U.S. News

06.26.13

Marijuana-Related Stocks Are on the Rise. So Should You Invest?

It’s not a stoner-utopia vision of the future—you can buy weed-related stock right now. Winston Ross reports on the risks (possible prosecution) and potential rewards (the next Google?).

Psst. You wanna buy some weed ... stocks?

We’ve got Growlife, Inc. Or maybe you’d rather puff on some Cannabis Science? Oh, that stuff’s not strong enough? Check out Privateer Holdings, a venture-capital firm based in Seattle that is about to close on $7 million in funding.

If that all sounds like some stoner-utopia vision of the future, it isn’t. It’s right here and now, man. With 19 U.S. states plus D.C. puffing legal medical marijuana and Washington and Colorado’s initiatives last November that legalized pot for everyone, marijuana-related stock trading was a when, not an if, thing. Right after the last election, some medical marijuana–related stocks boomed. A former Microsoft manager is promising he’s going to create the “Starbucks of Pot,” once he raises $10 million in startup money.

So are these investments a good idea? Sure, most of the weed-related companies now publicly trading on the stock market don’t do illegal business, unless of course you count marijuana still being an illegal substance under federal law and the feds being known to raid and seize the assets of medical-pot dispensaries over the past couple of years, despite their owners’ belief that they were legit.

But that’s the problem with the rise of pot stocks, several experts tell The Daily Beast. The federal government’s response to Colorado and Washington’s legalization measures remains hazy, which means shareholders who invest in a company that dances on a dim line between locally legal and federally illegal might find themselves not only broke but locked up.

“Your risk assessment includes federal prosecution and asset foreclosure,” at least as it concerns any business involved in growing or selling marijuana, said Hilary Bricken, a Seattle attorney with the Canna Law Group, which features a pot leaf on its homepage. And even for companies on the up and up, “these stocks are extremely speculative, and most of them are located in the pinks [penny stocks] anyway,” she said.

There have been some pretty dramatic examples of just how volatile stocks based on the wacky weed can be. In November, a company that builds a machine called MedBox that medical-marijuana dispensaries use to store weed saw its shares leap after the legalization measures in Colorado and Washington, from $6 to $205 in the span of a week, before dropping back to $20 the next day.

“The glam means there’ll be a lot of money chasing a few opportunities. Can you say dot-com? Somebody’s going to be Google. A lot of people are going to be Pets.com.”

“This story is funny, but it’s no joke,” wrote financial blogger Bruce Krasting of the “absurd” rout. “I’m thinking pot smokers shouldn’t trade stocks.”

Thing is, you don’t have to be a pot smoker to trade stocks. You just have to realize you’re wading into a pretty volatile market, with plenty of unknowns.

It’s a sector ripe for scams.

“It’s very easy for me to see how somebody could go public with an acquisition, change the company’s name to Marijuana Inc., and pump and dump,” said Mark Kleiman, a professor of public policy at the University of California, Los Angeles, and the official consultant for the state of Washington as it figures out how to implement the new law. “If somebody offers you the chance to invest in an ancillary business, investigate carefully. If it’s any activity that winds up delivering marijuana to consumers, run like hell. You can go to jail for this shit.”

The trouble with investing in anything marijuana-related is how sexy it is, really. Conventional wisdom has it that as this black-market trade inches closer and closer to legitimacy, truckloads of money will be in the offing. But it might be too early to get your retirement savings involved.

“The glam means there’ll be a lot of money chasing a few opportunities,” Kleiman said. “Can you say dot-com? Somebody’s going to be Google. A lot of people are going to be Pets.com.”

Count Michael Blue in the bullish camp. He’s chief financial officer of Privateer Holdings, a private-equity group (with no pot leaves on its homepage) he founded with a fellow graduate of Yale School of Management, Brendan Kennedy, who is CEO. Privateer is about to close on a $7 million round of funding to spend on investments that “strictly adhere to state, federal and local laws” but are all aimed at the cannabis industry.

Privateer’s flagship is a website called Leafly.com, billed as the Yelp or Consumer Reports of medical marijuana, with tens of thousands of user reviews of more than 500 strains of cannabis. The site generates $100,000 in ad revenue monthly.

Blue told The Daily Beast that Privateer is in negotiations to acquire several other “web-based information companies,” vetted by attorneys from three firms, though he said with so few players in the game right now, to be more specific would out the parties prematurely. Blue said Privateer’s goal is to help the industry feel “professional,” he said.

“Most of the other brands in this industry, you wouldn’t be comfortable sending a family member there,” he said.

November’s election resulted in a significant boost of capital for Privateer, Blue said, but it didn’t change anything about the company’s investment strategy because the federal government still hasn’t indicated whether it’s going to let the state laws go unchallenged.

“It’s incredibly important that everything we do complies with federal, state, and local laws,” Blue said. Now, though, “investors are starting to see the inevitability of the end of prohibition, and they can see that legalization is going to happen—probably sooner than they initially thought.”