TORONTO/ST. LOUIS (Reuters) - U.S. investors in Canada’s medical marijuana industry are betting they will not fall under the scrutiny of U.S. law enforcement officers - but it is a risky bet.
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 Administration 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.”
After the Reuters report, shares in Canadian medical marijuana companies fell sharply at the open before recovering some ground. OrganiGram Holdings Inc (OGI.V) dropped 6.9 percent in early trading, Bedrocan Cannabis Corp BED.V fell 4.2 percent and Tweed Marijuana Inc TWD.V declined 2.8 percent.
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.
It is 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.
“You can invest in pharmaceutical companies (whose drugs are not approved) in the United States. This is just another medicine.”
Canadian producer OrganiGram has nearly doubled in value since listing on Aug. 25. Meanwhile, Bedrocan 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 raising.
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, Douglas Royalty and Marguerita Choy