Bold enough to invest in cannabis? Here are some of your options

It’s been 168 years since the California Gold Rush.

Now, after the passing of Proposition 64 that legalized recreational use of marijuana, the state may seen a “green rush,” where investors try to take advantage of a nascent cannabis industry soon to be worth about $4 billion or even $7 billion by some estimates.

“It’s a lot like the dot com industry as well as the telecom revolution,” said Scott Jordan, director of business development at Dynamic Alternative Finance, a company based in the Denver area that has arranged $27 million in loans and equipment leases for cannabis business owners in the past two years.

But proceed with caution, said a number of speakers taking part in the California Cannabis Business Expo, which runs through Wednesday at the San Diego Sheraton Hotel and Marina.

“It takes commitment, confidence and guts,” said Karson Humiston, who at the age of 24 is the president of the Vangst Talent Network, a company of 15 full-time employees that recruits employees for firms in the cannabis industry.

The risky business of startups is even riskier in the cannabis market because the federal government still classifies marijuana as a Schedule I drug, in the same category as narcotics like heroin.

And the recent appointment of Jeff Sessions as the U.S. Attorney General was a major topic of discussion as attendees gathered Sunday evening for the start of the conference. Sessions has opposed legalizing marijuana, leading some to worry he might drop the Obama-era policy of allowing states to carry out their own marijuana laws.

At the same time, once California’s taxation and licensing regimes go into effect at the start of next year, there appears to be no shortage of places for potential investors to put their money, whether it be in companies cultivating marijuana or cannabis-based drugs with medicinal applications such as helping patients cope with epilepsy.

“You’re looking at a market for cannabis that has amazing, high-growth potential,” said Jack Scatizzi, managing director at Canopy San Diego, a technology accelerator aimed at finding and funding cannabis companies.

So if you have some spare cash and you’re willing to make the move into marijuana, where do you go?

In the words of those in the industry, you can start with companies that “touch the plant.” That is, cultivators, dispensaries, distribution outlets and makers of marijuana-infused products.

“If you’re investing in a cultivator, you’re going to get paid back in dividends,” said Scatizzi. ”It might be a short-term window where you can make a lot of money, depending on what the cultivation landscape looks like in five years. But you’re also at risk because you’ve invested directly in someone that is technically trafficking in a Schedule I narcotic.”

Investors can also put their money in companies that don’t “touch the plant” and deal with the cannabis industry in an ancillary way — such as digital media, power and energy companies (growing marijuana is energy-intensive) and biotech firms.

Ancillary companies have less risk, Scatizzi said, but investors would likely receive no cash dividends.

“It’s like investing in any other tech company, Scatizzi said. “You’re waiting for Google or Microsoft or Facebook to come in” and acquire the companies for millions of dollars.

Canada is seen as a growth market since medical marijuana is legal in all of its provinces and a small number of cannabis companies are traded on the stock market there, which may be attractive to investors with relatively small amounts of money.

A real estate investment trust based in San Diego, Innovative Industrial Properties, went public on the New York Stock Exchange last December to buy buildings and lease them to growers of medical marijuana.

Cannabis-related companies also trade on the NASDAQ, but many are penny stocks and trade “over the counter,” where volatility is high and the risks are greater.

Many OTC shares are not required to file audited financial reports with regulators, making it tougher for investors to get accurate and up-to-date financial information.

Investments in pharmaceutical companies developing drugs from cannabis to treat ailments such as epilepsy and multiple sclerosis may be a natural fit for some investors in San Diego, where the biotech industry has a high profile.

“It’s no difference,” Scatizzi said. “You either believe the FDA is going to approve the drug or not. You either believe the drug is going to work or not. If it works, Merck, Pfizer, Bayer, will buy them. End of story. There’s going to be a huge value in it. It just happens that they’re getting their medication from cannabis.”

Investor networks are another avenue.

“Investing your money, rather than in a specific company, but in a fund would offer an opportunity because they’ll do all the leg work, they’ll listen to the pitches, they’ll vet out the companies you can invest money in,” said Humiston.

But in most cases, you have to qualify as an accredited investor, which means meeting financial individual requirements such as income of $200,000 in each of the last two years or a net worth of more than $1 million excluding your primary residence.

Scatizzi said his group has a minimum of $50,000 that allows investors “instant access to a 30-company portfolio or invest in any of the companies that were offered.”

Jordan said his company just funded a $1.3 million construction loan for a company in Desert Hot Springs that included about eight different investors putting in about $150,000 each.

“They’ll earn a low double-digit return and receive monthly payments on that,” Jordan said.

Jordan, Humiston and Scatizzi all encouraged investors to weigh their comfort with risk, educate themselves on various companies and aspects of the marijuana marketplace and attend seminars and trade shows.

“I wouldn’t take my grocery money to invest in it but if you have extra money, I think with the returns you can achieve, it’s a good bet,” said Jordan.

Jordan and Humiston each echoed the old Latin proverb: Fortune favors the bold.

“By the time everyone’s really comfortable investing in cannabis, it’ll be too late,” said Humiston. “I think with big risk comes big reward.”

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rob.nikolewski@sduniontribune.com

(619) 293-1251 Twitter: @robnikolewski