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Legal Weed Lures Investors to Marijuana Industry

Customers stand in line at 3D Cannabis Center in Denver on Jan. 1

Photograph by Brennan Linsley/AP Photo

Customers stand in line at 3D Cannabis Center in Denver on Jan. 1

Robert Frichtel is chief executive officer of Advanced Cannabis Solutions, a Colorado Springs company that leases indoor spaces for growing pot. On Jan. 23, he and representatives of 11 other marijuana companies will seek funding from as many as 70 investors at a Las Vegas meeting organized by ArcView Group, an investment firm focused on the industry. “Everybody is running toward this as the next entrepreneurial wave—the green rush,” Frichtel says.

Investment interest in the marijuana industry has surged since Colorado and Washington voters in 2012 legalized sales to anyone 21 years and older. Long lines formed when Colorado shops selling pot opened on Jan. 1. A total of 20 states, including California and Massachusetts, now allow the medical use of marijuana, and New York may be next under a plan announced by Governor Andrew Cuomo. ArcView projects the market for legal marijuana will grow to $2.34 billion this year.

“Every day, more and more people realize that cannabis will be legal and that it will be the next great American industry, and so they’re placing their bets,” says Troy Dayton, ArcView’s CEO. “The question is when, how, and who. The who is largely being decided right now.”

ArcView is trying to cash in by connecting people who want to put money into pot with companies seeking investors. In return for a $3,500 annual fee, prospective investors get a chance to attend sessions where pot entrepreneurs promote their businesses. The number of investors in ArcView’s network has grown to about 110 from about 20 a year ago, Dayton says. Members include Republican New York State Assemblyman Steve Katz and Joby Pritzker, whose family started Hyatt Hotels (H).

One of the companies that has participated in ArcView meetings is MassRoots, which last year released a free mobile app that allows users to share photos of their weed use—an Instagram (FB) for stoners. Isaac Dietrich, co-founder and CEO of the Denver-based firm, says he secured $150,000 from three investors after pitching at an ArcView meeting in Denver last year. “We’re still exploring exactly how to monetize the app,” says Dietrich. “As people use it more and more and our network grows, then we’ll start focusing on advertising.”

“I just don’t see how there’s money to be made producing an agricultural commodity.” —Mark A.R. Kleiman

Prospects for legalization of marijuana are also galvanizing stock market investors. Some of the biggest percentage gains in the market this year are being harvested by investors speculating on marijuana penny stocks. GreenGro Technologies, which provides management services for medical dispensaries, has jumped to 43¢ from 4¢ this year through Jan. 14. Advanced Cannabis Solutions has climbed to $10.20 this year from $3.25. The company reported a $472,000 loss on $455 in sales in the quarter ending Sept. 30. The Financial Industry Regulatory Authority issued an alert in August saying investors should beware of potentially fraudulent purveyors of stocks connected to pot. It didn’t name any companies.

While federal law still classifies marijuana as an illegal substance, the U.S. Justice Department said in August that it wouldn’t challenge the legalization laws in Washington and Colorado, provided the states prevent out-of-state distribution, access to minors, and drugged driving, among other things. Mark A.R. Kleiman, a professor of public policy at the University of California at Los Angeles, said a federal crackdown on marijuana-related businesses “would be the least of my worries.” He says the economics are a bigger concern. “I just don’t see how there’s money to be made producing an agricultural commodity,” he says. “Once this is a competitive market, prices will be driven down to the level of costs. Costs for cannabis are very small, if it’s produced legally.”

Jim Willett, a retired business owner who joined ArcView in December 2012, disagrees. His investments include a Denver-based marijuana grower and store; Agrisoft Development Group, which sells software that allows marijuana businesses to comply with regulations for tracking their product from seed to sale; and Canna Security America, which installs security systems at pot businesses. “I’m looking for companies that are already established,” says Willett. He says that when he was a U.S. Navy pilot, he monitored the California coast, looking for freighters smuggling marijuana from Mexico and South America. “I’ve never smoked marijuana,” says Willett, who plans to attend the Las Vegas event. “I’m no crusader. I’m in it for the money.”

The bottom line: ArcView serves as a bridge between investors and fledgling companies in the $2.34 billion legal marijuana market.

Vekshin is a reporter for Bloomberg News in San Francisco.

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