Banking & Finance, Law, and Small Business & Startups

‘Green rush’ still checked by cash concerns

Michigan cannabis industry looks to private investors as federal law prohibits banks from lending.

May 11, 2018
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(As seen on WZZM TV 13) Entrepreneurs starting or scaling up cannabis businesses in Michigan face a tricky problem: with marijuana illegal at the federal level, they can’t borrow from traditional lenders.

Larry Magnesen, chief reputation officer at Fifth Third Bank, said his employer — one of the largest bank chains in West Michigan — does not lend to the cannabis industry.

“Handling any proceeds or conducting any business with marijuana-related businesses remains illegal under federal law,” he said.

“We have a policy called the ‘prohibited and high-risk policy,’ and marijuana is on the prohibited list.”

Private debt lenders and investors are the next logical step for borrowers — but the angel investors and lenders who are amenable to working with “cannabusiness,” as it’s often called, do not want their names publicly revealed.

Eric Seifert, founder and principal at Muskegon-based consulting firm Left Coast Capital, said entrepreneurs have to work around that by being well-connected.

“A lot of the success in the industry is networking,” he said. “Most people already in the industry will share information, even with competitors, other than what is their secret sauce. There’s a lot of camaraderie, and more events being promoted all the time that foster that networking.”

Seifert — who has four decades of experience as a banker and consultant and deep connections to the Michigan growth capital industry — advises cannabusinesses trying to secure funding. He said it’s not so easy for them.

“I work with various angel investment groups throughout the state, and a very limited number are interested in investing in medical marijuana,” he said.

He said the primary reason for that is risk.

“Cannabis is illegal on the national level, and the feds can come in anytime and shut a program down. You have to be in tune to taking that severe risk,” he said.

The second piece is “there’s no liquidity,” Seifert said.

“You can’t make an investment and sell it like you would a stock. You have to be in it for the duration.”

He said investors typically deal with that by setting terms they can live with.

“A lot of investors like to see the return of their dividends through profit sharing in the first three or four years and continue to receive profit sharing after that,” he said. “It’s definitely realistic. The cash flow can be very strong.”

Seifert said Michigan has a “strong population” of Securities and Exchange Commission (SEC)-accredited investors with a net worth of more than $2 million, and he said many of them are sympathetic to the marijuana industry without advertising it.

“They’re very in tune with the medical marijuana program, the medicinal effects, and they see what’s happened in Colorado and the other states — how the firms have grown and the cash return they’ve had.”

Still, Seifert said even those willing to take the risk should be prepared for possible losses.

“You have to be ready to kiss it goodbye if the tables turn,” he said. “The feds and (President Donald) Trump are talking positively about (protecting states with legalized marijuana) now, but that could change in an instant.”

He said funders should “bet on the jockey, not the horse” when it comes to investment decisions.

“The horse is the industry, and it’s growing,” Seifert said, adding although marijuana is a multibillion-dollar industry, much of it still is on the black-market side.

“On the jockey side of it, you have to make sure someone on the management team can scale it up, manage the growth and deal with uncertainty and regulation,” Seifert said.

Many of the clients he advises still are learning those skills.

“A fair number are existing caregivers or were black-market growers, and they are looking to scale up,” Seifert said. “They need to know more than how to grow and distribute on a local basis. They need to know how to scale up.

“It’s rare to find someone that has business sense as well as cannabis expertise.”

In the event marijuana continues to remain illegal at the federal level indefinitely, he said it would be wise for cannabusiness owners to toe the line.

“They need to make sure they comply with the state laws to the T,” Seifert said. “I’m seeing a few individuals and companies popping up just for the work of compliance.”

Several former attorneys at large law firms such as Varnum and Warner Norcross & Judd have left in the past few years to start their own cannabis law practices in West Michigan.

“Legal p’s and q’s are important, as well as accounting,” Seifert said. “There are very few CPAs active in the industry, but they need to work very closely with a cannabis CPA.”

Magnesen said if the federal government were to legalize marijuana, banks still would need to weigh their appetite for related risks inherent to the industry.

“We would look at all the factors again and look at the overall risk associated with that type of business,” he said.

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