The Marijuana Market

With California’s Proposition 64, the proposal which made recreational marijuana use legal in the state, in full effect as of January 1, 2018, new federal regulations could be on the horizon. This would make investment opportunities in the marijuana industry available to everyone.
The marijuana industry is one of the fastest growing in the country. The medical marijuana market alone generated a revenue of $4.7 billion in 2016 and is estimated to be worth $13.3 billion by 2020. With more states decriminalizing recreational sales, it is projected add $1.2 billion to the marijuana industry by 2020. The marijuana industry has become a promising opportunity for investors because of the revenue its proved to generate and the different industries available to investors. Investment opportunities have been fairly small until recently, so with growth on the horizon investors are working on ways to get in on the ground floor.
Silicon Valley has been financing the marijuana industry since the early stages of the legalization process, however, this opportunity has remained unavailable to the average investor. Individual investors can only take advantage of the industry’s 16% estimated yearly growth rate is to directly invest in a marijuana business or to join a syndicate group as a limited partner. This is not a feasible option for lots of investors because of the amount of capital required, access to deals, and illiquidity.
Even access to indirect investment opportunities such as pharmaceutical and medical research companies is tremendously limited without a multimillion dollar investment.
The biggest barrier to investing in the marijuana industry is the federal regulations that remain in order. 30 states currently have decriminalized either medical or recreational marijuana use, however it is still a Schedule I regulated substance in the eyes of the federal government.
Current federal regulations mean that companies involved in the marijuana space cannot go public. The SEC requires companies to meet some strict standards before they can be traded on the stock market, so any kind of involvement with the pot industry could be in violation of federal laws. Publicly-traded pharmaceutical purposely stay away from the pot industry for this exact reason.
The average investor will eventually be able to buy shares in companies that produce or distribute marijuana, invest in cannabis-related funds and securities and maybe even purchase marijuana futures – but first, a few things need to happen.
Reform on the Horizon
There’s a need for the federal government to pass legislation that would align with the stance most states are taking on medical and recreational marijuana. Canada’s nationwide marijuana legalization could provide the U.S. with a template to follow for federal and state governments to work together. However, since full legalization at the federal level isn’t likely to happen soon, reform has to start in the states which it has.
Some states will need to clarify their marijuana-related legislation. Currently, gray areas leave businesses and consumers unprotected and make it difficult for companies to access financial services such as loans, banking or even credit card processing. Clarifying legislation at a state-level would make it easier for pharmaceutical and biotech companies to invest in the marijuana space and for financial companies to offer their services to cannabis companies. This is key – because, as of right now, the industry essentially runs on hard currency with little to no credit or financing options.
Before it can grow and move away from a model that heavily relies on cash, the cannabis industry needs to secure access to financial markets. But due to federal regulations, banks and even insurance companies stay away from businesses involved with the production and distribution of marijuana. Instead, growers, dispensaries and even research labs have to secure financing from credit unions or angel investors. Come Jan. 1 in California, the Cannabis Banking Working Group could make financing more accessible to this industry, but access to financial services in every state would only become available if the federal government passes the SAFE Banking Act or other future legislation that would provide legal protections.
The marijuana industry is booming, and once we see these changes take place, we will likely see investment ramp up creating greater demand for funds and other financial instruments focused on this space. Soon, we could possibly have access to investment opportunities in companies that develop new products like THC-infused skin patches, new services such as cannabis delivery or new technology like devices that work as breathalyzers for drivers. Meanwhile, a host of supporting services tied to the cannabis-industry, including finance, insurance, logistics, tech and medical research could grow with it.
The stigma that surrounds marijuana is changing as more Americans have access to medical or recreational marijuana. Investment opportunities are still limited to a few wealthy investors, but there is a demand for retail investment products, both from investors and from the cannabis industry that needs capital to sustain its growth. Federal regulations are the missing piece of the puzzle for now, but this could change in the near future.