Stiff financial hurdles for starting a medical marijuana business in Illinois are creating a way for well-heeled investors to get involved. “There will be a whole heckuva lot of need for investment,” said Michael Griffin, CEO of HedgeACTLLC, a Chicago provider of Web-based software for managing hedge funds. “There could be hundreds of applicants.” He and two other organizers of Prairie Wellness Fund Ltd. plan to provide loans and letters of credit totaling tens of millions of dollars to help Illinois pot-related firms get started. Each of the 21 cultivation centers the state plans to license will have to put up a $2 million surety bond and prove it has $500,000 in working capital available to start the business, with somewhat lower requirements for the 60 dispensaries that will be allowed around the state. “They dont want a cottage industry, they want bigger players,” said Stephen Denari, a political consultant in Chicago and another principal of Prairie Wellness Fund. Building a cultivation center to meet the states strict security requirements is expected to run as high as $10 million, and even dispensaries will need $1 million to $2 million for inventory, he added. “There are really good applicants who couldnt reach that hurdle.” Illinois regulators are near the end of the comment period on final regulations for medical marijuana, after which applications will be available. It isnt clear when applications will be due, but the expectation is that the deadline will be sometime in the last three months of the year, said Chicago attorney Thomas Cronin, the third principal of Prairie Wellness Fund. LUCRATIVE DEBT MARKET While others are said to be eyeing the same opportunity, Prairie Wellness Fund “would be the first Ive heard of a business model based on financing applicants, but Im not surprised to see it emerge,” said Khurshid Khoja, a principal of Greenbridge Corporate Counsel, a San Francisco law firm that specializes in marijuana business law. He also is on the board of the Illinois Cannabis Industry Association. “I see investor pitches almost every week from startups that are in the process of applying for one or more (medical marijuana) licenses and need to raise debt or equity financing,” he added. “It was only a matter of time before someone addressed that lucrative debt market.” Prairie Wellness Fund originally intended to raise about $50 million to meet demand in Illinois, but after announcing its plans earlier this month the level of interest among potential applicants has increased its goal to “somewhere between $50 million and $100 million,” said Mr. Denari, who is CEO of Political Action League and chief political strategist for Democrats and Independents for Rauner, a super PAC formed by East St. Louis Mayor Carl Officer. In 1994, Mr. Denari was the Democratic opponent of former House Speaker J. Dennis Hastert after chairing Texas billionaire Ross Perots 1992 presidential campaign in the Chicago area. The organizers of Prairie Wellness Fund are still gauging demand and arent yet soliciting investors until they prepare and issue a private placement memorandum, probably around Sept. 1. They plan to seek investors only from Illinois, primarily wealthy individuals and family-run investment pools. In addition to the short-run opportunity of providing loans and letters of credit for applicants, there may be long-term financing needs to get marijuana businesses up and running. With plans to charge interest rates of about 24 percent, Mr. Griffin said returns to investors should range somewhere above 20 percent, net of fees and before taxes. The loans will carry rates like credit cards because they will be based on the personal guarantees of borrowers. Illinois regulations are very strict, so theres risk that a borrower could be put out of business overnight. Licenses cant be transferred, so the assets of a growing center or retail shop, let alone its inventory, would be useless as collateral. And theres always a possibility that investments will be for naught if the pilot program expires in three years. Nevertheless, the business is expected over the long term to be very lucrative, as it has been in other states that have legalized marijuana. “If anybody cant afford 2 percent a month in this business, you dont want them,” Mr. Denari said. “Theres something wrong with their business model.” mmjbusinessdaily/debt-fund-launched-for-illinois-mmj-startups/
Posted on: Mon, 28 Jul 2014 19:30:56 +0000
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