View attachment 40822 When James Howler created his marijuana-infused taffy in 2009, the Colorado entrepreneur had trouble finding an accountant willing to keep the books of a company making legally fuzzy medical marijuana candy. Now, five years later, venture capitalists from New York City want to shower him with money for a stake in his Cheeba Chews and a foothold in a $2.6 billion marijuana industry now operating in nearly half the country.
With medical marijuana legal in 23 states and Washington, D.C., and recreational marijuana legal in Colorado and Washington state, the market for weed is rife with potential, and the people in pinstripes have taken note. As the marijuana companies grow more sophisticated — and profitable — they are attracting the attention of investors and corporations.
Tapping into the green revolution, however, brings unique challenges for entrepreneurs and corporate honchos alike. States may have bucked federal law, which considers marijuana illegal for any purpose, but they have imposed their own complicated, lengthy lists of regulations meant to keep cannabis tightly under control and, in some cases, keep the corporate behemoths out.
But with so much money at stake, industry experts say, it's only a matter of time before corporate giants, already eyeing the market, grab their share, too. "If leaders of these companies are not looking at the cannabis space, then they are not doing their jobs," says Chris Walsh, editor of Marijuana Business Daily, a trade publication based in Denver. "Billions of dollars are here, and no seasoned business executive is going to overlook a billion-dollar industry that they might be positioned to tap."
If the crowd of 200 executives who jammed the marijuana panel at the Wine & Spirits Summit on June 5 in Denver is any indication, the alcohol industry is paying attention. "Some see it as a threat, and some are interested in being part of the industry," says Emily Pennington, editor of Wine & Spirits Daily, an online trade publication that hosted the summit. "Either way, they are watching it very closely."
Brown-Forman, the company that owns Jack Daniel's Tennessee Whiskey and Finlandia Vodka, mentioned marijuana legalization in its 2014 annual report as a potential threat to its market share. The company noted that consumer preferences may shift because of a number of factors, including "the potential legalization of marijuana use on a more widespread basis within the United States."
Most major tobacco companies, which explored the possibilities of marijuana in the 1970s, when federal legalization seemed possible, now deny any interest. "Marijuana remains illegal under federal law, and Altria's companies have no plans to sell marijuana-based products," says Brian May, spokesman for Altria, the company that owns tobacco company Philip Morris America. He said he could not speculate on what the company might do if the federal government lifted its ban on marijuana. The company took legal action in 2010 to lay claim to two domain names, Altria Cannabis and Altria Marijuana, from someone unrelated to the company who had purchased the names. May says it was a move to protect its trademark.
R.J. Reynolds Tobacco also says it isn't interested in marijuana.
"We have no intention to have any involvement when it comes to marijuana," spokesman David Howard says. "We have no interest in that industry." But tobacco giant Japan Tobacco International entered into a deal in December 2011 with Ploom, the San Francisco-based manufacturer of a pocket-sized smoking device that heats tobacco, vaporizing nicotine and flavor without producing smoke, to commercialize the product outside the United States. Although the company maintains its device is solely for tobacco, the latest version, called Pax, is popular among marijuana users.
At least two pharmaceutical firms, AbbVie and GW Pharmaceuticals, already produce medicines that contain active ingredients from cannabis. GW says it is a traditional pharmaceutical company that won't be dabbling in what it calls the "artisanal" medical marijuana business.The company manufactures Sativex, a cannabinoid medicine for the treatment of spasticity due to multiple sclerosis.
"Our business is very different. Our approach to cannabinoids as therapeutics is very different than the medical marijuana movement," says Stephen Schultz, vice president for investor relations at GW Pharmaceuticals. "Real medicine is designed and developed using proper science for a particular therapeutic need. It is run through clinical trials that yield a clear understanding of what a medicine does and does not do, and what the appropriate dosing regime is. None of those things are found in medical marijuana."
If some corporate giants are sniffing around these emerging markets, they haven't entered it in any public way.
