  In essence, this means that businesses that “touch the plant” need to get creative with their accounting or pay their federal tax bill based on their Gross Profit and not their Net Profit.  Ouch!
  4. Can companies get bank accounts or do they have to deal only in cash?
    • Banks are reluctant to bank “cannabis cash” out of fear of losing their federal deposit insurance and violating federal banking rules.  The rules are not that they cannot accept “cannabis cash” accounts, but that if they do, they must file expensive Suspicious Activity Reports (“SARS”) for every transaction related to the “cannabis cash” account.   Considering the compliance liability and expense, most banks choose to pass on banking the marijuana industry.  That being said, a survey completed by MJBizDaily.com found that 30% of responding businesses that “touch the plant” had bank accounts and 51% of ancillary business held bank accounts as well.  In addition, a March 2016 article in MJBizDaily.com reported that 301 U.S. Banks and Credit Unions served cannabis companies, up from 51 in March 2014.  
  5. Is it too early to invest?
    • The industry will never be smaller than it is today - at least that is our belief at Canopy.  Though good opportunities to invest in the cannabis industry will exist for decades to come, the opportunities of today are ripe for investors looking to make alternative investments in high growth industries.  Most of the investment opportunities are in companies that would be considered small to medium businesses.  In addition, with the federal laws as they are, large multinational publicly traded companies are either prohibited, or are choosing not to compete in the cannabis industry.  This leaves ample white space for cannabis companies to launch and grow into.  
  6. Who are the biggest players?
    • There are no major players in the cannabis industry today.  In fact we often say the largest companies in the cannabis industry haven’t even launched yet.  The most successful multi-state brands can be counted on one hand alone.  Numbers wise, the legal market is estimated to rake in just north of $5 billion annually, growing at 30%...that’s about half the quarterly profit of Apple.  Only a handful of companies boast revenues of over $100 million annually.  
  7. What are valuations like?
    • Valuations are moving closer to reality at a rapid clip, as the quality of the entrepreneurs and investors focused on the cannabis industry improves.  Generally, investors apply a discount to comparable valuations, and entrepreneurs apply a bonus to valuations, both because of cannabis.  Still, the cannabis industry is not immune to the laws of economics, so as more time passes, the valuations come closer in line with comparable companies in other industries.  
  8. Have there been any exits yet?
    1. Yes, notably Scotts Miracle Grow acquisition of General Hydroponics for $130 million and MassRoots went public and as of May 2016 had a Market Capitalization of around $35 million.  Most in the industry believe that as more states legalize and the banking problem is solved, valuations and the number of exits should increase dramatically.   
  9. How will the Presidential election impact the industry?
  10. Do I need to be a U.S. Citizen to invest in the cannabis industry?
    • No, investment in ancillary businesses is open to any qualified investor regardless of citizenship. Non-U.S. investors will need to register for and provide a U.S. tax ID number.

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Topics: Investing