Leslie Bocskor has big plans and they focus on people using pot.

The Las Vegas resident is creating a hedge fund to invest in medical and recreational marijuana companies, as well as a consulting firm to assist state governments in setting up regulatory guidelines for medical cannabis.

Bocskor, founding chairman of the Nevada Cannabis Industry Association, thinks the cannabis market is worth someplace between $2.5 billion, the number that ArcView Group says the legal market is worth today, and $41 billion, the figure used in a Rand Corp. study of legal and illegal marijuana commerce published earlier this year.

ArcView is a San Francisco firm providing venture-style financing to medical pot companies. Bocskor is a member of ArcView's investor network.

Through his company Electrum Partners, a consulting firm focused on the cannabis niche, he is putting an offering memorandum together aimed at a mix of investors that would include high-net worth individuals, pooled funds and funds of funds. He thinks the minimum investment will be $100,000. The fund is not accepting capital yet, Bocskor said. He said he hopes to have the memorandum finished by the end of the third quarter and to begin funding the new vehicle by the end of the year.

The hedge fund would invest in companies that are on the periphery of the legal cannabis niche, such as those that lease space to clinics or provide lighting equipment for indoor growing facilities. The fund would also invest in businesses more directly connected to the drug, including those involved in cultivation and preparing marijuana or its derivatives for sale. In the trade, such businesses are said to be "touching the sun."

"It is a unique environment," Bocskor said. "We have a market that is worth almost $3 billion and could be worth more than $100 billion, and we know the market is going to grow."

He said that some of that growth will occur as Canada better defines its government-regulated medical cannabis industry and in anticipation of more U.S. states approving the use of medical and recreational pot. Bocskor also said that he believes that the U.S. will bow to growing public sentiment to drop enforcement actions against cannabis clinics in the short run and do away with legal restrictions against the recreational use of marijuana in the next seven years.

The investment possibilities range from companies associated with recreational use in Colorado and Washington to companies catering to operations in 23 states and Washington, D.C., where medical use is permitted.

"There will also be opportunities in the life science and biotech sectors, the nutraceutical industry," Bocskor sad. "I also think there will be investments in companies related to industrial use of hemp and a huge industry is the ancillary market."

To be sure, marijuana is still listed by the U.S. Drug Enforcement Administration as a Schedule I drug, which is defined as a drug for which there is no currently accepted medical use and a high potential for abuse. Other Schedule I drugs include heroin, LSD and ecstasy.

That classification and the federal laws against possession, sales, transportation and cultivation could keep institutional investors away, at least initially.

"I know that for many funds, their charters will not allow them to invest in cannabis-related businesses," Bocskor said. "Their investment approach is conservative and so this fund won't work for them at first. Though I have heard from individual fund operators that they wish they could invest in the sector."

It isn't just conservative investors who steer clear of marijuana-based businesses.

"We are not going to invest in something that is in violation of federal law," said Brendan Kennedy, a managing director of Seattle-based Privateer Holdings Inc., an equity investor in the medical cannabis sector that has raised $22 million and is in the midst of a $50 million raise. Privateer's portfolio investments include Tilray, a licensed Canadian marijuana producer, and Arbormain, a Washington company that leases properties to cannabis-based businesses.

"We have a diversity of investors who expect a financial return and a social return," Kennedy said. "Some of them have a higher tolerance for risk than others. The biggest risks in this sector are the DEA, the IRS and the penny stock scam artists."

There is no shortage of companies that have gone public in the U.S. during the last two years that are tied to the marijuana niche. The majority of those stocks trade for less than $5, which defines them as penny stocks.

Depending on the source of the information and how far afield the research goes, there are at least 50 U.S.-quoted companies in the cannabis niche, and perhaps as many as 350.

There are enough public companies and interest in investment that the Cannabis Financial Network put together the Marijuana Index, a group of more than 40 companies weighted by market cap. To be included in the index, companies must have business connected to the industry, a market cap of at least $1 million, be publicly traded, have a minimum bid price of 1 cent for the previous 30 days and an average trade dollar volume of $10,000 each day for 30 days. It also requires that there be no pending Securities and Exchange Commission or Financial Industry Regulatory Authority litigation against the company.

