Pubdate: Fri, 05 Sep 2014
Source: Herald, The (Everett, WA)
Copyright: 2014 Associated Press
Contact:  http://www.heraldnet.com/
Details: http://www.mapinc.org/media/190
Author: Jonathan Fahey, Associated Press
Page: A9

THE BUSINESS OF POT

'It's A Gray Market Industry, That's Just How It Is,' Store Owner Says

NEW YORK - Legal or not, the business of selling weed in the U.S. is 
as wacky as ever.

The tangle of rules and regulations that govern whether and how it 
can be grown, bought and sold create complexity and ambiguity that 
cause major headaches for marijuana businesses - and enticing 
opportunities for those who want to exploit it.

"It's a gray market industry, that's just how it is," says Kayvan 
Khalatbari, who owns a marijuana dispensary and a chain of pizza 
restaurants in Denver.

The big issue: the nation hasn't decided whether marijuana is a 
dangerous illegal drug or not much worse than tobacco or alcohol. 
According to federal law, it is an illegal narcotic like heroin, with 
"no currently accepted medical use." But recent legalization pushes 
have made it legal - for medical use - in 23 states and Washington 
D.C. In Washington State and Colorado, it can be bought just for fun.

Entrepreneurs and investors have to navigate laws that are different 
from state to state and sometimes from county to county. That has 
given rise to a bumper crop of consultants promising to show the way 
to success, while shady public companies spin visions of fat profits. 
Consumers now have an array of new pot-related products to choose 
from, many of far higher quality than what's offered on the corner. 
But they must also discern truth from hope in the many claims about 
all the supposedly wonderful things pot can do.

Entrepreneurs

Khalatbari started his first pizza restaurant with a small business 
loan from a bank. To raise money to build a marijuana-growing 
facility, a bank loan wasn't an option.

Almost all banks avoid working with pot businesses because pot is 
illegal federally, and banks want to avoid running afoul of 
anti-trafficking laws. Also, residency restrictions in Colorado 
prevent raising money from outof-state investors in exchange for a 
share of the company, which is exactly what most investors want.

So, to build a 40,000 squarefoot growing facility, Khalatbari teamed 
with an out-of-state investor who is lending money for construction 
while trying to establish residency in Colorado. When that comes 
through, the investor should get an ownership stake in the facility.

Khalatbari says there's plenty of investor money sloshing around, 
looking to fund marijuana businesses, but the terms are expensive 
because of the risk and the restrictions. "It's almost impossible not 
to get funding," he says, "but it's not going to be on the terms you want."

Once up and running, entrepreneurs face more twists. Khalatbari kept 
his bank account in the name of the management company that 
controlled his pizza restaurants, called Sexy Pizza, along with his 
marijuana dispensary, Denver Relief. (He is also a stand-up comedy promoter.)

He was careful not to pay pot-related vendors out of the account, 
instead using cash, which is common in the pot business. And he 
didn't make cash deposits over $10,000 in order to avoid triggering 
suspicious activity inquiries. Still, three successive banks dropped 
him after learning the management company had ties to pot. He has 
recently found an unidentified bank that will work with him and a few 
other pot businesses.

Khalatbari can't write off certain expenses the way most businesses 
can. The Internal Revenue Service prohibits deductions for expenses 
incurred while selling what the federal government considers to be an 
illegal drug. That makes his profit lower than it otherwise would be. 
It also encourages him and other sellers to designate, for tax 
purposes, only a small portion of their stores as having anything to 
do with selling pot.

These conditions can help a business flourish once it's open. 
Would-be competitors face the same hurdles to getting started - local 
zoning rules, state regulations, financing complexity or a slow 
bureaucracy - so it can often be some time before the established 
business faces a challenge.

Washington has awarded 43 licenses to sell marijuana for recreational 
use - and just one in Seattle, called Cannabis City. California rules 
are relatively lax, and there are believed to be at least 500 
dispensaries just in Los Angeles. But Connecticut has approved only 
six dispensaries. The first opened last month - without pot - two 
years after getting approval. Illinois growing facilities must put up 
a $2 million surety bond to get approval.

Khalatbari has plenty of competition, but the profit margin at his 
marijuana dispensary is 60 percent higher than at the pizza 
restaurants. Even after the legal headaches, it's easier to make a 
profit selling the bud of a plant for $200 an ounce than it is 
selling a meat lover's pizza (pepperoni, spicy sausage, Canadian 
bacon and mozzarella) for $19.99.

Consultants

"Everyone wants to be in the weed business," says Adam Bierman, 
managing partner at a marijuana consulting company in Culver City, 
California, called the Med Men.

That suits Bierman just fine. Dozens if not hundreds of consultants 
like Bierman have popped up, feeding off the complexity of the 
marijuana business and the desire of so many to make it big in pot. 
Some act as matchmakers, promising to connect investors with 
entrepreneurs looking for money. Others sell help navigating the 
licensing process, tips on how best to grow marijuana, or advice 
about how to manage a startup that must operate outside of the banking system.

