Wall Street sees opportunity in marijuana
BELVIDERE, N.J. — Amid the whir of fans and the glow of soft white light, workers tended to bright green seedlings sprouting in a giant greenhouse.
Located about an hour’s drive from Manhattan in the hills of northwestern New Jersey, the facility produces basil, chives, oregano and other herbs that are sold in grocery stores around New York City.
But if Ken VandeVrede has his way the facility will one day be growing a much more valuable plant: marijuana.
VandeVrede is chief operating officer at Terra Tech, a hydroponic equipment maker based in Irvine. The small company wants to double the five-acre New Jersey greenhouse operation. The aim is one day to supply the exploding U.S. medical marijuana trade and to prepare in the event that recreational marijuana ever becomes legal nationwide.
“We can scale this thing very, very quickly,” said VandeVrede, clad in blue jeans and a pumpkin-colored sweater as he surveyed his indoor fields of produce and flowers. “When hemp and cannabis become legal, we’re ready to rock and roll.”
To do it, Terra Tech needs to raise $2 million. And like a number of small businesses in the burgeoning U.S. cannabis industry, it’s trying to enlist Wall Street’s help. Business owners have been pitching their ideas to potential investors, coming to New York in some cases to meet with would-be financiers.
Wall Street has good reason to smell potential profits.
Washington, D.C., and 18 states, including California, have already legalized medical marijuana; there are formal measures pending in 10 additional states, according to the National Cannabis Industry Assn.
Colorado and Washington legalized recreational marijuana use in November. In addition, a measure allowing “adult use” of pot has been proposed in Maryland, according to the association’s tally. Various bills to legalize marijuana and hemp have been proposed in Congress too.
Although pot remains contraband under federal law, some entrepreneurs see marijuana heading down the same path as Prohibition, which banned the manufacture, transportation and sale of alcohol from 1920 until it was repealed in 1933.
“More and more people see the inevitability,” said Brendan Kennedy, chief executive of the Seattle private equity firm Privateer Holdings, which targets cannabis-focused start-ups. “They see that the Berlin Wall of cannabis prohibition is going to come down.”
Privateer is raising $7 million to acquire small companies that have a hand in the trade but don’t grow or distribute marijuana. Its first acquisition: Leafly, a Yelp-style online rating site in Seattle for dispensaries and varying strains of marijuana.
With pot still federally outlawed, others are making similar bets — funding firms that supply equipment or ancillary services while steering clear of marijuana farming and sales.
Take Lazarus Investment Partners, a $60-million hedge fund in Denver, for example. One of Lazarus’ investments is in AeroGrow International Inc., a maker of hydroponic kitchen appliances geared toward growing herbs, lettuce and tomatoes.
Lazarus, which owns 15% of AeroGrow’s shares, has suggested that the company tweak its products to accommodate taller plants, including marijuana, said Justin Borus, the fund’s managing partner.
“We want to be selling the bluejeans to the gold miners,” Borus said. “We don’t want to take a bet on which state is going to get legalized and which dispensary is going to succeed, or [which] cannabis growers are going to be successful. We want to just make a bet on overall legalization.”
In California, MedBox, a West Hollywood maker of automated dispensing machines for doctors’ offices, pharmacies and pot dispensaries, is on the hunt for funding.
Vincent Mehdizadeh, MedBox’s founder, said the company is actively exploring raising $20 million in equity to boost staffing and fund research and development, acquisitions and marketing.
Mehdizadeh said he’s seen a “major spike” in interest from potential financiers looking to invest in the small company since Colorado and Washington legalized recreational pot use last year.
“Everybody’s loosening up a lot because they realize the momentum has shifted and the financial world is going to have to make room for this industry,” he said. “Wall Street and investment banks are going to have to come along for the ride, eventually.”
Derek Peterson, president and chief executive of Terra Tech, is working to get his company’s shares listed on a stock exchange by the end of the year. The company may try for NYSE MKT, which was formerly known as the American Stock Exchange and is geared toward smaller companies, or perhaps the Nasdaq Stock Market, he said.
“The stodgier Wall Street types are starting to realize there’s money to be made here,” said Peterson, who worked in wealth management at Wachovia Securities and Morgan Stanley Smith Barney.
The company has taken steps to get the word out to investors. It tapped Midtown Partners, a small New York boutique investment bank, to help it explore financing options as it planned the New Jersey greenhouse expansion. Terra Tech is merging with the farm’s owner, NB Plants, and retail gardening center and nursery. Both are owned by VandeVrede’s family.
Initially, the vast majority of Terra Tech’s revenue will come from cultivating fresh herbs and flowers from the New Jersey farm, with the rest coming from equipment sales. The idea is to first feed urban consumers’ growing appetite for pesticide-free produce, then add pot or hemp when the legal climate is right.
“There is this huge demand for organic food,” said Prakash Mandgi, Midtown Partners’ director of investment banking. “Marijuana cultivation, in my opinion, is a potential driver in the future, but it’s so tied to government rule and regulations.... Federally it’s illegal.”
Estimates for the marijuana industry’s size range widely, since much of the trade remains on the black market. Bloomberg Industries recently pegged it at $35billion to $45 billion.
Still, Wall Street is by no means opening the floodgates of capital.
Companies in this space are still quite tiny, not to mention risky, compared with large corporations trading on the New York Stock Exchange or the Nasdaq.
Moreover, Wall Street firms face a significant disincentive to investing in the industry: federal law. Growing and distributing marijuana can still lead to raids by federal agents — not to mention prison time and huge fines.
Major banks have come under intense scrutiny by the federal government in recent years for violating laws aimed at preventing money-laundering. The British banking giant HSBC paid $1.9 billion to end a U.S. investigation into its role processing cash for drug cartels and customers in rogue nations.
Marijuana dispensary owners have complained of difficulty opening bank accounts, forcing them to operate in cash only.
“This is messy,” said Dan Richman, a former federal prosecutor who handled narcotics cases and now teaches at Columbia Law School in New York. “This might be complex politically. It’s not complex as a matter of federal criminal law.”
Investors in businesses involved in growing or distributing cannabis could face civil forfeiture actions to seize their investments or other assets, Richman said.
“I would think the prospectus would have to say: ‘The government might come and take all of your money and possibly go after you,’” Richman said.
Federal law may not deter all investors. After all, the government can choose what laws to strictly enforce, and it’s unclear how the federal government will ultimately treat legalized recreational pot in Colorado and Washington.
Alan Valdes, a floor trader on the New York Stock Exchange, expects some of Wall Street’s more adventurous investors to put up money for a project he’s involved with called Diego Pellicer Inc.
The business idea is to open a dozen Starbucks-like high-end shops for pot in Colorado and Washington. Valdes said he and his partners might begin tapping investors — wealthy individuals, family-run funds — later this year.
“These are more mavericks — these are gunslingers,” he said of potential investors. “The big houses are off the table right now.”