SALT 2019: A Recap on Cannabis Investing


By: Garrett Baldwin


The cannabis industry continues to generate incredible returns for investors.

Just a $1,000 investment in Aurora Companies in early 2016 would have delivered investors a return of $20,600 in three short years. That same investment in Cronos Group would have delivered more than $70,000 in the same period.

But those returns might be conservative according to some advocates.

The question is where marijuana stocks will go should recreational cannabis achieves legalization at the federal level.

This morning, I sat in the second row of the SALT Conference, the premier money management event in Las Vegas.

Moderated by Sam Masucc, CEO and Founder of ETFMG, this morning’s panel on cannabis investment started with a simple question.

Is it safe to invest in cannabis?

However, the panel shifted into a more in-depth discussion about the sector not just in the United States and Canada, but also around the globe. The following is a recap of insight from the panel on regulation, cannabis investment, and the timing of federal legalization.


Thoughts from Ron Geffner, Sadis & Goldberg

Ron Geffner is a former lawyer at the SEC and is now a partner at ALTS Capital. If anyone knows how U.S. financial watchdogs are eyeing cannabis, it would be him.

During the panel, Ron Geffner recounted that marijuana became a Schedule I drug during the Nixon Administration. Now, more than 30 years later, even though states have begun to legalize marijuana both for medicinal and recreational purposes, a conflict exists between the United States Federal government and state laws.

With the bulk of Americans in favor of legal cannabis, one of the biggest challenges is how to allow cannabis companies to operate within the U.S. financial system. Just this week, 38 state attorney generals ask Congress to pass the "SAFE Act” a law that would offer a safe harbor for banks and insurance companies to operate in the industry.

Geffner said the overwhelming sentiment on federal legalization is positive. But he said that the key questions are “when and how” when it comes to the law. More importantly, he wondered who will be in charge of regulation: States or the federal government.

Geffner also said that the cannabis industry has shifted from a period of growth to explosive growth.  Then the sector went into vertical integration and consolidation.

Now he expects that the business will shift to an emphasis on hyper-specialization.

Geffner later discussed how liberalization of cannabis laws abroad and greater acceptance of cannabis had increased the interest in ancillary business tied to marijuana.

Fear of government intervention or arrests have decreased around the globe, according to the phone calls his firm have received from current and prospective clients. This is a good sign, because high-net-worth individuals, who are traditionally conservative with capital, appear ready to place significant investments into the sector.


Thoughts from Trent Overholt, CEO of 14th Round

Trent Overholt is a turnaround specialist with a significant background in consumer product goods companies. Greater adoption of cannabis-related products will be a boon for CPG companies.

Overholt said that cannabis regulations are consistently improving.

However, he cited a series of challenges that still exist. For example, there are logistical challenges that hinder movement across state lines. Even with firms that provide “no touch” ancillary businesses, they still struggle with the current patchwork of regulations.

Given that the current regulatory environment functions on state rules, every business must navigate each market differently. This creates a significant number of compliance challenges across state lines.

“Each individual state has a notably different state of regs, so how one of our brands operates in California is notably different than what they can and can’t do from the product itself.”

The related issues include the product itself, the cannabinoid count, material composition and the packaging itself. Overhold said that the packaging regulations changed two times in 2018, which created a series of disruptions for his portfolio companies.

However, despite the hiccups in the sector, he said that the industry is doing well. He suggested that ongoing banking challenges are at the front of his mind, but he is quite content being an early investor in the sector.

Overholt noted that consumer product goods companies are prepared to ramp up production in new products. “It’s a classic CPG playbook,” he said. The maturation of the industry and the reduction of a stigma around the space will improve the overall acceptance of the sector.

He noted that a lot of the products that are within the sector – like CBD oils and hemp products – don’t have any intoxicating impacts.


Thoughts Grover Norquist of Americans for Tax Reform

One of the top voices on fiscal policy also joined the panel. Grover Norquist offered his insight based on his significant experience on Washington policy. He said that the move to end prohibition for cannabis is following the path that many other issues have taken.

Norquist noted that risk-taking on the reform side always took a backseat to other issues. He said that the nature of Washington requires a state-based effort to get the Federal government to set national policy.

“I think it will take more than 41 states to end prohibition before we get a national law,” he said.

Norquist noted that risks remain high given the lack of banking regulations and the fact that tax law requires a "21% sales tax" on cannabis sales due to Schedule I rules. Norquist showed optimism that the SAFE Act would pass in the near future.

However, Norquist raised concerns about bipartisanship. He worries that too many politicians will attempt to attach riders to the bill that aim to include pork barrel spending or other showboating attachments.

His principal concern is that regulations could hinder the movement given that raising taxes on cannabis could increase the rise of the black market once again. He discussed how state regulatory efforts on alcohol sales might create a variety of schemes that lead to local governments picking winners and losers.