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Colorado Marijuana Investing

The Battle Between Federal and State Laws


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By Swagato Chakravorty
Thursday, May 23rd, 2013

Although there’s a marijuana revolution of sorts – at least, as far as the legal status is concerned – brewing across the nation, there are still significant hurdles.

marijuanaWould-be marijuana entrepreneurs continue to receive the short end of the stick when they approach banks and lending agencies for startup loans. And a lot of private investors remain leery of openly investing in this undoubtedly growing sector due to the federal/state legal tangle.

The Colorado Advantage

Things are somewhat different in Colorado, which, along with Washington, has approved the recreational use of marijuana. The biggest problem is that federal law has not been updated yet when it comes to cannabis – marijuana remains illegal under federal law. And that’s the biggest reason why banks and investors are wary.

Meanwhile, Dixie Elixirs in Colorado, a wholesaler of marijuana-infused food and beverages, isn’t afraid of investing in growing businesses. For example, the company recently invested in Canna Security – a small Denver-based security firm that installs security systems at marijuana dispensaries and farms.

Dixie Elixirs itself is a bit of a success story; the company averages annual sales of over $3 million already.

And ArcView, based in San Francisco, has popped up as a network that connects investors with marijuana businesses seeking startup capital.

As the Denver Post reports, though, problems abound. Since ArcView’s founding in 2011, the feds have carried out multiple raids on medical marijuana dispensaries spread across California. That, obviously, has not helped business.

However, the momentum cannot really be stopped once it’s started. MJ Freeway is another Colorado firm that went from soliciting investments to becoming part of the ArcView investor network. MJ Freeway provides software solutions to help marijuana businesses track their products through the entire workflow, as well as stay in compliance with state requirements.

Not having any actual contact with marijuana has helped MJ Freeway grow fast. Today, the company projects revenue over this year at between $1 and $2 million, and clients are situated across Washington, D.C., Colorado, and even Canada.

Colorado's Legal Status

Colorado is a sweeter spot for investors looking to cash in on this rapidly-expanding sector. The state already had its gates open for medical marijuana. There is extensive state oversight, and the general infrastructure is much more sophisticated than it is in Washington.

For example, marijuana packets are tracked via bar code from seed through sale, which helps curb the emergence of a black market. Of course, there are some problems. A mandate that requires retailers to grow almost 70 percent of what they sell has tamped growth. That was back when the question was just about medical marijuana.

But now that Colorado and Washington have approved its recreational use, Colorado must prepare for a mushrooming of the industry. That means some legislation will have to be changed and new ones introduced.

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Marijuana tourism, of all things, popped up as a surprising innovation. Given Colorado’s lenience with the whole issue, the state has seen a sharp rise in tourism for the explicit purpose of sampling the city’s pleasures.

One thing that’s seriously denting the industry’s will toward growth is the federal legal structure that lags behind. Right now, it’s illegal to take marijuana products across state borders. As a result, what’s grown or manufactured in Washington or in Colorado must stay within the borders of those states. That, obviously, is not a friendly climate for a growing industry.

Moreover, retailers are also restricted to sales within state borders. While the TSA isn’t actually hunting for marijuana, it isn’t exactly encouraged either.

As it stands, therefore, the entire marijuana sector is hamstrung by federal law. Until changes occur at the federal level, the sector can’t exploit its full potential for growth.

But companies like ArcView are making it possible for innovative startups to receive capital that is otherwise denied by more conventional sources. There are good investments to be made currently in companies that address peripheral needs of the marijuana sector (for example, Canna Security mentioned above), rather than companies that directly handle marijuana.

And Colorado’s law wins out here, too; producers and retailers kept separate from each other helps avoid ready monopolization. 

 

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