NJ marijuana legalization: Want to start a legal weed business? So do investors

This story is part of the HIGH HOPES series from the USA TODAY NETWORK New Jersey, which sent journalists to Colorado & California to see how legal weed could impact the Garden State.

COMMERCE, Calif. — Sturges Karban peppers his speech with investment buzzwords: "highly acquisitive," "omnichannel model," "aspirational markets." The cufflinked 40-year-old Harvard University graduate speaks frequently of "the space," the bull's-eye where, he says, he has invested nearly $10 million of his own money.

He's talking about marijuana.

He's referring to a substance that's still illegal under federal law, which means that large, federally insured banks don't handle marijuana transactions. Even while touting a potential $75 billion investment opportunity in a research note to investors, the New York bank Cowen Inc. warned that marijuana businesses "may be at risk of federal and/or state criminal prosecution."

In other words, marijuana investment is not for the weak of heart, or the sensitive of wallets. But for thrill-seekers and pioneers like Karban, Rafael de la Cruz and Arnaldo "AJ" Peralta, it is the space to be in.

"It's a gold rush," said de la Cruz, a former beverage marketing executive who started a marijuana investment group in 2016. "The gold rush is going to yield a lot of fool's gold and a couple of treasures. Not everyone is going to win."

Investors eye NJ, national prospects

The administration of New Jersey Gov. Phil Murphy, who has championed legal marijuana, estimates that the market could reach $1.2 billion— out of a total state economy of about $592 billion. At a conference in Philadelphia in early May, lobbyists for legal weed in New Jersey urged investors to commit their money to real estate and ancillary industries like greenhouses that would serve the marijuana industry.

Karban, the chief executive of MJIC, short for "marijuana investment company," is retooling his business from investing mainly in marijuana startups to controlling a big piece of the distribution network that gets the plant from greenhouses to store shelves.

"I think we can all agree that the benefit is disproportionate," he said. "Our ambitions are national. We expect this to go state by state by state."

Karban's company has the look of a tech startup: all sleek glass lines, concrete floors and minimalistic wall art of extreme closeups of marijuana plants, buds and oils. The suburban Los Angeles offices are mostly empty, which Karban attributed to renting in anticipation of adding to his 52-employee workforce. While admitting that the "irrational exuberance" that once gripped investors in early Internet startups now pervades marijuana, Karban said the biggest rewards await those at the front of the herd.

"The impulse right now is to move as fast as you can, and I think that's smart," Karban said. "Look at California now even versus Jan. 1 — you see billboards all over advertising marijuana stores."

Karban's optimism is well-founded, according to Cowen Inc. The bank revised its projection for legal marijuana sales by 2030 to $75 billion a year, from an earlier projection of $50 billion by 2026, as marijuana replaces alcohol as a "social lubricant" for many. Currently, alcohol sales total $210 billion a year, Cowen said.

Story continues after gallery

Marijuana business largely cash-only

Analysts' rosy projections haven't always met reality. Californians purchased about $339 million in marijuana products in the first two months of this year, as sales became legal to anyone 21 and older, which is 13 percent lower than state projections, according to BDS Analytics of Colorado. The state hasn't released sales or tax figures yet.

Murphy is projecting $300 million a year in New Jersey tax revenue from marijuana, which assumes $1.2 billion in sales at a 25 percent tax rate. A Roseland law firm, Brach Eichler, projected as much as $1 billion a year in tax revenue to New Jersey from legal sales — which would be well ahead of the combined tax windfalls to Colorado and Washington, the first two states to allow adult use of marijuana.

All of that money is flowing into an industry that, due to federal banking laws, still largely uses cash. Banks that are chartered by the federal government can't handle money from marijuana businesses, and the businesses themselves operate mostly with cash payments. California Treasurer John Chiang has proposed a state-run bank that could serve the marijuana industry; Murphy supports the idea in New Jersey.

Investors in California, the largest legal marijuana market in the world, with 40 million residents, are blazing a trail for counterparts in other states, said Peralta, 51, a native Angeleno who has invested in marijuana businesses for a decade. What happens in California will largely determine whether marijuana becomes a mainstream product, like alcohol, or is relegated to the margins of the economy, he said.

STAYING SAFE: Wild West of legal weed has few sheriffs to keep people safe on roads and from overdoses

TAX REVENUE: Colorado towns see mixed results after marijuana legalization

HIGH HOPES: Legal weed forever changed Colorado, California. What will happen in NJ?

ENTREPRENEURS: Legal weed unleashes new wave of cannabis entrepreneurs

"If you can make it here, you can make it anywhere," said Peralta, who heads the holding company Dogtown Brands.

Until marijuana has access to banks, its appeal to mainstream investors is limited, said de la Cruz, 48, a native New Yorker who said he has tens of thousands of dollars of his own money invested in marijuana businesses. De la Cruz, who cuts a hipster figure with a graying goatee, Coke-bottle sunglasses and a brown top hat, said the marijuana industry was largely a "clown show" populated by "rebels" who were more interested in promoting an edgy and illegal product than making sustainable returns.

That's changing rapidly, he said.

"The most incredible thing I've seen as an investor is how many dollars per square feet I see generated by dispensaries," de la Cruz said. "For the investor, this is the only crop that makes this much dollar per pound."

More marijuana legalization news

THUMBS UP: Support for legal weed in New Jersey up from 2014

GETTING SERIOUS: NJ marijuana legalization prospects have lawyers getting serious about weed

THE DANGERS: Legal weed in New Jersey? 'More people are gonna die,' veteran prosecutor says