Marijuana Money: Investing The Green Rush

Marijuana businesses face a unique set of challenges when it comes to managing their finances. Despite being legal in many U.S. states, federal law prohibits banks and credit unions from accepting marijuana money, forcing these businesses to deal primarily in cash. This creates a host of issues, from security risks and higher costs to difficulties in paying taxes and obtaining loans. However, there are some financial institutions, typically smaller community banks and credit unions, that are willing to work with cannabis companies, albeit with strict compliance controls and additional paperwork. As the legal marijuana industry continues to expand, businesses are seeking ways to invest their cash earnings, with options including individual stocks and marijuana ETFs.

Investing in marijuana stocks and ETFs

Types of Marijuana Investments

There are two main types of marijuana investments: individual stocks and marijuana ETFs.

Individual stocks allow investors to take advantage of short-term price shifts, but they come with the risk of picking the wrong company.

Marijuana ETFs (Exchange-Traded Funds), on the other hand, provide a more diversified investment strategy. ETFs allow investors to spread their investment across multiple companies in the marijuana industry, reducing the risk associated with individual stocks.

Marijuana ETFs to Consider

• Roundhill Cannabis ETF (WEED)
• AdvisorShares Pure US Cannabis ETF (MSOS)
• Amplify Alternative Harvest ETF (MJ)
• AdvisorShares Pure Cannabis ETF (YOLO)
• Amplify Seymour Cannabis ETF (CNBS)
• Cambria Cannabis ETF (TOKE)
• Global X Cannabis ETF (POTX)
• AdvisorShares Vice ETF
• Amplify Seymour Cannabis ETF (MJUS)
• Amplify Alternative Harvest ETF (MJUS)

Risks of Investing in Marijuana

It is important to note that investing in marijuana, whether through stocks or ETFs, carries significant risks. Some of the risks to consider include:

• Business risk: Marijuana companies face challenges in opening US bank accounts and securing funding due to federal illegality.
• Legislative risk: The industry's growth is tied to legislation, and future taxation could increase prices and push consumers away.
• Valuation risk: Young companies in the marijuana industry may have uncertain valuations, leading to potential overvaluation and market correction.
• Demand risk: As more companies enter the market, supply may outpace demand, especially with high excise taxes.
• Volatility risk: Marijuana stock prices are highly volatile, and short-term investments may be risky.

Tips for Investing in Marijuana

When investing in marijuana, it is important to do your due diligence and research each company and stay updated with the latest regulations. Consider the company's market cap and financial stability, especially if you are looking for a long-term investment.

Additionally, work with a broker who can guide you through the process and provide access to the necessary brokerage accounts for buying ETFs.

The risks of investing in marijuana

Despite the promising growth potential of the cannabis industry, investing in marijuana comes with a range of risks that investors should be aware of. Here are some key risks to consider:

Business Risk

The federal illegality of marijuana creates significant challenges for marijuana companies in the US. They often struggle to open bank accounts and secure funding, leading to a reliance on cash, which poses liability and accounting risks. This situation makes them vulnerable to theft and increases their security costs. Additionally, the lack of access to banking services hinders operational efficiency and makes it difficult to prove income for future planning, such as obtaining loans or finding investors.

Legislative Risk

The growth of the cannabis industry is heavily dependent on legislation. Changes in political opinion and policy can have a significant impact on the industry. For example, the introduction of taxes on marijuana products can increase prices for consumers, potentially reducing demand.

Valuation Risk

The young age of many companies in the marijuana industry makes it challenging to determine their appropriate valuations. There is a risk that excitement and high demand could lead to inflated valuations, which may later correct and result in declining prices.

Demand Risk

As more companies enter the cannabis market, there is a risk that supply could outpace demand. The spread of legalization may also encourage enthusiasts to produce their own small batches for personal consumption, further reducing demand for commercial products. High excise taxes on marijuana sales could exacerbate this issue.

Volatility Risk

Marijuana stock prices tend to be highly volatile, with wild swings in short periods. This volatility is less of a concern for long-term investors but can be risky for those with shorter investment horizons.

Scam and Fraud Risk

The rising popularity of marijuana makes this industry a prime target for scam artists and fraudulent investment schemes. Unlicensed sellers, unsolicited investment offers, and market manipulation are some of the issues investors need to be cautious about.

Speculative Risk

Marijuana stocks are considered speculative investments due to the industry's infancy and the federal illegality of the product. Investors should only allocate funds they are comfortable losing.

Foreign Stock Risk

Many cannabis stocks trading in the US are from Canada, and investing in foreign stocks comes with additional risks. There may be limited access to financial data, and investors may have no legal recourse in case of fraudulent investments.

Industry Experience Risk

The cannabis industry is relatively new, and many companies are small, falling into the category of penny stocks. These young companies may have inexperienced management, and their stocks can be prone to wide price swings and lower trading volumes.

Financial Services Risk

The reluctance of banks to engage with the cannabis industry due to federal illegality creates challenges for investors as well. Some investment professionals, such as advisors or portfolio managers, may be unable to recommend marijuana stocks due to these restrictions.

