Weed Investments: Legally Navigating The Green Rush

Investing in weed companies is a risky business, but there are ways to do it without breaking the law. The first thing to note is that, in the US, selling marijuana remains illegal at the federal level. This means that US companies that grow, process or sell marijuana domestically cannot be listed on big US exchanges. However, this is not the case for companies based in Canada, where the drug is federally legal.

There are three main types of companies in the marijuana industry: cannabis growers and retailers; cannabis-focused biotechnology companies; and ancillary product and service providers. Ancillary companies are a good option for those looking to invest without breaking the law, as they provide products and services to the marijuana industry without touching the plants themselves. This includes everything from growing and harvesting equipment to hydroponics products, lighting systems, packaging materials, and management services.

There are also a handful of marijuana ETFs available to US investors, which may be attractive if you don’t want to do stock-specific research. However, it's important to remember that investing in marijuana stocks is a risky business, and investors should do their research before getting involved in this burgeoning industry.

Investing in ancillary businesses that don't directly involve the marijuana plant

Ancillary businesses can include companies that provide growing and harvesting equipment, industrial hemp, medical containers, and marketing and public relations services. For example, The Capsule Consulting Group manufactures empty gelatin and vegetable-based capsules for weed companies to package their products. Similarly, Kush Bottles creates custom child-resistant containers for marijuana retailers without actually selling weed.

Another example of an ancillary business is Canna Flavors, which creates oil-soluble flavour extracts for use in baked goods containing cannabis to mask the taste of weed. Their products do not contain marijuana and can be used in any regular baking. GreenBroz is another ancillary business that makes a mechanical trimmer for marijuana harvesting. While it could technically be used for other purposes, its primary use is for the dry trimming of marijuana plants.

By investing in these types of ancillary businesses, investors can gain exposure to the cannabis industry without directly involving themselves in the handling of the marijuana plant.

Investing in companies that don't touch the plant but support the industry

While investing in cannabis companies is not as straightforward as investing in traditional blue-chip stocks, there are several ways to invest in the industry without owning a pure "plant-touching" cannabis stock. These companies are often referred to as "ancillary companies" or "ancillary firms" and they provide cannabis businesses with materials, technology, and services without ever "touching" the plant. This allows them to profit from the growing cannabis industry while staying listed on U.S. stock exchanges.

• Accessory and hardware companies: These companies make vape and smoking hardware, as well as other devices and packaging for consumers. Examples include KushCo Holdings and Greenlane Holdings, which distribute vaporizers and smoking accessories through dispensaries, smoke shops, and their own e-commerce stores.
• Engineering and design companies: These companies design high-performance grow facilities and provide vertical grow solutions for the horticulture sector, including cannabis. Examples include Urban-gro and Agrify.
• Companies providing growing materials: Several publicly listed companies provide materials such as greenhouses, growing containers, dirt, and fertilizer for cannabis cultivation. Scotts Miracle-Gro, one of the biggest sellers of lawn and garden products, offers its products and services to cannabis growers without being directly involved in the industry.
• Beverage companies: Several beverage companies have partnered with Canadian cannabis brands to develop marijuana-infused drinks. Examples include Anheuser-Busch InBev, which partnered with Tilray, and Constellation Brands, which made an investment in Canopy Growth.
• Pharmaceutical companies: Some pharmaceutical companies create synthetic forms of marijuana or cannabis-derived drugs for medical use. For example, AbbVie creates Marinol, a synthetic form of marijuana used to treat nausea and loss of appetite in patients with AIDS. Jazz Pharmaceuticals acquired GW Pharmaceuticals, which makes the cannabis-derived seizure treatment Epidolex.
• Real estate investment trusts (REITs): Cannabis REITs have been one of the best-performing property sectors in recent years. Companies such as Power REIT and Innovative Industrial Properties own and manage real estate assets related to controlled environmental agriculture and medical-use cannabis facilities.

By investing in these types of companies, individuals can participate in the growing cannabis industry while minimising legal and regulatory risks associated with direct involvement in plant-touching operations.

Investing in companies that operate in states where recreational use is legal

Understand the Risks

Investing in the marijuana industry comes with specific risks that you should be aware of:

• Legal and Political Risks: Marijuana remains illegal at the federal level in the US, which imposes severe restrictions on banks dealing with marijuana-related businesses. This makes it difficult for these companies to access critical financial services. While political support for federal legalization is growing, it is not guaranteed.
• Supply and Demand Imbalances: As a new industry, marijuana is prone to irregularities in supply and demand. This can lead to price fluctuations and revenue losses for growers.
• Over-the-Counter (OTC) Stock Risks: Many cannabis companies trade on OTC markets, which means they are not required to regularly file financial statements, making it challenging for investors to assess risks. Trading OTC can also result in low liquidity and difficulty in trading the stock.
• Financial Constraints: Many cannabis companies are unprofitable and face the risk of running out of cash. Dilution of share value can occur when these companies raise capital by issuing new shares.

Know the Different Types of Marijuana Companies

The marijuana industry consists of three primary types of companies:

• Cannabis Growers and Retailers: These companies cultivate, harvest, and distribute cannabis products, and some also operate retail stores. Examples include Curaleaf Holdings, Trulieve Cannabis, and Canopy Growth Corporation.
• Cannabis-Focused Biotechnology Companies: Biotech companies extract cannabinoids from marijuana to develop new pharmaceuticals. Examples include Jazz Pharmaceuticals and AbbVie Inc.
• Ancillary Product and Service Providers: These companies support the industry by providing products and services such as hydroponics, lighting systems, packaging materials, and management services without directly handling the plant. Examples include KushCo Holdings, Greenlane Holdings, Urban-gro, and Scotts Miracle-Gro.

