Interested in Investing in Cannabis? Here’s What You Need to Do First
As a business attorney and strategic advisor who focuses on cannabis, it’s hard to keep track of how many times the following scenario has transpired: An investor walks into my office who is as eager as can be to get into cannabis. Maybe he or she heard the right things from friend of a friend about percentages and entrepreneurial opportunities in the space. Maybe he or she has been negotiating what looks to be a killer real estate deal. But when I start asking them a few basic questions, everything falls apart.
Do these potential investors actually know what they’re getting when someone promises them a certain percentage of the company or rate of return? Do they know if the person they’ve been working with on that killer real estate deal is actually the person who owns or controls the necessary cannabis license? Do they know the ins and outs of the local, state, and federal rules and regulations that complicate any deal involving cannabis and hemp? Do they even know the difference between CBD and THC? (Hint: One has varying levels of psychotropic affects, which give you that high feeling, the other does not.)
All too often, these investors don’t know the answers to the most basic of questions related to the cannabis industry. In truth, that lack of knowledge makes sense. From outside the industry, it may seem like the chance to get in on the ground floor of a brand new industry like cannabis is an incredibly rare, so the urge to dive in and ask questions later is often strong. Despite the endless predictions that Big Pharma, Big Alcohol, and Big Tobacco are going to take over the market any day now, the industry remains in its infancy. So while seemingly scarce, in reality the opportunities for entrepreneurs and individual investors will remain significant for the foreseeable future.
This means that you have the time to do your due diligence now before making any bold investing moves. Not only do you have the time, but if you don’t, you could find yourself the victim of one of the many opportunities in legal marijuana that turn out to be far too good to be true – costing you your time, pride, and quite possibly a great deal of money.
So how do you go about completing your due diligence? Here are first steps to consider.
Research your local rules and regulations. You don’t need to be an investigative journalist or sophisticated lawyer. You just need to know how to use Google. Search for your state’s cannabis regulations. Does the state have a medical cannabis program? An adult-use program? Have regulators already issued licenses for these programs and, if so, what kind of licenses have they issued?
While the lengthy rules most states are putting out about cannabis might look intimidating, spending a little time scrutinizing the rules’ table of contents will point you to the sections that are most relevant to a potential investor or entrepreneur. For example, what are the basic requirements for people who want to get financially involved in cannabis in your state? If you have a criminal record, are you allowed to participate? If you live out of state, are you allowed to own stake in a cannabis company? Checking information like this will help you verify whether you’re allowed to invest in a particular state’s cannabis market to begin with.
Scrutinize the paperwork. As reliable as the folks behind a promising cannabis venture might seem, don’t take them at their word. Before you sink capital into their operation, ask to see their corporate documents. How is their company structured? Who is the person or persons who actually hold and/or control the relevant cannabis business license, and is that the person or persons you’ve actually been dealing with? Otherwise, it’s like you’ve been trying to purchase a building by simply talking with one of its tenants. You scoff, but it’s an all too common occurrence.
After you’ve scrutinized the company’s structure, do a little more web sleuthing. In many states it’s difficult to determine whether or not a particular cannabis license holder is in good standing with the state, but it’s a small industry, so when somebody screws up, word travels fast. So if you search Google and social media platforms for the company and something amiss pops up, that’s a good sign there’s a problem – or at least evidence that it’s time to be asking some hard questions.
Connect with the right experts to help you. At the end of the day, you need a CPA or tax professional who is well versed in the tax structure and the ramifications of the cannabis industry, as well as an attorney who has real-world knowledge and experience in the cannabis space. While it may sound self-serving, I am not just saying this because I fall into the latter category. The cannabis industry is still in its infancy and it is complex and ever-changing, so it is critical that you align yourself with professionals with the background, skills, expertise, and knowledge necessary to guide you strategically through the hurdles and murky waters of the cannabis space.
How do you find these industry pros? Don’t just go with the first person you find who calls themselves a cannabis expert – because chances are they’re not. Do some legwork. Go to respectable cannabis industry conferences, like those organized by the National Cannabis Industry Association or the Marijuana Business Conference & Expo. Walk the expo floor, attend the seminars – and notice who really knows what they’re talking about. Start asking around. Who do established players in the space recommend? If you start hearing the same names over and over, you’ll know you’re on the right track.
Then, arrange phone or, better yet, in-person meetings with your top choices. While it may cost you money and time to do so, it’s worth it so you can personally vet their knowledge and experience and determine whether your personalities mesh. Some folks might hesitate to pay the consultation fees associated with such fact-finding meetings, but that’s foolish. No amount of initial legwork tracking down a shortlist of potential experts will take the place of you meeting with these individuals and getting a sense of who they really are.
Educate yourself on the industry. Of course, you don’t want to blindly rely on your team of experts. You should work towards become an expert in the developing world of cannabis as well. For starters, go beyond fluffy cannabis lifestyle coverage and the gee-whiz approach of many mainstream news outlets reporting on cannabis. Become a regular reader of the cannabis trade publications that are doing an admirable job of chronicling the evolution of the new industry. Great options include Marijuana Business Daily, Green Market Report, and CannaInvestor Magazine. At the same time, sign up for cannabis-related newsletters like Marijuana Today Daily, Marijuana Moment, and WeedWeek. That way, you’ll stay informed of all the latest developments in the space.
This might all seem like a lot of work. But trust me, once they help you separate the legitimate investment opportunities from the ones that should be avoided, all this time, money, and effort will pay for itself.