NEW YORK (MainStreet)  When Republican New York State Assemblyman Steve Katz appeared before members of the ethics committee to explain his involvement in the marijuana industry, he received not one negative reaction from his constituents or fellow Assembly members.

"I've gotten a lot of support and interest," Katz told MainStreet.

As the state budget proposal comes to vote in New York with a medical marijuana provision tucked into it, Katz is in the process of launching a cannabis mutual fund called Greenstead.

"The fund will invest in legal marijuana companies and ancillary or support businesses to dispensaries, cultivators and growers," Katz said.

The Greenstead Growth Fund isn't the only cannabis mutual fund preparing to launch. The High Times Growth Fund anticipates building a full portfolio in two years with an average investment size of $2 million and average time to exit of five years, according to the High Times Growth Fund website. Although calls to their office were not returned, the High Times Growth Fund website states that it will invest in businesses across all areas of the rapidly growing domestic cannabis market and that:

"HTG Fund's senior team has, on average, over 18 years of industry experience, covering cannabis companies, income trading, research, investment banking and financial services."

Seeds of Growth and Challenges

Despite not being allied with any established mutual fund company, such as Vanguard or Fidelity, Katz's Greenstead will launch within the next 12 to 24 months.

"We are establishing the Greenstead Fund from scratch," said Katz. "My goal is to create a publicly held mutual fund that will bring the incredible opportunities that exist in this industry to working families and middle class individuals throughout the country."

Completing registration with the SEC is part of the process of launching any fund however filing with the regulatory agency doesn't rule out legal challenges across state lines with a cannabis mutual fund.

"There could be legal issues depending on what state a cannabis fund is launched from and whether marijuana is legal there," said Stephen Ma, an SEC regulatory litigator with the law firm Early Sullivan in Los Angeles. "Even if the fund does business in a state that has legalized marijuana there is no guarantee that the fund can avoid legal issues as long as marijuana remains illegal on a federal level."

Ma suggests investors around the country think twice before investing in such a mutual fund for more reasons than just the law.

"In a developing industry with laws that are still being formulated and tested in the courts, investing in a cannabis mutual fund is pretty risky," Ma told MainStreet. "There are concerns that untested businesses without traditional funding or management may be ripe for mismanagement or even fraud. In fact, FINRA last year issued warnings to investors to be aware of potential issues, including pump and dump schemes."

Katz's fund has no plans to invest in cannabis companies that are penny stocks at risk for pump and dump schemes but rather expects the fund to be highly diversified yet focused only on cannabis.

"We are interviewing people who have excellent credentials to be the fund manager and are in the formative stages of the mutual fund in that we've received some money to launch but it's closely held right now," Katz said.

--Written by Juliette Fairley for MainStreet