But many of these "consultants" have little or no experience in the 
business. Bierman acknowledges he didn't when he started six years 
ago. "We got our teeth kicked in," he says.

Now his firm knows the ropes, he says, but the industry is crawling 
with people who don't.

In February, PetroTech Oil and Gas - a drilling services company - 
announced it was establishing a management company in Washington and 
Colorado to help pot growers. Trading volume in the tiny company's 
stock rose 13-fold and the penny stock rose to 7 cents per share over 
three weeks. The Securities and Exchange Commission suspended trading 
in the stock in March over questions about the accuracy of the 
information about the company's operations.

Investors

Investing in the pot business seems like it should be as easy as 
printing money. The product's millions of users are so dedicated that 
they've been willing to risk arrest to get it. To reach them, all 
businesses have to do is grow a weed and sell the flowers.

Pot investing is treacherous, though, even for professionals.

"There are a lot of large egos and puffery in this industry," says 
Brendan Kennedy, a former Silicon Valley banker who helped found 
Privateer Holdings, a marijuana-focused private equity firm. "It 
takes a lot of time and energy to sort through the hyperbole and find 
the right, legitimate opportunities."

Every new pot company thinks it has the best growing technique or 
marijuana strain, Kennedy says, but few have worked out a long-term 
business plan that coldly assesses the market and the risks. Growing 
plants for profit isn't quite so simple. "Ultimately it's a crop, 
it's a commodity, not very different from a lot of agricultural 
products that are out there," Kennedy says. "Would you invest in a 
winery? Or a strawberry grower?"

Investing in pot stocks is even scarier, because nearly all of them 
are so-called penny stocks, like PetroTech, that trade outside of 
major exchanges. There are now a couple dozen of these companies, 
often with names that play on marijuana's scientific name, cannabis 
sativa, such as Advanced Cannabis Solutions or Cannabusiness Group. 
But many have tenuous ties to the marijuana industry, regulators say.

Kennedy says the penny stock companies "are full of charlatans and 
hucksters," who are "purely playing on the desire of Main Street 
investors to get into the industry."

One of the companies, called GrowLife, makes urban gardening 
equipment and trades under the ticker symbol PHOT. An October report 
designed to look like it was issued by a Wall Street firm suggested 
the company's stock was poised to rise nearly 300 percent. But that 
"research" was actually paid for by GrowLife - a detail found only in 
the report's fine print.

GrowLife's shares soared 900 percent, to 60 cents from 6 cents, 
between October and early April, when trading was halted by the SEC. 
In June the company revealed that the $37 million loss it reported 
for the first quarter was actually double that, $74 million. GrowLife 
shares have since fallen back to 7 cents.

GrowLife CEO Marco Hegyi says the report "was never intended to boost 
the stock" and that legalization efforts boosted shares of GrowLife 
and other marijuana companies.

Consumers

A decade ago, pot consumers risked jail time by buying pot of 
uncertain origin and quality in backalley deals. Now, in many states, 
they can shop openly for a wide variety of strains with different 
levels of potency. Pot can be bought in lotions, foods and drinks 
with precise doses.

But buyers still need to beware. Companies are using pot's new 
legitimacy to try to equate getting high with taking care of your 
body or curing any number of ailments, making extraordinary health 
claims about pot to push their products.

"Because it's a drug that makes people feel good, marketers want to 
put medical claims on it," says Bill London, a professor of public 
health at California State University in Los Angeles and a health 
claim watchdog. London has no problem with legalization, but says 
many medical claims for marijuana "are false or exaggerated" and 
"should not be tolerated."

The website Cannabis.org, which is owned by GrowLife and carries the 
tagline "Cannabis is Medicine," lists 17 major diseases that cannabis 
can treat, including Alzheimer's, cancer, and diabetes.

Some of the chemicals in marijuana have been tested thoroughly and 
found to effectively treat some conditions, such as reducing nausea 
and stimulating appetite in patients undergoing chemotherapy. These 
or other chemicals in pot may someday be found to be effective in 
treating other diseases - or they could be found to be dangerous in 
ways not yet understood. Scientists simply don't know yet.

A Colorado company called Dixie Elixirs sells pot in pill form called 
"scrips" - short for "prescription." These pills allow users to 
manage both their ups and downs, despite the same amount of pot in 
each pill, with additives like ashwagandha root. "Awakening Scrips" 
are said to provide a "stimulating sensation," while "Relaxing 
Scrips" are said to "reduce mental and physical stress and promote relaxation."

Joe Hodas, chief marketing officer at Dixie Elixirs, says the company 
is careful to not make specific medical claims about its products. 
"It's the regulatory framework that forces businesses to sell 
(marijuana) as medicine because that's the only way it's legal (in 
most states)," he says.

In a marketing pitch for one potbased product, called Foria, a woman 
identified as "Anna, 29" says: "Foria is potent medicine and the most 
healing way I have ever used cannabis." It's not clear that Anna had 
a medical problem, though. The product is a pot-based lubricant for 
women, designed to increase sexual pleasure by delivering a high 
through their private parts.
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MAP posted-by: Jay Bergstrom