The Green Rush Begins: Investors Get In On Pot's Ground Floor

Enlarge this image toggle caption Brennan Linsley/AP Brennan Linsley/AP

In the past, you could go to jail for selling marijuana. Now, depending upon where you live, you could end up going to the bank.

Medical marijuana is now legal in 20 states, and legislation is pending in 13 others. It's become a $1.5-billion-a-year industry, and it's expected to triple in just a few years. With legal cannabis one of the world's fastest growing market sectors, investors are seeing green.

Everyone from mom-and-pop operations to venture capitalists are rushing to get in on the ground floor, Bruce Barcott tells NPR's Rachel Martin. Barcott is a journalist who covers the cannabis industry in Washington and Colorado, the two states that have legalized recreational marijuana.

Operations starting from ground zero need a lot of start-up cash to lease or buy warehouse space. They also need to purchase ancillary items, such as growing lights and watering systems, as well as security systems required by the states.

Banks are loathe to lend to pot businesses, even though the feds lifted legal restrictions on banks Friday. So enterprising investors are raising the funds that growers and sellers need.

Some of the investors are surprising, says Barcott, who is writing a book on the legalization of marijuana. An early entrant was Privateer Holdings of Seattle, a private equity company started by two Yale business school graduates who had worked in banking in Silicon Valley.

"They came out and spent three years digging into the industry, surviving some lean times," says Barcott. The first three years Privateer Holdings brought in just $7 million of investment. This year they expect to bring in about $50 million.

"Now that things have turned, they're sort of in the catbird seat," he says.

Investors, especially those who are reluctant to be associated with pot's negative stereotypes, have their eyes on the businesses that service the legal marijuana industry. Barcott says they are looking for people like Ross Kirsh, inventor of the Stink Sack, a smell-proof, childproof package for pot. Colorado's law requires that pot be sold in child-resistant containers.

"He pitched his idea to the ArcView investors at a meeting in Seattle back in November," says Barcott, referring to the San Francisco-based cannabis investor network. "He raised probably, I don't know, $100,000-$150,000 and was on a plane to a factory in China that night."

But investing in marijuana is not risk-free. Cannabis remains a controlled substance, along with heroin and LSD. Illegal growing or selling can mean a 40-year prison term.

But last August, in a sign that America's long-running War on Drugs was undergoing a shift, the U.S. Department of Justice issued a memo stating that it would allow Colorado and Washington to implement ballot initiatives legalizing the recreational use of cannabis.

There were, however, strings attached. Essentially, the feds will look the other way as long as the states have a system of "robust controls and procedures on paper; it must also be effective in practice." At the same time, the memo stated that marijuana remains an illegal and dangerous drug.

Barcott believes that the Obama administration sees Washington and Colorado as test cases. Can they regulate the legal marijuana industry, keeping out organized crime and not selling to kids?

"That gives everybody essentially three years to show the rest of the country that it can work," he says. "When the next president comes in, in January 2017, all bets are off. They could end it with the stroke of a pen."

With no guarantees, investing in marijuana is not for everyone. But for those who have the cash to spare, and are willing to risk it, there is potential for huge returns.

As the saying goes, Barcott says, don't bet any money you can't afford to lose. "I wouldn't really invest the house and the farm in this industry," he adds. "But if you've got some extra money to invest, right now it's looking pretty good."