Investing in Weed: Here is What to Look Out For
Cannabis investment in the US can be tricky. Here is how to do it without getting burned.
Cannabis investment can be lucrative, but there are scams out there. Here is what to watch out for. Gains can be quite high and rightfully so. It is not necessarily a sign that it is a scam. The reason for high gains for investors is that cannabis start-ups are having difficulty to obtain start-up capital. The cannabis industry is highly profitable and high returns are possible. The reason of limited capital for cannabis is it is illegal at the Federal level. Since banks are federally insured and get loans from the FED, banks will follow federal laws. This makes obtaining loans for new cannabis businesses a highly difficult venture. Larger investment companies tend to stay away from cannabis as well because they often need to abide by Federal laws or don’t want to be associated with cannabis. This leaves cannabis businesses with little options to get the start-up capital that they need. For individual investors, cannabis investment can be a cash cow, but it comes with risk.
Changing Laws:
It doesn’t matter what the cannabis start-up tells you, the cannabis industry is not fully legal. Even if it is legal at the state level, the federal government can come to a cannabis business and shut it down and seize assets. For this very reason, most large investment companies will stay away. You can benefit greatly from this if you are willing to risk losing your investment. Return on investment needs to be fast and high (typically 100% to 200% per year).
Business Plan:
The cannabis business that needs your capital must have a business plan. The following shall be included in the business plan:
Expenses:
• Cost of the Lease
• Number of employees and expenditures for payroll
• Construction expenditures
• Utility expenditures
• Material expenditures
• Equipment rental
• Distribution expenditures
• Taxes
• Management expenditures
• Office expenditures
• Licensing expenditures
• Legal expenditures
• Miscellaneous expenditures
Capital:
• Current capital in Reserve
• Expected reserve capital over the projected life of the business
Income:
• Anticipated sales price of cannabis
• Number of flowering units produced
• Revenue from sale of flowering units
• Amount of trim produced
• Revenue from sale of trim units
• Manufactured byproducts Revenue
• Nursery Revenue (if any)
So how does the novice read a business plan?
The numbers should all be there. You start with income, then subtract the expenses to see how much profit is available. Go and visit the cannabis work site and verify the assets/materials on hand match what is in the business plan. Capital on reserve is important because disaster can strike. For instance, a pest or mold could destroy a crop, power outages can also destroy crops if power is required. The crops may not be able to pass inspections and must be thrown out, or the Federal government may come in and confiscate the crop. The business plan is the most important piece of the investment. If you don’t know how to read a business plan, hire a business accountant to review the business plan for you. If there is not business plan, the investment is either a scam or the start-up has no idea how to run a business.
Lease agreements, LLC registration, and permits:
You must get a copy of the property lease agreement, a copy of the LLC registration, and copies of permits. The business will not be able to operate without these licenses and titles/leases. It is up to the start-up to obtain proper licenses and leases prior to obtaining investor capital. Without proof of these documents, the start-up is clearly a scam.
Cash only business:
Due to the nature of the cannabis industry, banks typically will not do business with cannabis, therefore no bank accounts. There is however a way around this. The property and assets can be owned by a LLC and allow a non-profit cannabis grower to rent the facility for a fee. The LLC that owns the property can therefore legitimately bank and collect rent while the non-profit is a cash only business. You can be an investor in the LLC and bank normally without the issue of cash only industry. If the start-up is not providing a 3rd party LLC, then it is a clever idea to start your own LLC to separate your personal banking from the investment. The LLC you start may need to be a cash only operation.
Securities:
The investment may fall under rules of the Securities Act of 1933. Generally, an investor must have a net worth of $1 Million dollars to participate. This eliminates most people, but there is an exception. In some cases, the cannabis business may be able to accept a small percentage of investors that don’t meet the net worth requirements. Those individual’s investment limits will need to be evaluated case-by-case. Finally, an investor can be part of an investment group or Trust and invest as part of a larger entity.
Beware of high pressure sales tactics:
If a sales person is pressuring you to invest in short notice, beware, it is possibly a scam. Start-up money often takes time to free up to invest. Most people need to sell stocks, assets, or transfer monies which takes time. If the sales person gives you a deadline that is less than a week, then it is usually a scam. Even if it is not a scam, they are likely not being truthful with their claims.
Background Checks:
Finally, get all the names of the cannabis business and their role in the business. Get copies of their resumes. Check to see if they are qualified to operate the business. Check the management team's qualifications and find out what business they have operated in the past. Verify if those businesses have been successful under their management.