Pubdate: Sun, 03 Feb 2013
Source: Arkansas Democrat-Gazette (Little Rock, AR)
Copyright: 2013 Los Angeles Times
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Note: Accepts letters to the editor from Arkansas residents only
Author: Joe Mozingo, Los Angeles Times

'POT' INDUSTRY ON ROLL IN COLORADO AS LEGAL FUN USE NEARS

DENVER - Two hedgefund partners - monogrammed shirts, taut Windsor 
knots, cufflinks - step into a hipster cafe called Sputnik on an 
unorthodox mission.

They are meeting a business consultant to discuss a way to bolster 
share prices at one of their portfolio companies, which sells indoor 
garden kits for tomatoes, herbs, flowers and salad greens. Their idea 
is to tap into a new market, but they must be discreet for fear of 
blemishing the publicly traded company's reputation - with a 
marijuana connection.

Similar meetings have convened across Colorado in the two months 
since state voters approved a constitutional amendment to allow the 
adult use of recreational weed. The state has become a nucleus of the 
rapidly evolving marijuana industry, offering a glimpse at what life 
might be like if weed is legalized nationwide, with companies, 
entrepreneurs and investors maneuvering for a piece of the expected boom.

Dispensaries are handing out glossy prospectuses to attract 
investors. Luxury cannabis leisure magazines in the vein of Cigar 
Aficionado are promoting the industry and cannabis tourism. Companies 
are jostling for various sectors of the market, from grow lights to 
point-of-sale systems. And marijuana growers are shedding the pothead 
vibe to sell their services to MBAs, who have the capital to get 
started but not the arcane knowledge required to produce a good product.

The hedge-fund partners from Lazarus Management Co. are among the new 
breed. They have traveled to Sputnik to talk to Ean Seeb, a 
consultant specializing in marijuana.

"In the past you had a bunch of marijuana enthusiasts with little or 
no business acumen looking to get into this industry," said Seeb, 37, 
co-founder of Denver Relief Consulting. "Now we're seeing a complete 
role reversal. A bunch of businessmen with a lot of money who 
recognize this opportunity, and they have no clue what they're doing 
as far as cultivation."

The state already boasts a regulated for-profit market of medicinal 
marijuana. It's much more regimented than California's industry, 
which operates under murky everchanging rules that vary from place to place.

In Colorado, sellers of medical marijuana must go through a 
background check, pay between $ 15,000 and $20,000 a year in 
licensing fees and submit to regular inspections. Every plant is 
tagged and numbered, from seed to sale. No such system exists in California.

Seeb and his partners have run a dispensary for medical marijuana 
since 2009, and they know the key players in Colorado and how to get 
licensed. They tapped that expertise to start consulting in 2011. 
Their first client was a 97-year-old Denver institution, Central Bag 
and Burlap, which wanted to provide packaging for pot shops and 
edible marijuana products.

"We helped them create their name, their logo, their product line, 
the initial marketing," Seeb said. "They are now the premier 
packaging supplier for the industry in Colorado."

Other businesses are hoping the new law will spur even more growth. 
Toni Fox, owner of 3-D Denver's Discreet Dispensary, is seeking 
investors. She printed a company prospectus the moment Amendment 64 passed.

With $500,000, Fox could build grow rooms in a warehouse next door 
and buy another dispensary in the mountain town of Buena Vista. She 
expects to produce 75 pounds of marijuana a month, worth well over 
$300,000 by 2014, when businesses will get the first licenses to sell 
recreational pot.

It hasn't been easy to get this far. Banks don't give loans to 
dispensaries because they are illegal under federal law, so Fox and 
her husband sold the assets of their commercial landscaping business, 
as well their boat, a motor home, her Mercedes-Benz and his Hummer, 
and invested it all in the dispensary. They spent $300,000 in 
construction costs before she could even get her certificate of 
occupancy and state license.

Last year, their net income was $17,040. But they see a big increase 
coming, with a rise in volume and price. She has a big advantage 
because existing dispensaries will get first dibs on the retail 
licenses, which are expected to be limited in number. Their 
prospectus predicts net income jumping from $338,190 this year to 
$5,888,990 in 2014 and $6,770,990 by 2015.

Expecting to draw tourists, they decorated the waiting room like a 
Rocky Mountain cabin and installed an 80-foot "viewing corridor" with 
windows so customers can see the marijuana plants growing.

"I am the closest dispensary to the airport," she said.

The giant caveat hanging over this new marketplace is how the U.S. 
Justice Department will react.

President Barack Obama signaled early in his first administration 
that prosecutors would not go after medical marijuana users, which 
all but launched an industry in California and, to a lesser extent, 
other states. Then in 2011, U.S. attorneys around the country began a 
campaign of raids, civil suits and prosecutions to rein it all back in.

After marijuana legalization measures passed in Colorado and 
Washington state in November, Obama said in a television interview 
that it "would not make sense for us to see a top priority as going 
after recreational users in states that have determined it's legal."

This comforted some, but users have generally not been the targets of 
the crackdowns. The sellers have been.

Even without a full crackdown, Colorado is affected, stuck in a kind 
of half-Prohibition. Purveyors of marijuana can't get bank accounts, 
loans or institutional investors. They have to file tax returns under 
a provision targeting drug traffickers, which prohibits them from 
deducting routine expenses such as payroll.

When Wanda James founded her company, Simply Pure, producing high-end 
marijuana-infused foods, she thought she could avoid the gray areas. 
She was a well-connected political consultant who was on Obama's 
national finance committee in 2008 and also a restaurateur with her 
husband, a chef.

In 2010, Simply Pure began producing high-quality soft candies, olive 
oil, banana bread, marinara sauce and mango salsa. More than 120 
dispensaries sold the products on a regular basis.

But last July, her bank closed her accounts. She could have lied 
about what the company sold, but she didn't want to.

She's not giving up. Gov. John Hickenlooper appointed her to a task 
force to sort out regulations for the new recreational marijuana 
industry. Finding a solution to the banking problem is among her objectives.

"We would love someday to be able to work with Whole Foods or Trader 
Joe's to produce a line of cannabis products that people can rely on, 
that taste great and are good for you," she said. "You might not be 
able to imagine your mom taking a hit from a bong, but you might see 
her taking a bite of a peppermint cup."

Back at Sputnik, Seeb listens to the hedge-fund partners. Leery about 
the stigma of marijuana, they ask to withhold their portfolio 
company's name from this article.

Managing partner Justin Borus asks Seeb whether he sees a market for 
the indoor grow kits. "And if there is a market for this, where 
should these things be sold? Should they be sold at Bed Bath & 
Beyond? Should they be sold at dispensaries?"

Borus and his partner wonder whether someone like Seeb might want to 
join in as a sister marijuana company - getting the word out that 
these devices work for pot, selling the seed kits and giving online 
training that customers might want.

Borus' partner, who did not want to give his name, said the company 
would probably not want to market directly for marijuana use. "But 
there are probably some fun ways to do it with a wink and a nod," he 
said. "They say, 'Marijuana? We have nothing to do with marijuana. 
But you might go online and check out this company that might just 
have seed kits that fit perfectly into our device.' "

Seeb was on board. Last week, he and his partners went to the 
company's headquarters for their first meetings.
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MAP posted-by: Jay Bergstrom