How to open a dispensary bank account

Although the cannabis industry is not federally legal in the US, cannabis businesses can have bank accounts. However, this is limited by legislation that makes it risky for many banks to offer their services to these businesses. As a result, most major banks refuse to let cannabis businesses open an account.

To open a dispensary bank account, you should follow these steps:

• Create a list of local banks: You will need to find a smaller institution, such as a community bank or credit union, that is willing to work with cannabis retailers. Ask other dispensary owners, accountants, or lawyers which banks they use.
• Be upfront about your business: When speaking to potential banks, be transparent about the fact that you are a legal marijuana business and ask if they are willing to support you.
• Assess the bank's customer service and relationship-building: It is important to choose a bank that values customer relationships and offers good service.
• Read the fine print: Make sure you understand the account's capacity restrictions, limits, and fees. Check for monthly account maintenance fees and additional fees for wires, payroll, checks, debit cards, and access to online banking.
• Compile your business documents: You will need to provide various documents to establish ownership and decide on your bank signatories. This may include operating agreements, bylaws, certificates of good standing, and documentation of your sources of business funds.
• Be prepared for a physical site visit: It is normal for banks to require a physical site visit or inspection as part of the account opening process.
• Prove the legality of your funds: Financial services providers must adhere to regulations around anti-money laundering. You will need to demonstrate that every dollar going into your account is from a state-legal sale, using reports from your point-of-sale system.
• Maintain open communication: Always be honest and transparent with your bank, and keep them informed about your business activities to maintain a good account standing.

By following these steps, you can successfully open a bank account for your dispensary business, allowing you to manage your finances more securely and efficiently.

The benefits of cannabis banking

Cannabis banking offers a multitude of benefits to businesses operating in the cannabis industry. Firstly, it helps to mitigate the risk of theft. Without access to banking, cannabis businesses are forced to manage large amounts of cash on-site, making them attractive targets for criminals. This poses a significant risk to the safety of employees, facilities, and the brand's reputation.

Secondly, cannabis banking improves operational efficiency. It allows businesses to pay and receive payments faster, streamlining accounting and bookkeeping processes. This is especially beneficial for legal, tax, and compliance reasons, as it provides a clear record of transactions.

Additionally, cannabis banking enables businesses to accept non-cash payments. To utilize point-of-banking solutions, a bank account is required, allowing businesses to cater to a wider range of customers.

Furthermore, banking is crucial for future planning. To qualify for loans, attract investors, or sell the business, companies need to demonstrate their financial performance, which is challenging to do when relying solely on cash transactions.

Lastly, cannabis banking reduces costs for dispensary owners. Without banking, owners have to invest in robust security systems and employ guards to protect their assets, products, and cash reserves. There are also time costs associated with managing large amounts of cash, including counting, logging, packaging, storing, and transporting it.

While the cannabis industry faces challenges due to federal illegality, cannabis banking provides a safer and more efficient alternative to managing cash, reducing risks and improving operational effectiveness for cannabis businesses.

How to get a loan for your dispensary

Although it is much harder to get a loan in the cannabis industry, it is not impossible. Here are some options to consider when looking to get a loan for your dispensary.

Work with a Partner

Companies like Green Check, Abaca, and Safe Harbor provide cannabis banking solutions and expert advisory services for financial institutions. They facilitate trusting relationships between financial institutions and legal cannabis business owners to fuel your business growth while minimizing the time, cost, and risk required to maintain compliance.

Do Your Research

There is a lot of information available online to find banks and credit unions that work with cannabis businesses. You can also ask other dispensary owners, accountants, or lawyers in your area what banks they use. Be careful with newer cannabis-friendly banks, as they may realize the compliance requirements aren't worth it and shut down the program. Do your due diligence and research established financial institutions that have been serving cannabis businesses for a while.

Apply for Social Equity Lending

If you qualify, social equity lending programs can be an excellent asset for businesses that need additional help. These programs can offer lower interest rates and even zero-interest loans.

Look to Friends and Family

Many dispensary borrowers find that those closest to them can provide the financial means necessary to get their dispensary off the ground. Be sure to treat friends and family the same way you would any financial institution – be professional, prepare accordingly, and understand that loans come with risks.

Online Lenders

There are also online lenders that specifically cater to the cannabis industry and can provide quick funding with minimal paperwork. For example, Clarify Capital provides loans with interest rates as low as 7% and funding within 1 to 2 days. Another example is FundCanna, which has funded over $20 billion to small and medium businesses nationwide and can provide funding in as little as 24 hours.

Traditional Banks

Although it is challenging, it is not impossible to get a loan from a traditional bank for your dispensary. You will need to find a bank that is willing to work with cannabis businesses, and you may need to have a bank account with the bank before they are willing to lend to you. You'll also need to consider what you can offer as collateral, as the most valuable asset of your business (marijuana) is something that a financial institution cannot repossess if you default on your loan.

Frequently asked questions