Pubdate: Sun, 21 Sep 2014
Source: Day, The (New London,CT)
Copyright: 2014 Associated Press
Contact:  http://www.theday.com/
Details: http://www.mapinc.org/media/293
Author: Jonathan Fahey, AP Business Writer
Page: E1

SELLING POT CAN BE A SHADY, CRAZY, CONFUSING BUSINESS

New York (AP) - 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 Colorado and Washington state, 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 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 they want 
to avoid running afoul of anti-trafficking laws. Also, residency 
restrictions in Colorado prevent raising money from out-of-state 
investors in exchange for a share of the company, which is exactly 
what most investors want.

So, to builda 40,000-square-foot 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.

"We can't be honest and open about where we can put our legal money," 
he says. "They are pushing us underground."

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.

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.

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.

"It's much higher-risk," he says of the marijuana business. "But the 
reward is much greater."

Consultants

"Everyone wants to be in the weed business," says Adam Bierman, 
managing partner at a marijuana consulting company based in Culver 
City, Calif., 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.

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 that trade outside of major exchanges.

Consumers

A decade ago, pot consumers risked jail time by buying pot of 
uncertain origin and quality in back- alley 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."
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MAP posted-by: Jay Bergstrom