Grass is greener for Wall Street cash strategists

Marijuana investors bet on demise of drug’s ban

BELVIDERE, N.J. - Located about an hour’s drive from Manhattan in northwest New Jersey, the Terra Tech greenhouse 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 Jerseygreenhouse 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 ’n’ 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 toenlist 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 have already legalized medical marijuana; there are formal measures pending in 10 additional states, according to the National Cannabis Industry Association.

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 marijuana remains contraband under federal law, some entrepreneurs see it 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the same path as Prohibition, which banned the manufacture, transportation and sale of alcohol from 1920 until it was repealed in 1933.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 cannabisfocused startups. “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 percent 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 andwhich 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, Calif., 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, hesaid.

“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.

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.

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.

And, investors in businesses involved in growing or distributing cannabis could face civil forfeiture actions to seize their investments or other assets, said Dan Richman, a former federal prosecutor who handled narcotics cases and now teaches at Columbia Law School in New York.

“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.

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

“This is messy,” said Richman “This might be complex politically. It’s not complex as a matter of federal criminal law.”

Business, Pages 64 on 04/07/2013

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