Cannabis is exploding. Not literally (at least not with my clients). But the cannabis industry… wow. It’s officially one of the fastest growing markets in the world. In just North America, spending on cannabis is expected to grow from $9B in 2017 to $42B in 2027. Worldwide, it’ll hit nearly $60B.
So, it’s hot. And you know what happens when markets get hot… investors want in. I work exclusively with cannabis companies as an outsourced general counsel, or as board advisor, and in these roles can tell you there are no shortage of investors, new and experienced, wanting to get into cannabis. Who can blame them? While no industry is foolproof, cannabis is a good bet right now.
But the thing about this space is the extreme complexity. I tell founders, executives, and especially investors to do very thorough research before jumping in. Here are three things anyone considering investing in cannabis needs to know.
See the business for yourself
Cannabis is very much a supply chain business. Some businesses cultivate, some process and package, some are retailers, some are wholesalers, some develop the tools, some just distribute, and some do many of these things under one roof. It is imperative that you understand clearly what you’re investing in, because the laws that regulate that business will vary depending on WHAT the business does. If you think you’re investing in a cultivator, and find out they’re also a retailer, you could be facing certain liabilities you didn’t know you had to prepare for.
I advise all potential investors to visit the business in person, a few times, and get to know it well. Check out the facility, talk to the key employees, learn as much as you can about the product(s). Also, research and ask about competing businesses in the same area, including reviewing available competitive licenses. You need to know what your investment will be up against.
Cannabis is not an investment you want to make blind, you very much need to see and evaluate the physical business before making a decision.
Dive into the inner workings
Because this is a young industry with a lot of first-time entrepreneurs, cannabis businesses are notoriously known for not managing their operations tightly. I preach this to clients — they NEED to have all of their operational documents, including inventory records, financials, and inspections records updated and ready for presentation at all times, especially if they want to bring investors in at any point. It’s not unreasonable for you to ask to see all corporate records, and especially records relating to corporate structure and affiliated entities (especially for tax purposes), and employee training documents.
An important question to ask is: does the business you’re considering investing in have a public banking arrangement? In most states, some banks will accept banking from well qualified cannabis companies. If an FDIC insured bank will give them an account, it signals to you that they are well run and managed.
While it may feel uncomfortable, part of your due diligence must include asking them to disclose any past issues with the founders or executives. Certain things like convictions, law suits, or jail time could cause serious problems for the business with regulators. And if something bad happens with one of the founders, you could be implicated as an investor. Further, know that if you buy more than a 5 or 10% stake in many cannabis companies, you very likely will have to go through substantial background reviews by state agencies.
Like I said, the industry is new. We have a lot of kinks to work out. On that note…
Study individual state regulations
I’ve talked about this extensively — one of the most complicated things about this field is the fact that every state has its own set of regulations when it comes to cannabis. Look very closely at the state in which the company you’re considering is doing business. Some states are more heavily regulated than other states, and what flies in one state will get you fined or shut down in another.
If the business you’re looking at is aiming to operate in multiple states, you’ll need to do your homework on all of them. Hopefully the founder has already compiled the information for you (a good sign), but it’s always healthy to do your own due diligence. Throw in the fact that the federal government has now approved the sale of industrial hemp products with less than .03% THC, and you have to look at the state regulations alongside federal regulations.
If this sounds like a lot of work – good, it should be. Cannabis may be hot and yielding big returns, but the wrong investment could mean big losses or even criminal charges. It’s worth every bit of effort before you write the check. If you need help, there are experts like myself who know this space and are happy to help you with due diligence.
Andrejs Bunkse is an attorney and entrepreneur with decades of experience guiding companies in heavily regulated industries, Andrejs acts as chief legal officer, senior advisor and board member for a variety of enterprises, with an emphasis on the cannabis industry and high tech. Since 2013, his primary focus has been on supporting transactions, licensing support, business development and providing overall guidance in the complex and evolving cannabis industry.
He is either general counsel, board member or board advisor for enterprises in California, Ohio, Arizona, Massachusetts, Pennsylvania, Canada and Mexico.