How to legally invest in pot companies

How to get rich off weed
How to get rich off weed   

Score one for the stoners: The pot industry is poised to be gigantic as more states embrace legalization. And, if you want to get in on the ground floor, several advocates say now is the right time to bet big on marijuana.

"Overall public opinion of marijuana has changed," said Dan Humiston, president of the International Cannabis Association. "The stance has just softened. With time as the population ages, a lot of the generations that were really opposed to it are being replaced with the generations that are comfortable with it."

Bloomberg reports that the cannabis industry had a market capitalization of $3 billion as of April. There's currently more than 50 publicly traded pot-related companies. Twenty-four states have legalized medical marijuana, and recreational use for adults has been approved in Washington, Colorado, Alaska, Oregon and Washington, D.C.

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With more companies going public every day, the still illegal industry is growing rapidly. New Frontier Financials, a big data shop that focuses on the marijuana industry, estimates that the industry will reach $15.2 billion by 2020. At least seven states are expected to have marijuana legalization initiatives on their 2016 ballots.

Humiston believes that as more states come on board, the hysteria that was overvaluing companies has died down, so prices are more realistic.

It also helps that the stigma of being in the weed business is quickly fading away thanks to celebrities like Tommy Chong creating their own weed brands and high profile investors like Peter Thiel, said media and public relations expert Cheryl Shuman. In January, the PayPal co-founder's Founders Fund took a minority stake in Seattle's Privateer Holdings. The company runs a medical marijuana growing operation in Canada and a pot review site called Leafly.com, among other marijuana-related businesses.

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"Investors want to see if an influencer, a trendsetter, a cutting edge individual gets involved," explained Shuman—who calls herself the Martha Stewart of marijuana. "Now I'm getting 10 calls a week."

Marijuana Country: The Cannabis Boom - Edibles explosion
Marijuana Country: The Cannabis Boom - Edibles explosion   

It's important to note that the business is still illegal. Ryan Hurley, partner of Rose Law Group in Scottsdale, Arizona, admitted during a panel at the 2015 Cannabis World Congress & Business Exposition in New York on Thursday that when clients ask him to protect them from going to jail, he can't 100 percent guarantee it. While the federal government has recently turned a blind eye to companies who follow state regulations, Hurley said the policies could change after the 2016 election.

"This is still federally illegal," he told CNBC. "I get a lot of people who come in and talk to me because I'm a lawyer. Can I set up some corporate structure to protect them? They can still go to jail for doing this. It's the number one thing to keep in mind."

If you're willing to take the risk, Hurley pointed out that while Washington and Colorado already have a heavy concentration of businesses, newly legalized states like Alaska and Oregon have more opportunities to get a license for a growing facility. He added Colorado is also notoriously hard for nonresidents to start marijuana-related businesses on its soil.

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Hurley said states that will likely pass some sort of legalization next year, such as Arizona and Maryland, might also be a places to start scoping. He said it seems that it will remain difficult to establish a business in areas like New York and Minnesota.

If you want to forgo the licensing process and invest in an existing company—which is safer—Hurley said to make sure that the company follows state regulations. States that have legalized for adult use rather than just medical tend to have more existing rules, leaving less ambiguity and less legal risk.

Medical marijuana growing in Denver
Harriet Taylor | CNBC
Medical marijuana growing in Denver

To minimize your risk, Frontier Financials Group co-founder Rick Gilchrist suggested investing in ancillary businesses that don't directly involve the marijuana plant and can operate anywhere legally. Gilchrist especially pointed out that marketing and public relations experts willing to take on marijuana clients are especially in demand.

Related businesses not "touching the plant" can include everything from growing and harvesting equipment to industrial hemp to medical containers. The Capsule Consulting Group manufactures empty gelatin and vegetable based capsules that come in flavors like orange, strawberry and coffee for weed companies to put their product in. While it is intended for medical marijuana use, it doesn't directly deal with the plant. Likewise, Kush Bottles creates custom child resistant marijuana containers for retailers, but doesn't actually sell weed.

Canna Flavors creates oil soluble flavor extracts for use in baked goods containing pot to mask the taste of weed, but its products don't contain any marijuana. It can also be used in any regular kind of baking.

And GreenBroz makes a mechanical trimmer for marijuana harvesting, a completely legal machine. Co-founder Cullen Raichart pointed out it could technically be used for other purposes, but admitted he couldn't think of another purpose for using the device besides the dry trimming of marijuana plants.

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Like with any business, make sure to research what the company does and the history of the leadership, Humiston said.

"It's not good for our industry and it's not good for the investor if they invest and make a bad decision," he said. "The best thing for our industry is everyone will prosper."

Still, while these products may turn you a profit, if you want the most returns, companies that actively work with the marijuana plants are still your best bet, Shuman pointed out.

"The people who are strong enough and smart enough and have the right attitude, who are willing to take those risks, will be the billionaires of 2016 and beyond," Shuman said. "The higher the risk, the higher the potential reward."