California Medical Marijuana: Where’s All the Money?

With passage of the Medical Cannabis Regulation and Safety Act(MCRSA), our California cannabis lawyers have been representing a steady onslaught ofinvestors looking to get into Californias MMJ industry in some way, shape, or form. And with the vote on Proposition 64 coming up in November, excitement about The Golden State is palpable.

But its not all roses when it comes to current California MMJ laws and investing.

We tell theseinvestors that California is still a risky place since its current state MMJ laws (which were not repealed by MCRSAs passage) do notsatisfy federal directiveson robust state marijuana regulation. We also tell them that despite a high level federal courtblocking the Fedsfromenforcing the federal Controlled Substances Act against CaliforniaMMJ providers, its no slam dunk that either you or your investmentwill besafe in California.

When we get investors tell us that theyre going to invest in a California collective we have to tell them that islegally impossible because California MMJ collectives are either non-profit mutual benefit corporations or non-profit collectives. Once potential investors find out that the most they can legally do is make a loan to a collective, they quickly begin asking about other, more profitable avenues in Californias MMJ market.

So, where is most of the money in Californias MMJ market? In the California Gold Rush, those who sold the pick axes and the shovels tended to make more than those who actually panned for gold and the California cannabis industry has seen a similar dynamic.

Based on the transactions our lawyershave donein the California cannabis industry, the real money seems to be made in the following sectors:

1. Real estate. I cannot count the number of calls Ive received from across the U.S. and even from overseas (Spain, Germany, Israel, Russia and Australia, mostly) from individuals and companies seeking to acquireand build turn-key cannabis facilities in California. Investors and real estate developers know MMJ-friendly properties are difficult to find in California due tothe threat of federal asset forfeiture, banks barring their landlord clients from renting to cannabis businesses, local law restrictions andbans, MMJ land use and zoning laws, and the threat of ever-present NIMBYs. All these difficulties make the few good cannabis properties all that more profitable and REITs, property developers, property management companies, and landlords are rushing toinvest in and develop cannabis commercial properties to lease or sell to cannabis businesses.
2. Technology.As an ancillary service, technology is a less scary for financiers than investing directly into a business that violates the federal Controlled Substances Act. Market entry is also considerably easier because current California MMJ laws dont affect or prohibit outside software providers and its very unlikely either the MCRSA or Prop. 64 will either.The primary void today seems to be in software that providesbusiness-to-business solutions or thatincrease cannabis business efficiencies. California is going to birth some of the best CannTech in the U.S. and maybe the world a belief with which even Seattle-basedMicrosoftwould probably agree.
3. IoT.The Internet of Things is picking up speed in Californias cannabis industry and in the industry everywhere else as well. Cannabisgrowers are turning to automated grows, and cannabis patients are getting turned on to automated products. For more on IoT and the integration of cannabis, gohereand for the liability issues that stem from cannabis and IoT, gohere.
4. Collective Management Companies.Given Californiasnon-profit restrictions, a popular business model is for managers and directors of collectives to form a parallel, for-profit management company that assists the collective in its day-to-day operational activities. Oftentimes, the management company is a vehicle for investors to get a piece of the MMJ industry and it canalso serve as a way to help the collective capture the costs of goods sold to better deal with the IRS. These management companies can be extremely risky asthey can actually increase liability if used improperly to dodge taxes ...