Conflicting laws, shady penny stocks, wild health claims cloud market; pot for your privates?

  • Article by: JONATHAN FAHEY , Associated Press
  • Updated: September 4, 2014 - 5:00 PM

NEW YORK — Legal or not, the business of selling weed in the U.S. is as wacky as ever.

The tangle of rules and regulations that govern whether and how it can be grown, bought and sold create complexity and ambiguity that cause major headaches for marijuana businesses — and enticing opportunities for those who want to exploit it.

"It's a gray market industry, that's just how it is," says Kayvan Khalatbari, who owns a marijuana dispensary and a chain of pizza restaurants in Denver.

The big issue: the nation hasn't decided whether marijuana is a dangerous illegal drug or not much worse than tobacco or alcohol. According to federal law, it is an illegal narcotic like heroin, with "no currently accepted medical use." But recent legalization pushes have made it legal — for medical use — in 23 states and Washington D.C. In Colorado and Washington State, it can be bought just for fun.

Entrepreneurs and investors have to navigate laws that are different from state to state and sometimes from county to county. That has given rise to a bumper crop of consultants promising to show the way to success, while shady public companies spin visions of fat profits. Consumers now have an array of new pot-related products to choose from, many of far higher quality than what's offered on the corner. But they must also discern truth from hope in the many claims about all the supposedly wonderful things pot can do.

ENTREPRENEURS

Khalatbari started his first pizza restaurant with a small business loan from a bank. To raise money to build a marijuana-growing facility, a bank loan wasn't an option.

Almost all banks avoid working with pot businesses because pot is illegal federally, and banks want to avoid running afoul of anti-trafficking laws. Also, residency restrictions in Colorado prevent raising money from out-of-state investors in exchange for a share of the company, which is exactly what most investors want.

So, to build a 40,000 square-foot growing facility, Khalatbari teamed with an out-of-state investor who paid for construction while trying to establish residency in Colorado. When that comes through, the investor could get an ownership stake in the facility.

Khalatbari says there's plenty of investor money sloshing around, looking to fund marijuana businesses, but the terms are expensive because of the risk and the restrictions.

"It's almost impossible not to get funding," he says, "but it's not going to be on the terms you want."

Once up and running, entrepreneurs face more twists. Khalatbari kept his bank account in the name of a management company instead of his marijuana dispensary, called Denver Relief. He was careful not to pay pot-related vendors out of the account, instead using cash, which is common in the pot business. And he didn't make cash deposits over $10,000 in order to avoid triggering suspicious activity inquiries. Still, three successive banks dropped him after learning the management company had ties to pot.

"We can't be honest and open about where we can put our legal money," he says. "They are pushing us underground."

He has recently found an unidentified bank that will work with him and a few other pot businesses.

Khalatbari can't write off certain expenses the way most businesses can. The Internal Revenue Service prohibits deductions for expenses incurred while selling what the federal government considers to be an illegal drug. That makes his profit lower than it otherwise would be. It also encourages him and other sellers to designate, for tax purposes, only a small portion of their stores as having anything to do with selling pot.

These conditions can help a business flourish once it's open, however. Would-be competitors face the same hurdles to getting started — local zoning rules, state regulations, financing complexity or a slow bureaucracy — so it can often be some time before the established business faces a real challenge.

California rules are relatively lax, and there are believed to be at least 500 dispensaries just in Los Angeles. But Connecticut has approved only six dispensaries. The first opened last month — without pot — two years after getting approval. Illinois growing facilities must put up a $2 million surety bond to get approval. Washington has awarded 43 licenses to sell marijuana for recreational use — and just one in Seattle, called Cannabis City.

Khalatbari has plenty of competition, but the profit margin at his marijuana dispensary is 60 percent higher than at the pizza restaurants. Even after the legal headaches, it's easier to make a profit selling the bud of a plant for $200 an ounce than it is selling a meat lover's pizza (pepperoni, spicy sausage, Canadian bacon and mozzarella) for $19.99.

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