Investors considering medical marijuana IPOs

Thursday, March 24th, 2011 By

Hydroponic growth

Hydroponic supply companies are considering initial public offerings. Image: Flickr / jpck / CC-BY

In 30 percent of the United States, medical marijuana is legal, to varying degrees. The industry surrounding medical marijuana can be a very profitable one. Now, two major marijuana industry companies have announced plans for initial public stock offerings.

Marijuana related industries

There are a variety of industries that have developed around medical marijuana. Businesses provide grow lights, humidifiers, fertilizers, processing equipment, packaging equipment, etc. Estimates say the marijuana industry could be worth $60 billion or more within 10 years. The technology sector of the industry is also continuing to grow. There are now “grow trailers” that can be controlled by smart phone apps, and hydroponic technology is improving every year. Many medical dispensaries and growth operations fund their expansion with short term loans in hopes of making big profits — and most do. Average markup for grow stores ranges between 70 and 120 percent of wholesale cost.

Initial public offerings planned

Companies that directly deal in marijuana exist in a difficult legal gray area. All marijuana is illegal on the federal level. On the state level, all recreational use of marijuana is illegal. Marijuana for medical use is legal in some states, but federal officials have raided state-compliant businesses in many states. Two companies — GrowOp Technology Ltd. and General Cannabis Inc. — both avoid this legal gray area by selling the technology and equipment, but not the actual substance. Both companies have indicated that by the end of 2011 they wish to be traded on public stock exchanges. These initial public offerings would raise more than $10 million for these businesses and allow individual investors to get in on a “growth” industry.

The problem with marijuana finances

The growth of medical marijuana has many investors hoping to get in on the action. This growth, however, could be creating another financial bubble. Since medical use was made legal in California in 1992, the price of finished product has dropped from $3,000 or more per pound to $1,800 per pound. Competition is fierce; warehouse-style operations such as WeGrow are franchising across many cities. Marijuana industry business owners are assuming that more states will continue allowing medical marijuana.

Source

24/7 Wall St

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