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 With marijuana still illegal on a federal level in the United
States, American investors in Canadian medical marijuana can be seen
as violating the Controlled Substances Act, according to some U.S
experts. And the use of the banking system to transfer the proceeds
of such investments could be seen as money laundering.
The U.S. Drug Enforcement Agency has already been tracking
investments made in state-sanctioned marijuana business in the
United States. When asked by Reuters about the DEA's view of U.S.
investments in Canadian marijuana, DEA spokesman Rusty Payne said
the agency is "most interested in those types of activities."
U.S. investors have been increasingly drawn to the raft of public
listings by producers that has sprung up since Canada overhauled its
laws this year, making it legal to buy marijuana from licensed
producers with a doctor’s prescription.
Canada's medical marijuana market, which is expected to grow more
than tenfold, to C$1.3 billion, in a decade, has matured more
rapidly than its peers. While U.S. investors have several European
markets where medical marijuana is legal on their radar - Canada has
been the biggest beneficiary of fund flows from U.S. investors.
"We really like the Canada model, which is really unlike any other
in the world,” said Christian Groh, a co-founder of Seattle-based
private equity firm Privateer Holdings, one of the largest players
in the medical marijuana sector. "What we're doing here does not
violate local, state and federal law (in Canada)."
Privateer created a Canadian subsidiary as its foothold in the
market. Other investors, however, have jumped straight in from their
U.S. bases.
Timothy White, national risk specialist for Banker's Toolbox Inc, a
firm that helps banks detect and report money laundering, said U.S.
investors in Canadian marijuana firms could be violating drug
trafficking and money laundering laws.
"That is two violations of U.S. federal law. I don't see there is
any way around that," White said.
A former DEA official who asked not to be named said that "at best,"
the investments are "an extremely reckless thing to do." Investors
could face money laundering charges and any return on investment
"would have the taint of drug proceeds," the former official said.
"If they sought legal advice on this, they were grossly
underserved," the former official said.
There have been no prosecutions by U.S. authorities of investors in
Canada, according to legal experts who have been closely following
the market.
Payne, the DEA spokesman, said the U.S. agency has "limited
investigatory resources" to pursue investors and is most interested
in targeting those with deep pockets who pour large sums into the
industry.
HIGH HOPES
It’s a risk many U.S. investors, eyeing healthy returns, are willing
to take. They are counting on shifting attitudes toward marijuana in
the United States, and they see scant chances of prosecution under
the Obama administration.
"There are so many companies investing in the Canadian side, and
this (money-laundering risk) is just not something that is coming up
as an issue," said one U.S. investor in the Canadian medical
marijuana market who spoke on condition of anonymity.
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"You can invest in pharmaceutical companies (whose drugs are not
approved) in the United States. This is just another medicine."
Canadian producer OrganiGram Holdings Inc has nearly doubled
in value since listing on Aug. 25. Meanwhile, Bedrocan Cannabis Corp
was the second-most actively traded stock on the TSX venture
exchange on its market debut on the same day.
Roughly 30 percent of OrganiGram’s shares are held by U.S.
investors. Other producers also reported high levels of U.S.
investment in their shares and capital raisings.
Toronto-based PharmaCan Capital, one of the most active investors in
the Canadian market and likely to go public itself, said it raised
about 35 percent of its capital outside Canada.
So far, only relatively small U.S. investors have been active in
Canada's marijuana sector. Deep-pocketed institutional investors in
the United States are yet to be swayed, partly because of the legal
risks and because the investments available are generally too small
to interest them. Then there is the stigma associated with the
industry.
Canadian and U.S. investors also have to grapple with the risk of
betting in a nascent, unproven market that is still finding its way.
Securities regulators on both sides of the border have warned
investors to stay clear of speculators.
"The larger institutions have a lot to lose and face a lot of
scrutiny because of everything else they do,” said Brian Vicente, a
partner at Vicente Sederberg in Denver. "They are not interested in
taking that risk at this moment, and that opens up space and
opportunities for smaller firms."
Hopes that more U.S. states will follow the lead of Washington and
Colorado and approve ballot initiatives that make marijuana legal
for adult use have boosted the ranks of investors looking at early
stage marijuana-related companies. Twenty-three U.S. states have
legalized medical marijuana.
"Some investors look at this and think, 'I'm getting in on the
ground floor. I'm going to be part of the next Facebook of
marijuana, and timing is everything. ... I can buy in low and
eventually sell super-high when legalization hits,' " said Hilary
Bricken, a lawyer at Seattle-based Harris Moure. "That day may never
come."
(Reporting by John Tilak in Toronto and Brett Wolf of the Compliance
Complete service of Thomson Reuters Accelus in St. Louis; Additional
reporting by David Randall in New York; Editing by Amran Abocar and
Douglas Royalty)
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