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Federal Crackdown On States' Legal Marijuana Drives Private Investors Away


This month, Attorney General Jeff Sessions told federal prosecutors that they are free to go after marijuana businesses. So it is a lot riskier now to do business in the nine states that allow legal recreational cannabis. As Colorado Public Radio's Ben Markus reports, the immediate impact here has been on the financing.

BEN MARKUS, BYLINE: Colorado sold more than $1 billion in recreational marijuana last year, but deep-pocketed investors were excited to take on something even bigger - California.

SCOTT MARTINEZ: And being able to enter into that market, folks saw dollar signs in their eyes.

MARKUS: Scott Martinez is a Denver attorney, and he was in the middle of brokering deals worth potentially tens of millions of dollars from a large, private equity fund. But those investments suddenly dried up when Jeff Sessions removed what little legal protections existed for the industry.

MARTINEZ: And they decided it wasn't worth the risk right now.

MARKUS: At about the same time, across Denver, another attorney, Sean McAllister, had an East Coast, private investment fund get cold feet on a $3 million pot deal.

SEAN MCALLISTER: There's no doubt that Jeff Sessions intended to and in fact did destabilize the cannabis industry.

MARKUS: By raising the probability of federal prosecution, Sessions has ratcheted up the risk for investors. The U.S. attorney in Colorado declined to be interviewed but, in a statement, said he had no plans to ramp up prosecutions. That said, the perceived risk is still enough to scare some investors away.

In this busy warehouse in Denver, there's no sense that the industry is in any kind of turmoil. A woman in a hairnet pumps marijuana-laced chocolate into plastic, candy-bar molds. This is Incredibles, one of the state's largest edible cannabis producers. Bob Eschino is the owner, and he seems unfazed by Sessions' memo.

BOB ESCHINO: Tomorrow, there's going to be another problem that's going to potentially shut down the entire industry. Remind me what it...

MARKUS: That's a lot of risk to live under.

ESCHINO: Like I say, we keep our blinders on.

MARKUS: But banks don't share that risk tolerance. They'll give him a simple checking account, but they won't lend money to help him expand the business. So Eschino must rely on private financing, which is suddenly drying up. And what money is available may come with more onerous terms now. Investors have already been asking for more than interest. They want an ownership stake.

ESCHINO: It's hard to sell equity now as we're still, you know, in triple-digit growth mode.

MARKUS: Eschino says if this was a normal business, banks would be tripping over themselves to give him a great deal on a loan. There are about 20 banks in Colorado offering checking accounts for cannabis businesses. But now there's fear that banks may retreat from the industry too because of Sessions' memo.

SUNDIE SEEFRIED: I think some banks and credit unions did have that as a trigger to exit. We did not.

MARKUS: That's Sundie Seefried, the president and CEO of Safe Harbor Private Banking. She calls it that because lawyers told her there was no safe harbor for her from federal prosecution. And she says she's been looking over her shoulder for years. When Sessions released his memo, she sat down and wrote letters to Colorado's congressional delegation.

SEEFRIED: And said that, you know, I don't want to put $80 million back on the streets. Can you help protect your citizens by keeping this money in the bank?

MARKUS: Cannabis entrepreneurs bristle at what they say is the hypocrisy of it all. The IRS will accept their taxes and audit their books, but in almost every other normal business respect, they say they're treated like second-class citizens. For NPR News, I'm Ben Markus in Denver.

(SOUNDBITE OF J MASCIS SONG, "HEAL THE STAR") Transcript provided by NPR, Copyright NPR.

Ben Markus