Don't Invest in Medical Marijuana Public Companies Just Yet

Nineteen states plus Washington DC have legalized medical marijuana with legislation pending in six more states. Washington and Colorado have even legalized the sale of marijuana for recreational purposes. In the wake of this trend, I was hired by a consortium of successful California medical marijuana growers to explore how they could create a public company, attract investors and sell shares; perhaps making their pot stock the next Apple. After extensive research, which included retaining the top marijuana defense attorneys in California, the results were not encouraging.

The growers wanted to go public for a variety of reasons, but mainly to eliminate Federal, state and local raids and arrests, and destruction and confiscation of their property. Every grower I had met had spent time in jail.

Legalizing marijuana and welcoming it into the mainstream makes too much sense not to happen, but it is not going to happen today. First off, the anti-marijuana establishment has too much at stake. The Drug Enforcement Agency employs over 10,000 people and has an annual budget of $3 billion. The U.S. has spent over $1 trillion fighting the Drug War with over half of Federal inmates in jail on drug related charges. In 2009 alone, 1.66 million people were arrested on drug charges in the U.S., with 4 out of 5 merely for possession.

According to, based upon information from the Drug Enforcement Agency and other published sources, the domestic marijuana market is about $100 billion annually. This is about the same size as the domestic market for distilled alcohol - an industry that is regulated and pays lots of taxes. In 2012, federal tax revenues for alcohol were $10 billion, and there was an additional $6 billion per year in state & local tax revenues from the sale of alcohol. A 2008 study by a Harvard economist indicated that full legalization of drugs in the U.S. would result in a $44.1 billion savings from law enforcement costs. Considering both the tax revenues that would result from legalization and the costs of keeping drugs prohibited, legalization is inevitable.

But right now, marijuana is still an illegal Schedule I drug under the federal Controlled Substances Act (CSA) under the Comprehensive Drug Abuse Prevention and Control Act of 1970. Even after states began enacting laws to legalize medical marijuana, such as California's passage of Proposition 215 in 1996, the federal government prosecuted people for violating CSA in states where medical marijuana was legal. In Gonzales v. Raich (545 U.S. 1 (2005) the court ruled on June 6, 2005 that under the Commerce Clause of the United States Constitution, which allows the United States Congress "To regulate Commerce... among the several States," Congress may ban the use of cannabis even where states approve its use for medicinal purposes.

On October 19, 2009, Attorney General Eric Holder announced formal guidelines for federal prosecutors in states that have enacted laws authorizing the use of marijuana for medical purposes. The guidelines make clear that the focus of federal resources should not be on individuals whose actions are in compliance with existing state laws, while underscoring that the U.S. Department of Justice will continue to prosecute people whose claims of compliance with state and local law conceal operations inconsistent with the terms, conditions, or purposes of those laws.

"It will not be a priority to use federal resources to prosecute patients with serious illnesses or their caregivers who are complying with state laws on medical marijuana, but we will not tolerate drug traffickers who hide behind claims of compliance with state law to mask activities that are clearly illegal," Holder said. "This balanced policy formalizes a sensible approach that the Department has been following since January: effectively focus our resources on serious drug traffickers while taking into account state and local laws."

However, arrests still happened. In United States v. Stacy (S.D. Cal. Mar 2, 2010), the defendant, who operated what he called a "medical marijuana collective," was tried and convicted for selling marijuana. The defense's case was based upon reliance on Holder's above statement.

The CSA still provides for criminal penalties for those aiding and abetting the growing and selling of marijuana. That means that if you invest just $1 in purchasing a share of a public company involved in the medical marijuana space, the Federal government could arrest you. That, to me, makes investing in a public medical marijuana company not a good idea. Yes there are existing public companies involved in medical marijuana. And the minute one of them is successful enough to show up on radar, some hungry and ambitious Federal prosecutor is going to go after them.

In 1998 voters in the District of Columbia approved a medical marijuana law. That law was blocked for 11 years by a Congressional (Barr) amendment to the District's appropriations bill. In July 2009 the US House of Representatives voted to remove the Barr amendment to the District's appropriation's bill.

By Congress voting to repeal the Barr Amendment, they have effectively voted to disregard the CSA as it relates to growing and selling or aiding and abetting the growing and selling of medical marijuana, at least in Washington, DC and other states that have legalized it.
That's the theory, but the true test will be in court. Someone needs to get arrested and bring this defense up in court and the court has to approve it. And the decision and appeals would have to move their way up through the superior courts. Frankly, I would not count on the current Supreme Court to rule that the repeal of the Barr Amendment by Congress constitutes Congress's intent to nullify CSA as it applies to the sale of marijuana in states that have approved its sale.

Bottom line -- don't invest in a medical marijuana company, even on a small-scale, unless you're OK with the possibility of spending time in a Federal penitentiary.