Pubdate: Sun, 24 Mar 2013
Source: Los Angeles Times (CA)
Copyright: 2013 Los Angeles Times
Contact:  http://www.latimes.com/
Details: http://www.mapinc.org/media/248
Author: Andrew Tangel
Page: B1

MARIJUANA INC.

Entrepreneurs, Hoping to Cash in If Pot Becomes Legal Nationwide, 
Pitch Their Ideas to Potential Investors. Wall Street Can Smell Profits.

Located about an hour's drive from Manhattan in the hills of 
northwestern New Jersey, the facility produces basil, chives, oregano 
and other herbs that are sold in grocery stores around New York City.

But if Ken VandeVrede has his way the facility will one day be 
growing a much more valuable plant: marijuana.

VandeVrede is chief operating officer at Terra Tech, a hydroponic 
equipment maker based in Irvine. The small company wants to double 
the five-acre New Jersey greenhouse operation. The aim is one day to 
supply the exploding U.S. medical marijuana trade and to prepare in 
the event that recreational marijuana ever becomes legal nationwide.

"We can scale this thing very, very quickly," said VandeVrede, clad 
in blue jeans and a pumpkin-colored sweater as he surveyed his indoor 
fields of produce and flowers. "When hemp and cannabis become legal, 
we're ready to rock and roll."

To do it, Terra Tech needs to raise $2 million. And like a number of 
small businesses in the burgeoning U.S. cannabis industry, it's 
trying to enlist Wall Street's help. Business owners have been 
pitching their ideas to potential investors, coming to New York in 
some cases to meet with would-be financiers.

Wall Street has good reason to smell potential profits.

Washington, D.C., and 18 states, including California, have already 
legalized medical marijuana; there are formal measures pending in 10 
additional states, according to the National Cannabis Industry Assn.

Colorado and Washington legalized recreational marijuana use in 
November. In addition, a measure allowing "adult use" of pot has been 
proposed in Maryland, according to the association's tally. Various 
bills to legalize marijuana and hemp have been proposed in Congress too.

Although pot remains contraband under federal law, some entrepreneurs 
see marijuana heading down the same path as Prohibition, which banned 
the manufacture, transportation and sale of alcohol from 1920 until 
it was repealed in 1933.

"More and more people see the inevitability," said Brendan Kennedy, 
chief executive of the Seattle private equity firm Privateer 
Holdings, which targets cannabis focused start-ups. "They see that 
the Berlin Wall of cannabis prohibition is going to come down."

Privateer is raising $7 million to acquire small companies that have 
a hand in the trade but don't grow or distribute marijuana. Its first 
acquisition: Leafly, a Yelp-style online rating site in Seattle for 
dispensaries and varying strains of marijuana.

With pot still federally outlawed, others are making similar bets - 
funding firms that supply equipment or ancillary services while 
steering clear of marijuana farming and sales.

Take Lazarus Investment Partners, a $60-million hedge fund in Denver, 
for example. One of Lazarus' investments is in AeroGrow International 
Inc., a maker of hydroponic kitchen appliances geared toward growing 
herbs, lettuce and tomatoes.

Lazarus, which owns 15% of AeroGrow's shares, has suggested that the 
company tweak its products to accommodate taller plants, including 
marijuana, said Justin Borus, the fund's managing partner.

"We want to be selling the bluejeans to the gold miners," Borus said. 
"We don't want to take a bet on which state is going to get legalized 
and which dispensary is going to succeed, or [which] cannabis growers 
are going to be successful. We want to just make a bet on overall 
legalization."

In California, MedBox, a West Hollywood maker of automated dispensing 
machines for doctors' offices, pharmacies and pot dispensaries, is on 
the hunt for funding.

Vincent Mehdizadeh, MedBox's founder, said the company is actively 
exploring raising $20 million in equity to boost staffing and fund 
research and development, acquisitions and marketing.

Mehdizadeh said he's seen a "major spike" in interest from potential 
financiers looking to invest in the small company since Colorado and 
Washington legalized recreational pot use last year.

"Everybody's loosening up a lot because they realize the momentum has 
shifted and the financial world is going to have to make room for 
this industry," he said. "Wall Street and investment banks are going 
to have to come along for the ride, eventually."

Derek Peterson, president and chief executive of Terra Tech, is 
working to get his company's shares listed on a stock exchange by the 
end of the year. The company may try for NYSE MKT, which was formerly 
known as the American Stock Exchange and is geared toward smaller 
companies, or perhaps the Nasdaq Stock Market, he said.

"The stodgier Wall Street types are starting to realize there's money 
to be made here," said Peterson, who worked in wealth management at 
Wachovia Securities and Morgan Stanley Smith Barney.

The company has taken steps to get the word out to investors. It 
tapped Midtown Partners, a small New York boutique investment bank, 
to help it explore financing options as it planned the New Jersey 
greenhouse expansion. Terra Tech is merging with the farm's owner, NB 
Plants, and retail gardening center and nursery. Both are owned by 
VandeVrede's family.

Initially, the vast majority of Terra Tech's revenue will come from 
cultivating fresh herbs and flowers from the New Jersey farm, with 
the rest coming from equipment sales. The idea is to first feed urban 
consumers' growing appetite for pesticide-free produce, then add pot 
or hemp when the legal climate is right.

"There is this huge demand for organic food," said Prakash Mandgi, 
Midtown Partners' director of investment banking. "Marijuana 
cultivation, in my opinion, is a potential driver in the future, but 
it's so tied to government rule and regulations.... Federally it's illegal."

Estimates for the marijuana industry's size range widely, since much 
of the trade remains on the black market. Bloomberg Industries 
recently pegged it at $35 billion to $45 billion.

Still, Wall Street is by no means opening the floodgates of capital.

Companies in this space are still quite tiny, not to mention risky, 
compared with large corporations trading on the New York Stock 
Exchange or the Nasdaq.

Moreover, Wall Street firms face a significant disincentive to 
investing in the industry: federal law. Growing and distributing 
marijuana can still lead to raids by federal agents - not to mention 
prison time and huge fines.

Major banks have come under intense scrutiny by the federal 
government in recent years for violating laws aimed at preventing 
money laundering. The British banking giant HSBC paid $1.9 billion to 
end a U.S. investigation into its role processing cash for drug 
cartels and customers in rogue nations.

Marijuana dispensary owners have complained of difficulty opening 
bank accounts, forcing them to operate in cash only.

"This is messy," said Dan Richman, a former federal prosecutor who 
handled narcotics cases and now teaches at Columbia Law School in New 
York. "This might be complex politically. It's not complex as a 
matter of federal criminal law."

Investors in businesses involved in growing or distributing cannabis 
could face civil forfeiture actions to seize their investments or 
other assets, Richman said.

"I would think the prospectus would have to say: 'The government 
might come and take all of your money and possibly go after you,' " 
Richman said.

Federal law may not deter all investors. After all, the government 
can choose what laws to strictly enforce, and it's unclear how the 
federal government will ultimately treat legalized recreational pot 
in Colorado and Washington.

Alan Valdes, a floor trader on the New York Stock Exchange, expects 
some of Wall Street's more adventurous investors to put up money for 
a project he's involved with called Diego Pellicer Inc.

The business idea is to open a dozen Starbucks-like high-end shops 
for pot in Colorado and Washington. Valdes said he and his partners 
might begin tapping investors - wealthy individuals, family-run funds 
- - later this year.

"These are more mavericks - these are gunslingers," he said of 
potential investors. "The big houses are off the table right now."
- ---
MAP posted-by: Jay Bergstrom