It's not that they don't want to, Walsh says. "It's because there are several big barriers keeping them from doing so." Federal law and regulations that differ not only from state to state but from town to town make it inefficient, not to mention potentially illegal, for big business to enter the market, he says. "I definitely think we're going to see mainstream companies come into the cannabis space, but it won't happen until there's change at the federal level," Walsh says.
Some states don't allow non-residents to open or have equity investments in marijuana businesses.
Colorado, which has more than 1,300 licensed marijuana businesses, requires marijuana investors to have lived in the state for at least two years. The owner, operator and employees must all be residents of the state. Non-state residents can lend money but can't have an equity interest, says Colorado Department of Revenue spokeswoman Natriece Bryant. The state enacted those regulations specifically to keep the giant multinationals out, Bryant says.
"We wanted to make sure it was a closed system that we could really wrap our heads and hands around," says Colorado Rep. Jonathan Singer, a Democrat from Longmont who sat on the task force that devised the regulations. "If you have outside investment, can you track where those dollars are coming from? You want to make sure that none of the criminal element is infiltrating the marijuana industry."
"This is not just a protectionist element to keep money in Colorado. It's also to keep the federal government outside Colorado," Singer says. "The federal government is very clear that they could come in if it was found (the marijuana industry) was contributing to criminal enterprises." Singer acknowledges that without outside investment and no access to bank loans, the state's marijuana industry is finding it challenging to grow.
Most federally insured banks have opted to stay away from the industry because of legal uncertainty about whether transactions for marijuana businesses could be considered money laundering. That means marijuana businesses have little access to small business loans or even payroll accounts. With banks out of the picture for now, most of the financial backing for growth in the marijuana industry has come from venture capital, angel investors and private loans.
"We've had bankers from New York City asking for a tour of the facilities and wanting to know how they can invest," said Ralph Morgan, chief operating officer of Open Vape, which specializes in extraction of purified cannabis oil from marijuana and produces a vape pen that vaporizes the oil to be inhaled. Open Vape products are sold in Colorado, California, Washington, Oregon and Arizona. "There are tons of people dumping tons of money into the industry," says Cheeba Chews' Howler. "There is money to be made, and that's why that big money is coming in."
Boulder-based Cheeba Chews is still a small business, producing 12,000 pieces of its signature hand-cut and -wrapped taffy, which retail for about $12 each, and related products each week, says marketing director Eric Leslie. But after a few years in the marijuana edibles business, the company developed nationwide name recognition and wanted to expand.
So far, Cheeba Chews has opted for slow and steady growth without investors or bank loans, Leslie says. It is the largest edible manufacturer in the country, he says. Investors have approached, Howler says. Some speculators offer shell companies or schemes to take the company public, Howler says. "It just screams 'sketchy' to me," he says. A manufacturer of almost any other product could simply ramp up production, create a distribution plan and ship its orders around the country.
Not marijuana. Since pot remains illegal under federal law, a cannabis product cannot be transported over state lines. States where marijuana is legal have wildly divergent regulatory setups. So Cheeba Chews had to get creative. It grew by licensing its brand to manufacturers already licensed to operate in California and Washington. "You have to be agile enough to meet the standards in every state. On top of that, the laws are constantly changing," Leslie says. "You have to have this adaptability. You're not going to find an industry like it." The industry, he says "is creating itself right in front of our eyes."
Ultimately, once corporate America thinks the industry is safe, well-established marijuana companies will be targets for acquisition, says Steve Berg, chief financial officer of Open Vape. "By virtue of the success we've had and the powerful brand we've developed, we constantly get inquiries from individuals and companies looking to partner," Berg says. None have come from Big Pharma, Big Tobacco or Big Alcohol, "but we feel like we can feel them out there," he says. "How could it be otherwise? This is a new industry that is growing very, very rapidly," Berg says. "Any business-development division that has any similarity has to have their eye on this ball."
