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Regulation and Compliance > State Regulation

Marijuana Investing: Why Advisors Should Just Say No

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In 2014, sales in the legal marijuana industry reached $2.7 billion, according to ArcView Group, a market research firm for the cannabis industry. The group predicts that by 2019, sales will approach $11 billion and that by 2020, an additional 14 states will have passed laws allowing recreational use.

Greenwave Advisors, another research group for the legal marijuana industry, estimates that at the current rate of legalization, the market will reach $21 billion by 2020, or $35 billion if it’s legalized in all 50 states.

Recreational marijuana use is legal in only four states and Washington, D.C., but medicinal use is allowed in 23 states. CBD oil, which has very low levels of THC, the psychotropic agent in marijuana, has been legalized for limited uses in an additional 15 states, including Texas, where use of the oil to treat children with epilepsy was legalized on Monday.

The House passed three amendments on Wednesday to prevent the Justice Department from interfering in states that have allowed medicinal use and to cut funding for the Drug Enforcement Administration.

Considering the apparent change in attitudes toward weed, it might seem like a good time for investors with the palate for such high-risk opportunities to consider adding them to their portfolio, but David Welch, a lawyer at D|R Welch Attorneys at Law in Los Angeles, said they need to take their time.

The problem with investing in the marijuana industry is simply that it’s still illegal at the federal level, and an advisor can’t in good faith recommend such an investment, he said.

“I don’t believe there’s a financial advisor who under their duties can actually suggest that their client invest in the medical marijuana business,” Welch told ThinkAdvisor on Thursday. “It’s something that has to be done outside of the realm of the financial planner, just because of the risk involved.”

He compared medical marijuana to vice investments like gambling and pornography, which are not illegal federally but may be in certain states.

“There are certain types of gambling that are not allowed [federally], but it’s up to the states to determine if it’s allowed. It’s different here because under federal law, marijuana is illegal, but under state law, it may be legal. When you invest your U.S. currency in a marijuana business, you have already violated federal law.”

He acknowledged that investors may feel like they have the blessing of the federal government to invest in the marijuana industry, but he reiterated that that could change.

“There are certain protocols being followed by the United States’ attorney’s office. There are certain protocols being followed by different federal agencies that are sort of ignoring the illegality of these investments in the operation of medical marijuana, but who knows when those protocols may change,” he said.

The marijuana industry is getting bigger. The MJIC Marijuana Index has tracked legal marijuana since 2013. Its Global Composite index tracks 150 securities. The index opened at $368 on Friday.

However, according to Welch, “In my opinion, the only legal way to invest in this industry is to invest in property that has dual purpose, that is not solely for the purpose of using it for marijuana.”

Legalization is inevitable, Welch said. “The federal government will eventually allow for the use of medicinal marijuana. I have not heard of anyone who believes differently. The question is when, and until then, investment in marijuana remains illegal.”

Investors who want to get into this space should position themselves so that they’re ready when the prohibition on weed is lifted. “For our clients that are looking at this space, we’re looking to place them in a position where they can control the means of production when and if prohibition is lifted,” Welch said. “That’s how we help our clients who are very interested in this arena. The last thing we want that client to do is to be prosecuted and risk their money or their liberty.”

Advisors who are approached by clients to invest in the marijuana industry can do due diligence for their client, Welch said. However, as part of an advisor’s job is to inform clients about the risks they’re taking, “any time jail time is involved, an advisor will always say, ‘No, it’s not a good risk.’”

They may also find it beneficial to consult a legal expert. “It’s probably best, and I don’t say this self-servingly, but to consult legal counsel that understands what is allowed, which actions are punishable and which are not.”

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