Evaluate and Monitor Top Cannabis Stocks and ETFs

When considering investing in a marijuana company, it is essential to research the management team, growth strategy, financial statements, and the number of warrants and convertible securities issued. Some top marijuana stocks to consider include Curaleaf Holdings, Trulieve Cannabis, Green Thumb Industries, Canopy Growth Corporation, and Tilray.

It is also important to monitor the changing dynamics of the marijuana industry, as the criteria for making investment decisions can change rapidly. Keep an eye on any marijuana stocks or ETFs in your portfolio and stay updated with industry news.

Invest in Your Favorite Cannabis Companies

Investing in marijuana companies carries a high level of risk and may not be suitable for everyone. Only investors who understand and can tolerate these risks should consider adding cannabis companies to their portfolios. Start with a small position and gradually increase your holdings as the market grows and the company's performance improves. Remember to diversify your investments and not put all your money into a single stock or ETF.

Investing in companies that operate in states where medicinal use is legal

Understand the Risks and Landscape

It's important to remember that investing in the cannabis industry comes with unique risks. The industry is relatively new, and the product is still classified as a Schedule I drug at the federal level, which can create legal and financial constraints for businesses. As a result, many cannabis stocks are small and fall into the category of penny stocks, making them riskier investments.

Research the Company and Leadership

Before investing, thoroughly research the company, its history, and the leadership team. Understand their business model, how they make money, and the long-term investment merits. Check if the company follows state regulations, especially in states where adult use is legal, as these tend to have more established rules, reducing legal risk.

Consider Ancillary Businesses

If you want to minimise your risk, consider investing in ancillary businesses that support the cannabis industry without directly handling the marijuana plant. These could include companies providing growing and harvesting equipment, packaging solutions, or marketing and public relations services.

Understand the State Regulations

Different states have different regulations regarding the legal status of cannabis for medicinal and recreational use. Some states may only allow medical use, while others have legalised recreational use as well. Understand the specific regulations of the state where the company operates, including any licensing requirements, possession limits, and taxation rules.

Evaluate the Financials

When considering a cannabis company to invest in, evaluate their financial health and growth prospects. Check their revenue growth, market capitalisation, and price-to-sales ratio. Remember that most cannabis companies are growth stocks with small market caps, so they carry a higher level of risk.

Diversify Your Portfolio

Remember to diversify your portfolio and not put all your eggs in one basket. Cannabis stocks should only be a small part of your overall investment portfolio. Consult with a financial advisor to determine how much exposure to this sector is appropriate for your investment goals and risk tolerance.

Understanding the risks of investing in the marijuana industry

The marijuana industry is growing, and with recreational marijuana legal in 24 states and Washington, D.C., and medical marijuana legal in 14 more, it has become a full-fledged industry. However, it is important to remember that this is a nascent industry, and its main product is still classified as a Schedule 1 drug at the federal level. Here are some of the key risks to consider before investing in the marijuana industry:

Regulatory Uncertainty

The legal status of marijuana is subject to change, and it is still considered a Schedule 1 drug by the federal government, which classifies it as illegal, prone to abuse, and having no recognized medical benefits. While some regulations have loosely protected cannabis businesses from federal interference, policies can change, and there is a risk of enforcement action in the future.

Volatility and Financial Risk

Marijuana stocks are highly volatile and can experience wild price swings. The industry is also subject to financial risks, as many companies involved in producing or selling marijuana are young and more susceptible to financial difficulties. This can increase the risk for individual investors, and there is a potential for significant losses if the market corrects and prices decline.

Cash Flow and Profitability Issues

Many pot stocks face cash flow issues, and some are just months away from running into liquidity problems. Marijuana businesses also face unique challenges when it comes to banking and accessing financial services. They often have difficulty opening bank accounts and obtaining loans or lines of credit, which can hinder their growth and profitability.

Security and Data Breaches

The cannabis industry is a prime target for thieves since many companies operate primarily in cash. Additionally, the industry is vulnerable to hacking and data breaches due to its focus on growth rather than cybersecurity. As the industry involves sensitive healthcare information, data breaches can lead to significant liability risks.

Scams and Market Manipulation

The rising popularity of marijuana stocks makes them a target for scam artists. The Securities and Exchange Commission (SEC) has issued alerts about potential investment fraud and market manipulation, including trading disruptions and fake press releases meant to influence prices.

Inexperience and Management Issues

The marijuana industry is relatively new, and many companies are small, falling into the category of penny stocks. This means they may have inexperienced management teams, and there is a higher risk of mistakes or operational issues.

Limited Research and Information

Marijuana stocks, especially those that are smaller or penny stocks, may have limited publicly available research and information. This can make it challenging for investors to conduct thorough due diligence and fully understand the risks and potential of these investments.

International Complexity

The legal status of marijuana varies internationally, and investing in cannabis companies operating in other countries can introduce additional risks. There may be limited access to financial data and research, and there could be potential legal complications if issues arise.

Industry Stigma

Despite increasing acceptance, the marijuana industry still faces stigma and reluctance from some sectors. This includes banks and financial institutions, which may be hesitant to provide services to cannabis-related businesses. This can create challenges for investors who may have limited options for investing in marijuana stocks through traditional channels.

Investor Emotions and Volatility

Marijuana stocks are influenced by retail investors, who are more likely to allow their emotions to impact their buying and selling decisions. This can result in wild volatility, with prices being pushed far higher or lower than their fair value estimates due to investor sentiment.

In conclusion, while the marijuana industry offers exciting growth potential, it is essential for investors to carefully consider and understand the risks involved. These risks include regulatory uncertainty, financial instability, security concerns, scams, and inexperienced management. Conducting thorough due diligence and diversifying one's portfolio are crucial steps to mitigate these risks.

Frequently asked questions