CANNAINVESTOR Magazine September / October 2016 - Page 51

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While investing in state-licensed cannabis businesses can be considered to be the wild west of investing, it doesn't have to be. In many states that have legalized cannabis, the regulations are evolving and in some states, very defined. The more developed the regulations, the easier it is for investors to evaluate the regulatory environment as it impacts a potential opportunity.

It is important for an investor to determine whether the state’s regulations and the regulators themselves are truly “friendly to the plant.” While a state such as Colorado has very well-defined regulations and regulators who are generally friendly to the industry, the regulations of many other states including Illinois, New York, and New Jersey are challenging for the new industry and add a layer of complexity to establishing a viable business.

Most states have limited the number of licensed cannabis businesses. On the surface, less competition may be seen as a real advantage in establishing a new business. But if these states make it difficult or nearly impossible for patients to be approved to purchase cannabis, or severely limit the number of medical conditions, and diseases cannabis can be used for, it may significantly limit the potential of success.

Supply, demand, and pricing are also a consideration. It could be argued that Colorado, with over 2800 licensed cannabis businesses, consisting of both medical and recreational licenses, has too many industry participants. Many investors have recently been asking whether any Colorado grower, processor or retailer is operating profitably. A few weeks ago a colleague, somewhat jokingly, told me that he thought that every cannabis dispensary or retail store in Colorado was likely for sale.

Ultimately it’s all about dollars, and America’s legal cannabis industry is projected to generate revenues of more than $7 billion this year, an increase of approximately 25% over last year. Of this $7 billion, one state, Colorado, which has both medical and recreational cannabis, will account for an estimated $1.2 billion. Estimates for this year’s illegal sales are as high as $40 billion. This 25 percent growth rate has placed the industry on many investor’s radar screens.

The online publication, Marijuana Business Daily, has projected legal sales of $40 billion by 2020. This is a tremendous revenue projection for an industry that only had a minimal existence a few years ago.

Investments in Licensed Businesses in States That Have Medical or Recreational Cannabis

There are numerous challenges in investing in businesses that grow, process or sell cannabis in the states that have legalized medical or recreational cannabis.