For Marijuana Entrepreneurs, Sticky Red Tape Remains in Colorado
Once a quarter for the past two years, the ArcView Angel Investor Network plays matchmaker between individuals curious about investing in the newly legal marijuana market and pot entrepreneurs who need capital to expand. Skeptical financiers at each of these pitch sessions have had to price in an enormous risk: that even with more states moving to legalize the drug, the federal government could still step in and block the trade.
That changed in August, when Attorney General Eric Holder told the governors of Colorado and Washington, the two states that legalized marijuana for recreational use last November, that the Justice Department wouldn’t interfere with their new laws as long as certain guidelines (such as keeping the drug away from children) are observed.
So at this week’s ArcView meeting, held in Denver, the deal pens must have been uncapped and Champagne (or other toasting substances of choice) flowing, right? Not so fast. Would-be pot backers are still being blocked by a Colorado rule that requires investors to qualify as state residents for three years before making equity investments in the marijuana business—a restriction that doesn’t apply to other industries. The limitation even covers debt investments that can convert to equity over time, a popular way to back startup companies.
“In at least one case, investors were just not able to do a deal, because of the residency requirement,” says Steve DeAngelo, ArcView’s president. A poll of the 60 to 70 investors in attendance—twice the turnout of the previous meeting—showed that more than 90 percent came from out of state, he says. That forced the Colorado companies present to make two pitches, one for in-state money and one for the rest. “Most of our investors are interested in equity, not debt,” says DeAngelo, who sports long, Willie Nelson–style braids. “Sadly, the overwhelming majority would not be able to invest.”
That means investments that might go to Colorado are being diverted to the state of Washington, where residency restrictions are more favorable. The alternatives are pretty unexciting: Out-of-state investors can buy real estate in Colorado, then lease it to marijuana companies, or find ways to invest in the “picks and shovels” of related ventures, such as waste management companies that will attempt to specialize in disposing of dispensaries’ junk.
One surprising upside of the Justice Department’s August announcement: Women attended the investment event in numbers for the first time, DeAngelo says. He estimates they made up 20 percent of the audience.
“Colorado has an opportunity to claim a—if not the—leading role in the cannabis industry, if it’s properly financed,” DeAngelo says. “It’s an opportunity to build the first big companies and the first big brands. But it’s going to be difficult for them to do that if they’re unable to get the financing that’s available to every other industry.”