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Trump officials rattle burgeoning legal-pot industry

Recent statements by Trump administration officials have led to a flurry of news reports that the days of legal recreational use of marijuana are numbered.

Industry watchers told Scotsman Guide News that the media has blown rumblings from the White House out of proportion, but the perception that a federal crackdown could take down legalized pot in the eight states that have approved recreational use could temporarily scare off some lenders and investors.

“From an investment standpoint, this could really be the perfect storm because it creates this uncertainty,” said Troy Dayton, chief executive officer of The ArcView Group, an investment and market-research company focused on the emerging cannabis industry. Dayton said he’s seen no evidence that investors are losing interest in the market, although he expects that some larger and more risk-adverse institutional investors will wait and see how the Trump administration responds in the next few months.  


“Most people are not going to understand that the likelihood of that uncertainty fading in just a few months is high,” Dayton said.

President Donald Trump hasn’t made his position on legal marijuana clear since assuming office. Recently, however, the administration appeared to take a tougher line.

During a briefing on Feb. 23, White House Press Secretary Sean Spicer told reporters “you will see greater enforcement,” and he also seemed to draw a distinction between the medical and recreational cannibas markets, saying there is a “big difference” between medical marijuana and recreational use. Spicer also appeared to connect the legal adult-use of marijuana with the opioid crisis (heroin and abuse of prescription pain killers) now afflicting several states.

Attorney General Jeff Sessions also has hinted recently that the feds will be more aggressive on enforcing federal drug laws. Sessions and Vice President Mike Pence have been anti-drug crusaders who oppose marijuana legalization, which has also stoked fears in the industry.

The targeting appears to be focused on recreational use, not medical use. Colorado and Washington passed referendums to allow recreational use in 2012, and became the first states to adopt laws allowing for sales. Oregon, Alaska and the District of Columbia approved recreational use in 2014, followed by California, Nevada, Massachusetts and Maine last year. Numerous other states allow medical use of marijuana. 

Under a cloud

The legal marijuana business has always been under the cloud of a potential federal crackdown. Marijuana is still classified by the U.S. Drug Enforcement Agency as a Schedule 1 controlled substance, the same classification as heroin.

The Obama Administration did not enforce the federal prohibition in states that legalized its use so long as those states enacted strict regulations and complied with a framework of conditions outlined in Department of Justice (DOJ) guidance known as the Cole Memo. For example, the DOJ guidelines mandate that there can be no commingling of the legal and non-legal marijuana trade, and that cannabis sales must be strictly controlled to prevent use by minors, and so on.

“The Trump administration doesn’t really have a marijuana policy that is coherent,” said Dominic Corva, the founder the Center for the Study of Cannabis and Social Policy. Corva is a longtime cannabis-market expert and researcher who holds a doctorate degree in political geography.

Corva said legalization has had support from the libertarian and populist wings of Trump’s base. The billionaire Silicon Valley investor Peter Thiel, cofounder of PayPal and an influential Trump supporter, is a major investor in Privateer Holdings, a private equity firm invested heavily in the marijuana industry. Trump, according to media reports, is considering pro-medical marijuana advocate Jim O’Neill as the next head of the Federal Drug Administration. O’Neill is a Thiel associate and a founder of the Coalition for Cannabis Reform.  

“Trump’s base is not the normal Republican base,” Corva said. “His populist base includes lots and lots of libertarian, right-wing anarchists and rural redneck folks who love marijuana. Poor, white people love marijuana.”

Corva, who sometimes serves as a consultant to private equity funds considering investments in legal cannabis, said "there is lots of money going into legal cannabis."

“It is coming from the tech sector in particular," Corva added. "Those people are less risk adverse.”   

ArcView's Dayton said the cannabis industry has always carried an extra layer of risk, both for lenders and the high net worth investors that his organization seeks to attract, as well as for the pot growers and companies themselves.

“Until federal law completely changes, and we end federal prohibition, then being in this industry is an act of civil disobedience,” Dayton said. “If somebody isn’t willing to be involved in some level of civil disobedience, then they should go start a dry cleaners or something.”

Still, private money lenders are more nervous about what the Trump administration might do, said Glen Weinberg, a partner in Colorado-based Fairwood Commercial Lending, which early on bankrolled pot companies in real estate deals in the Denver metro area.  

“I don’t know how anybody could not be thinking that,” Weinberg said. “It has always been a concern of mine.”

Denied traditional commercial loans from banks, the cannabis industry has mostly relied on private money lenders and equity investors to finance the purchase of buildings and real estate used to grow, warehouse and sell weed.

Pot businesses have tended to pay grossly inflated prices on this real estate as a cost of doing business, Weinberg said. If the feds were to begin to slap growers and pot retailers with orders to cease and desist, the values of their shuttered properties would plummet, and the investors holding the notes would take big losses.

Weinberg said he has passed on hundreds of deals involving specialized buildings whose values are over-inflated. 

“I just looked at one yesterday,” Weinberg said. “The broker actually got quite upset with me because he thought this property was worth $1.5 million dollars. In reality, to a generic user, that building may have been worth $400,000 to $500,000, and he was putting a three-times premium just because it was pot.

“I am fine in the industry, I am just being really cautious,” Weinberg said. 


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