Colorado to Ease Restrictions on MJ Investors
On May 6, 2015, Colorado legislators approved a measure that will ease restrictions on out-of-state investment in marijuana businesses. Although the law does not eliminate the existing two-year residency requirement for investors, it creates a work-around that, according to Amanda Ostrowitz, Co-Founder and Chief Strategy Officer of CannaRegs, Ltd., “will make investment significantly more appealing and ultimately support the creation of an efficient secondary market for capital and debt investments in the legal cannabis trade.”
Colorado law currently provides that a license will not be issued to a marijuana business owner who has not been a resident of Colorado for at least two years prior to the date of the application. The restriction seems an effort to demonstrate good faith in honoring the Cole memorandum’s focus on preventing revenue from the sale of marijuana from going to criminal enterprises and preventing the diversion of marijuana from states where it is legal under state law to states in which it is not.
But it discourages investment. As Steve DeAngelo, co-founder of the ArcView Group told the Atlantic in 2013, “The investors are here. They want to do the deal. But the deal can’t be done because Colorado law won’t allow it.”
For out-of-state investors, it makes equity investing impossible and debt financing less attractive because it leaves lenders relatively unsecured. Some creative approaches to the latter problem have arisen, but they have the unfortunate side effect of making financing arrangements opaque, precisely the opposite of the residency requirement’s intended effect.
Under the regulations to roll out by January 1, 2016, out-of-state individuals, but not corporations or foreign investors, are expected to be able to sign option agreements for future financing, termed “permitted economic interests.” Those options may then become equity ownership interests when the individual passes the required criminal background check and satisfies the two-year residency requirement. How investors will respond is uncertain, but the disappointment expressed when the residency requirement was first imposed suggests that there may be pent up demand.
As far as Colorado cannabusinesses are concerned, the change could make a big difference:
- The larger potential pool of investors should drive down the interest rate on debt financing, which is critical to equipment dependent sectors such as infusion and extraction,
- Companies will be able to offer equity to investors at a more competitive price. This may ultimately allow entrepreneurs to hold on to a greater ownership interest in the businesses they have nurtured from the beginning of the green rush, and
- Businesses will be able to raise the kind of funds they will need to grow. It essentially levels the playing field for Colorado enterprises that compete for investment with businesses in states with no residency requirement. Some expect to seeconsolidation and an explosion of multiple-location chains.
According to Ostrowitz, “The current limitations and prohibitions imposed a prudent limitation on the flow and access to capital, whether as debt or equity, as the legal cannabis trade developed. We are now at a point where these artificially created barriers, will soon limit legitimate access to sophisticated pools of growth capital, and more widely, the capital markets as a whole.” It is time to roll back the residency requirement.
This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.
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MJINews.com is owned by Panther Media, which was founded in March of 2014 by veteran publishing and investment executives David Friedman and Kristin Fox. MJINews was designed to fill the need for a reliable and credible source of information for investment opportunities in the nascent legal marijuana industry. MJINews is dedicated to helping entrepreneurs and investors make informed business and investment decisions. You can follow MJINews on Twitter @mmjinvestor.
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