Don't expect a marijuana boom, even where it's legal

November 8, 2012: 8:15 AM ET
medical marijuana colorado washington
Marijuana has been legalized in Colorado and Washington, but federal prosecutors and a patchwork of local restrictions could crush a boom.
NEW YORK (CNNMoney)

Potheads everywhere rejoiced when two states finally achieved what was previously impossible: legalize marijuana for recreational use. The industry would finally go retail.

But entrepreneurs hoping to become shop owners or growers in Colorado or Washington should beware.

Federal prosecutors still view weed as illegal, and they show no signs of backing down from raids.

Meanwhile, cities and counties in Colorado have created a dizzying patchwork of laws. That means a business could follow every state law but still be shut down.

Take the experience of Dave Schwaab, who once led a tech firm and was in quasi-retirement when he decided to get into the pot business. He waited until 2009, nearly a decade after Colorado legalized medical marijuana for patients with certain debilitating health conditions.

Related: Marijuana legalization passes in Colorado, Washington

His dispensary, Abundant Healing, was one of two dozen that opened in Fort Collins. It employed 19, grew 1,200 plants and cared for 1,000 patients. Its revenue topped out at $70,000 a month.

Then last year, the city cracked down and passed a new ordinance outlawing dispensaries. Police came by and chopped down the plants. Schwaab was forced to fire his entire staff and lost $300,000.

"I adhered to every legal state regulation, all 165 pages of unambiguous requirements," he said.

Schwaab resorted to growing weed himself, tending to 10 patients. One has four different cancers. Another suffers from neuropathy, a nerve disorder that causes shooting pain and a burning sensation.

Colorado's Amendment 64, passed in Tuesday's election, offers him a chance to get back in business. He can open what he calls "a marijuana liquor store" and sell to anyone age 21 and older. It sounds like a promising proposition, but Schwaab has his reservations.

"Even though this wonderful amendment passed, I might not go back into business because of the legal quagmire," he said. "They took my capital once. I'm not going to let them do it again."

A Marijuana mecca

Those who aspire to open a pot business in Colorado or Washington will also run into trouble when looking for a bank to borrow funds or manage everyday finances. Major banks avoid doing business with those in the marijuana industry, because they fear federal agencies will charge them with drug racketeering and money laundering.

Then there's the potential for entanglements with the Drug Enforcement Agency and others. The Justice Department is now reviewing the state ballot initiatives, but federal prosecutors in both states made it clear to CNNMoney on Wednesday: enforcement remains unchanged.

Consider what the burgeoning industry is up against. Prosecutors in the Eastern District of Washington were among the first in the country to put pressure on those in the pot business by targeting their landlords. Prosecutors last year sent letters warning them: kick out weed tenants or lose your property.

Additionally, federal prosecutors in both states have been aiming their sights at dispensaries operating within 1,000 feet of schools.

Related: California's marijuana industry under attack

Joshua Kappel, a Denver attorney who advises the weed industry, said newcomers will take "a very cautious approach." In Colorado, the doors don't even open until next year because the state has a year to develop regulation, said Amendment 64 advocacy director Betty Aldworth.

In Washington, entrepreneurs will also have to get over high taxation costs. A 25% tax rate will be imposed on the product at three stages: when the grower sells it to the processor, when the processor sells it to the retailer and when the retailer sells it to the customer.

The rocky road ahead didn't stop pot stocks from getting high Wednesday, though. Shares of Medical Marijuana (MJNA), Growlife (PHOT) and Hemp (HEMP) all had strong gains. These all are thinly traded penny stocks listed on over the counter exchanges, however.

Part of that could be the growing notion that this week's victory for the legalization movement -- the most significant ever -- means the scales are finally tipping in their direction. Greg Campbell, journalist and author of medical marijuana book Pot Inc., questions how long the public will tolerate watching the DEA bust everyday citizens following state law.

"No one questions their authority to do it," Campbell said. "It'll be a question of priority. If the DEA is really going to waste its resources, doing that rather than focusing on bloodshed on the border, you'll see complete outrage."

CNNMoney writer Ben Rooney contributed to this story.

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