The risk of trading in penny stocks in the cannabis sector is not lost on the SEC. In May, the commission issued a public statement warning investors about pot stocks. It has suspend trading in at least 13 cannabis companies this year, including Green and Hill Industries Inc., SK3 Group Inc., Alternative Energy Partners Inc., WebXU Inc., Fortitude Group Inc., Fusion Pharm Inc., Growlife Inc., CitadelEFTInc., Petrotech Oil & Gas Inc., Aventura Equities Inc., Cannabusiness Group Inc. and Advanced Cannabis Solutions Inc.

"Penny stock scam artists represent a danger of giving this sector a black eye and of slowing down its momentum," said Privateer's Kennedy. He added that Privateer won't invest in public companies in the U.S. or Canada.

"Let me tell you a story," said Bocskor. "In January, I was at ArcView and we were listening to different companies pitching. One company had a $295 million market cap, but no revenues, no capital on hand, and a complete disconnect between basic financials and its share price. When I asked the CEO about it, he said that disconnect wasn't his problem. I said it was his problem and his company and its stock was going to act as a magnet for mischief and bad actors.

"We all know this [industry] has attracted bad actors, and that regulators are being very careful. But I have seen this kind of thing before, during the dot-com era. Some of these companies might as well have dot-cannabis attached to their name," he said.

Bocskor has some background in investment banking, having worked as a broker at Lehman Brothers in the 1980s and having co-founded Mason Cabot LLC, an investment bank that focused on early-stage media and technology finance, in the 1990s.

His strategy with his hedge fund will focus largely on turning around marijuana businesses that struggle as public companies.

"A lot of these companies are going to have problems. Their share price might start out well after a reverse merger, but it will drop and they will have trouble navigating the waves as a public company," he said. "For companies with a value proposition - real assets and a pedigree - we will look to do a turnaround."

Douglas Leighton, managing partner of hedge fund manager Dutchess Capital Management in Boston, said he thinks Bocskor's turnaround strategy has merit.

"I think it is a little bit early for that," Leighton said. "I don't know that there are many companies right now that need that, but those companies are coming."

Dutchess has done some investing in medical cannabis, counting MassRoots Inc. and American Cannabis Consulting Inc., which is owned by American Cannabis Co., among its investments.

"We have already thought about doing turnarounds, and it's something we will do next year," he said. "A lot of those issues will stem from whether a company is touching the plant or not, or whether it has a non-profit status. We think that there will be an opportunity in the ancillary businesses."

Many of the medical cannabis companies that have gone public have done so using reverse mergers. Critics of reverse mergers say that they subject companies to less scrutiny and regulatory oversight than those that go public through initial public offerings.

"Of course reverse mergers are going to be criticized - they are easier to do and faster than IPOs," said Bocskor. "But the companies that have seen the trading halts were not cited for problems over their cannabis businesses or the mergers - it has been about trading issues."

He plans to offer his firm's services in exchange for equity stakes of 2.5% to 4.99%. It will advise companies on management, structure and product issues, and help them raise capital.

The as-yet-unnamed hedge fund won't participate in private placements connected to reverse mergers.

"We are looking at investing further down the line, after companies have had a chance to be public and to get a taste of the marketplace," Bocskor said. "We are going to look for companies that fit into what we are trying to do."

No parameters have been set in terms of projected returns, but Bocskor said the key for his fund will be to acquire the equity at a discount to the market, likely through a combination of discounted share price and warrants.

Hold periods are likely to be in a range of two to three years.

"We are not looking at investing in life science companies where longer holds are normal," Bocskor said. "We are in an industry that is evolving rapidly. Things are going to move quickly."

The firm also plans to advise state governments that have yet to set up medical marijuana programs. Strong business concepts in those states will garner investments by the hedge fund, Bocskor said. The firm plans to promote Nevada's medical marijuana policies as a model.

"Nevada is different from other states and has benefited from the difference," Bocskor said. "If you have a card [that signifies approval to use medical marijuana] in another state, Nevada honors that card. There is full reciprocity. The state also allows outside ownership of a business. It doesn't have to be only Nevada residents. And the license process is based on merit, not a lottery. Most importantly, Nevada allows for marijuana-based clinics and businesses to be for-profit operations."

Bocskor said that Nevada's economy has benefited from its model for regulating the medical marijuana industry, which he said was influenced by the state's successful structure for regulation of the casino industry.

Originally published by The Deal Pipeline

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