Open Vape's chief operating officer, Ralph Morgan, who worked in medical device sales before he and his wife, intrigued by the medical side of cannabis, decided to open a dispensary in Colorado, says there's nothing mysterious about the marijuana industry. "All the regular business rules apply to the marijuana industry — taxation, regulation, human resources," Morgan says. "It's just a different widget." Morgan says recreational marijuana businesses are a natural fit for the alcohol industry, which is already accustomed to state-by-state regulation.
Marijuana products "could be made and distributed in a similar fashion," Morgan says. "The alcohol industry has done a good job of creating brands." Trip Keber, who four years ago founded Dixie Elixirs to make marijuana-infused drinks, chocolates and lotions, says he, too, has had inquiries from investment bankers, hedge funds and venture capitalists. And at conferences, he has fielded questions from alcohol industry executives. "Four years ago, I couldn't get anyone to return my calls," Keber says. "Now the tables have turned. We are too big to ignore."
THE NEW MARIJUANA PROFESSIONALS
One of the biggest signs that the industry has matured is the influx of top-notch professionals — lawyers, accountants, advertising execs — willing to take jobs at the marijuana companies, Berg says. Full legalization in Colorado and Washington was a watershed event for many business professionals, who could then feel it was safe to join the industry, Berg says. "One of the major themes or trends in the legal cannabis industry is the professionalization of the industry," Berg says. "Professionals are crossing over from the more conventional industries because they see a lot of opportunity and a lot of challenge."
As those professionals have entered the market, Berg says, he's seen big leaps in quality control and in standardization of systems and manufacturing processes. Keber, a former dot com entrepreneur who sold his company and moved to Colorado in 2002, began exploring the possibilities in the marijuana industry seven years ago. A former Washington, D.C., resident who once interned at the conservative Heritage Foundation think tank, Keber wore business suits to meetings. The other marijuana entrepreneurs thought he was a narc, he says. "I went to these clandestine meetings because people didn't want you to know where their marijuana cultivation was. No one understood what was legal, illegal. Those were clearly the Wild West days," Keber says. "One thing I understood clearly: If we took traditional business practices and applied it to this disorganized community, it would transform it." When he created Dixie Elixirs, he sought top-notch professionals, including food scientists and herbalists.
Now among them is Joe Hodas, 44, who until a year ago was a partner in an ad agency in Colorado. The agency created Dixie's logo. Hodas, a father of three who describes himself as the "quintessential middle-of-the-road family guy," agonized about whether to leave his conventional ad-guy job for Dixie. He wondered if the industry could survive, if the company had enough capitalization and whether the feds could shut them down and throw him in the clink. "There's risk all over the place with this industry, but I don't think there will be another opportunity in my lifetime to be part of the birth of an industry," he says. "I'll either do it now or never."
A few months later at the Cannabis Economy Summit, he was surprised to find himself at a table with executives from cheese, nut and chocolate manufacturers. "More people want to get engaged in this business," he says.
Changes in societal attitudes toward marijuana caught attorney Barry Peek's attention a few years ago. Peek, a labor and employment lawyer at the 65-lawyer New York firm Meyer, Suozzi, English and Klein, did some reading, attended a few conferences and then gathered a group of three or four attorneys in his firm to study the issues around medical marijuana. He concluded that medical marijuana would turn out to be big business. And if it's a new business, Peek says, people will need legal advice.
When New York Gov. Andrew Cuomo signed the state's medical marijuana law on July 5, Peek's firm was ready. "We are advising clients on how to maneuver through those regulations," Peek says. "We have a full-service law firm, so if there is a company that needs to get into the business, we can handle corporate issues, tax issues, land-use issues, whatever they need."
Interest in New York is widespread, from farmers in Upstate New York who have idle land that could grow marijuana to doctors who want to dispense it, Peek says. "It will be a growing sector in the legal community," Peek says. "And once the smaller companies get a foothold and become profitable, they will get bought out by larger companies."
USA Today/Oct. 4, 2014
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