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Portfolio > Alternative Investments > Cannabis

Would-Be Marijuana Investors, Look Past the Plant

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One of the primary concerns for investors researching the cannabis industry is “whether or not they want to touch the plant,” according to Gary Allen, chief operating officer for New Frontier Data.

“Some investors are nervous about the illegality nationally of the cannabis industry,” so they tend to stay away from investment opportunities that involve the actual sale of the plant, Allen said. Instead, they prefer opportunities like “technology platforms such as ourselves, ancillary services, product development, industrial development, biotech – there’s a lot of opportunity in all of those areas for investors.”

New Frontier Data is a big data technology firm that produces business intelligence for players in the cannabis industry. It creates industry reports to serve investors and their advisors, as well as a software-as-a-service (SaaS) platform to help financial firms, legislators and operators navigate the cannabis industry.

New Frontier also provides advisory and consulting services, and produces indexes to help cannabis investors as well as players in other sectors understand “how the legal cannabis market is affecting tobacco through cannibalization, alcohol through cannibalization, as well as [the] pharmaceutical” industry.

Marijuana has been approved for medicinal use in 29 states and Washington, D.C., as well as Guam and Puerto Rico, according to the National Conference of State Legislatures. An additional 17 states have approved certain marijuana-based products with low THC levels for medical use. Adult recreational use has been legalized in four states and Washington, D.C.

(Related: New York State Posts Marijuana Coverage Ruling)

However, President Donald Trump has indicated a less permissive stance on rolling back federal prohibition, including seeking greater authority to enforce prohibition in states where it has already been legalized for adult use, according to John Kagia, executive vice president of industry analytics for New Frontier Data.

Kagia said Congress has been more amenable to legalization than the president. In fact, Sen. Cory Booker, D-N.J., introduced a bill on Aug. 1 that would remove marijuana from the list of controlled substances, making it legal at the federal level.

Kagia believes that at the state level, “medical and, to a lesser extent, adult use legalization is going to continue very aggressively over the next few years.”

Despite the uncertainty around the actual legality of marijuana, Allen said that “one of the more exciting facets of the industry itself is that there are just numerous investment opportunities. As with every industry, this industry needs an infrastructure. It needs technology, and that technology is not just advertising … but more industrial technology” similar to what is seen in more mature industries.

That means technology that can facilitate cultivating, processing, testing and distributing the plant, Allen said. “There’s really almost a limitless number of investment opportunities.”

Technology could help solve another issue peculiar to the cannabis industry. A report by Arcview Market Research found the marijuana market in North America reached $6.7 billion by the end of 2016, and is projected to grow to more than $20 billion by 2021, Business Insider reported. The problem is, unless something changes, most of that will be in cash, which puts them at risk of violating anti-money laundering regulations.  

“Cannabis businesses still don’t have access to financial services. It remains a very cash-intensive business,” Kagia said.

The technological and business changes to relieve that pressure are only just starting to take place. Credit Union Times, a sister publication of ThinkAdvisor, reported in July that Partner Colorado Credit Union created Safe Harbor Services LLC to offer savings and checking accounts specifically to cannabis businesses.

Distributed ledgers like blockchain and Ethereum have potential to ease some of the cash flow pressure, and several altcoins have popped up that serve this industry, including PotCoin, MarijuanaCoin and CannabisCoin.

“We’re just starting to see an application of these types of technologies in cannabis,” Kagia said. Because of the illegality of the marijuana industry, “much of the innovation that has transformed virtually every other sector of the economy, from agriculture to retail to consumer products, has largely skipped over cannabis. You haven’t had this sort of industrial infrastructure and capital to develop an industrial infrastructure to modernize” the industry.

There’s a “huge opportunity for innovation in the space,” Kagia said, but investors need to be patient as “it is still moving relatively slowly and the industry is still very nascent.”

Still, he concluded, “Given the volumes of capital at play and the speed at which the industry is growing, we expect that as the industry matures we’ll be seeing a lot more of it.”

— Read What’s Next for Crypto Coins as SEC Tames Wild West of Finance on ThinkAdvisor.


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