Seattle-based Privateer Holdings is the burgeoning industry’s sole private equity firm. Privateer operates as a holding company that sells investors preferred stock in itself, according to founder Brendan Kennedy. The firm has raised $5 million of its $7 million target, which it expects to meet by the end of June—all from high-net-worth individuals.
“Most of them are looking for a financial return but all of them are looking for a social return,” said Kennedy. “They’re looking to end the harm caused by [marijuana] prohibition.”
That prohibition continues to cast a legal cloud over the future of marijuana-related businesses. Possession of cannabis remains a federal crime. In states where marijuana has been legalized for medical or personal use, licensed growers and dispensaries that are in compliance with local regulations still face the possibility of federal prosecution.
Another stumbling block is Internal Revenue Service Rule 280E, which prohibits “drug trafficking organizations” from claiming business expenses as deductions. The IRS has used 280E to audit medical marijuana dispensaries and, in several cases, disallowed deductions for standard expenses such as rent, payroll and cost of goods. Some dispensaries ended up owing millions of dollars in back taxes and penalties and were forced to shut down.
“It’s a complicated business,” said Keber. “You have to clearly understand the regulatory model in each state. But most importantly you have to understand that what we’re doing is perceived as illegal at the federal level.”
That may explain the high level of secrecy surrounding the event in New York. The location was not disclosed until the evening before. Media members were advised that participants whose name tags displayed an orange could not be interviewed or shown in any photos or video.
With some estimating that marijuana-related businesses have the potential to generate up to $40 billion in sales, ArcView’s Dayton is hopeful that the power of big business will lead to reform of federal marijuana laws and tax regulations.
Dixie’s Keber echoed that sentiment. He participated in the Cannabis Industry Association’s meetings with 13 federal lawmakers to lobby for exempting state-licensed marijuana dispensaries from Rule 280E and reforming other marijuana regulations. “We found them to be very open-minded and they received us with open arms,” he said.
Investors may be looking to profit from marijuana-related businesses, but they also “want to see a day when not a single adult is punished for this plant,” said Dayton. “They see business as the most powerful platform for political change.”