As more states consider legalizing marijuana for recreational use, forward-thinking investors are wondering how to profit.
There is a lot of money to be made from cannabis.
Marijuana retail sales rose to $4.8 billion last year from $3.4 billion in 2014 and could hit $25 billion by 2020, according toU.S. News & World Report.
As marijuana becomes more socially acceptable and companies find new ways to manufacture cannabis and THC products, investors have every reason to look at the booming marijuana industry.
But there are massive problems with investing in marijuana.
Although the legal issues with investing in a federally banned drug are obvious, that is just the tip of the iceberg. There are serious financial concerns related to investing in marijuana companies, and the market represents wild speculation at its worst.
Investors have every reason to be interested in what could be one of the fastest-growing markets in a few years. But despite this potential growth, the risks related to investing in marijuana are too problematic.
In terms of the legal issues, though recreational marijuana is legal in several states, it is still illegal federally, and the stock market is concerned about following federal regulations.
Investors won't get arrested for buying stock in a marijuana company. But the federal ban on marijuana poses a huge problem for the industry and potential investors.
Although there is every reason to assume that the march for legalization will continue, there is no guarantee that will happen. If the federal government decides to crack down on marijuana businesses, that would hurt the companies and their investors.
In order to get around the federal ban, state laws legalizing marijuana have regulations against taking marijuana either into or outside the state. But this creates other problems.
First, marijuana growers and distributors have limited growth because they can't expand outside their home states.
Second, because states can't coordinate with each other on marijuana policy, there are no nationwide industry standards on marijuana potency. Individuals can end up consuming more marijuana than intended, especially in the case of slower-acting marijuana edibles.
The result can be tragic cases such as the death of Kristine Kirk, whose husband murdered her after he consumed a marijuana candy.
Kirk's children have sued the candy company for "failing to warn customers that edibles could lead to paranoia, psychosis and hallucinations."
Regardless of the lawsuit's outcome, incidents such as these will discourage potential customers.
There are, however, signs that things may change on this front.
For example, there is already talk in Colorado of an oversight body that would regulate the industry. This is welcome news that will help alleviate investor worries, but that change may still be a long way off.
All the aforementioned problems are about the marijuana industry. But there are bigger problems with investing in a marijuana company, namely, that there are almost no marijuana companies on Wall Street that are safe investments.
As previously reported, there are 350 cannabis-related businesses, but the vast majority are traded over the counter because as marijuana businesses, they can't comply with federal regulations. These OTC stocks are penny stocks, which are notoriously volatile and are filled with shady stock and promoters showcasing pump-and-dump schemes.
In the worst-case scenario, these businesses can be outright fraudulent.
The Securities and Exchange Commission recently filed fraud charges against a man who raised more than $500,000 with a crooked medical marijuana venture and then used the money for his personal expenses. In 2014, the SEC also issued a warning against ventures trading over the counter that claimed to be dealing in marijuana.
Those who want to trade in an OTC marijuana company must do their research and see what auditors say. But no matter what, this kind of investing comes with a lot of risk.
There are some marijuana-related companies listed on the Nasdaq Stock Market including GW Pharmaceuticals (GWPH) - Get Report, Insys Therapeutics and Zynerba Pharmaceuticals. These three biotechnology companies are designing marijuana-based drugs that they hope will pass Food and Drug Administration scrutiny.
Of the three, GW Pharmaceuticals is the most solid. It is working on developing a marijuana-based drug to treat children with severe epilepsy, and its stock price received a huge boost in March after successful test reports were released.
Biotech firms researching marijuana would benefit from an end to the federal ban. Research on marijuana's health effects would be easier and grow in demand as scientists would rush to figure out what the drug can do.
As much potential as the marijuana industry has, the lack of industry standards and companies in which to invest, as well as the fact that it remains illegal federally are massive hurdles that should give investors pause.
GW Pharmaceuticals has potential, and other marijuana biotech companies aren't bad long-term investments, but investors shouldn't jump into the sector until the smoke clears.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.