What Are the Risks in Investing in a Pot Startup? Federal Law May Not Be Your Biggest Hurdle

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Dear Pot Lawyer,

I’m thinking of investing in a pot business, but I still can’t get over the risks with the feds. What should I do?

You might start by thinking about this issue in another way. Even in these darkest of times, the greatest risk to your investment may not be retrograde federal law. You probably stand a greater chance of losing your investment because you invested in a start-up. I could be wrong about that, but everything I’ve seen for the past several years suggests otherwise.

Every day, I go to work at a law firm that represents hundreds of pot businesses, auxiliary businesses, and investors in Oregon, Washington, and California. To my knowledge, not one of these businesses has ever been subject to a federal inquiry, warning letter, or raid. I also know dozens of other pot lawyers and law firms. To my knowledge, not one of their clients has ever been subject to federal inquiry, warning letter, or raid. It certainly has happened from time to time, out there in the world—but in our world, it simply has not.

Now, this is not to say that federal law does not codify serious, gratuitous penalties and punishments for trading in cannabis. It does! When we put together private placement memoranda for pot businesses to give to investors like you, they contain brutal warnings along the lines of “all of your assets could be seized and you could go to jail.” There are important reasons why we want and need to say these things, but I have yet to see these consequences.

What I have seen, on the other hand, is many businesses fail and people lose their shirts. I’ve seen businesses fail because people stole from their partners, because they couldn’t get a loan they were promised, because they got out-jockeyed by restrictive zoning laws, because they were out-competed by people with better products and systems, because they couldn’t execute a business plan, and on and on. I’ve also seen businesses fail for what were probably indirect consequences of federal cannabis laws: oppressive taxation, lack of financial services, confounding local regulation (I’m looking at you, City of Portland), etc. But I haven’t seen the feds come knocking.

At the end of the day, you are considering a unique type of business investment: ownership in a cannabis start-up. In making that decision, it’s important to weigh both types of risk: legal risk and business risk. On the legal risk side, Jeff Sessions, Donald Trump, and their cohort seem to have plenty of awful ideas, but they aren’t very good at getting things done. On the business risk side, roughly half of US small businesses fail within five years—and that number has got to be higher in weed. So take a long, hard look at the company before you invest. If it still seems like an idea worth pursuing, then you can weigh the federal legal risk.