Weed business ownership still hidden in haze of smoke

Want a stake in the medical marijuana business but missed out on getting a coveted state license? You might not be too late.

Weed businesses that scored licenses to grow in Illinois are looking for investors.

But if the chance to get in on the ground floor of what’s already a $2.7 billion industry in the United States sounds too good to be true, insiders say the tiny number of patients so far permitted to use marijuana in Illinois is causing them sleepless nights.

They’re looking for tens of millions of dollars in financing to build marijuana farms — and to keep running while hoping the state will loosen its restrictions on who can use the drug.

The continuing search for investors means that, despite the background checks that were required in the lengthy and costly license-review process designed to weed out organized crime and other undesirables, it’s still not clear who will end up owning many of Illinois’ medical marijuana businesses.

And the widespread use by the license owners of holding firms and subcontractors further complicates who will reap financial benefits from legal marijuana.

At least three of the operations awarded state licenses to grow medical marijuana — Cresco Labs LLC, In Grown Farms LLC 2 and Ieso LLC — are now seeking venture capital investors.

And Salveo Capital, a private equity fund focusing on the legal marijuana business, is offering to help others.

A lawsuit filed in Cook County Circuit Court last month by a company that failed in its bid to win a license to grow marijuana in the Kankakee area accused Cresco Labs, which won the Kankakee license, of lacking the financing needed to get its state licenses. Cresco has been awarded three farming licenses, but only one is being challenged in court.

Though Cresco hasn’t responded to the allegations, documents obtained by the Chicago Sun-Times show a subcontractor it hired to develop its farms is seeking $29 million from investors, in addition to $7 million in equity it already has. A presentation prepared for would-be investors in the subcontractor, Free Market Ventures, projects that, with the right legislative breaks, the legal marijuana business will be worth $35 billion by 2020.

And it attempts to entice investors by asserting that “due to the ongoing gray area between state and federal laws, medical marijuana growers and distributors are willing to pay significant premiums for services, including real estate.”

Another company, In Grown Farms LLC 2, which has a license to grow marijuana in downstate Stephenson County, is looking for $13.5 million, according to what the company described as a “draft internal” document, not meant to be seen by the public, obtained by the Sun-Times.

“In Grown Farms LLC 2 is prepared to fund this project with ready resources fully available to us,” a company spokeswoman said. “However, like any other business, we will entertain capital investment opportunities, and should they become available, those potential investors will be fully vetted in accordance with state rules, and we will seek authorization from the Department of Agriculture to add them to our investor team.”

The state says it’s OK for medical marijuana companies to bring in additional investors or restructure their businesses, but first they need permission from the two agencies handling business licenses.

“As with the initial applications, the departments shall conduct a thorough review of the requested changes, including background checks for any new investors,” said Lyndsey Walters, a state spokeswoman

Cresco officials wouldn’t comment on their subcontractor’s search for investors.

Jack Buck, president of Free Market Ventures, didn’t respond to calls.

Another marijuana farming firm, Ieso, is “in a very strong financial position” but is also seeking investors, said Kelly McGrath, a spokeswoman for the company who wouldn’t say how much money is being sought.

“What we’re looking for is unquantifiable: dedicated and talented people willing to make an investment in patient care that goes beyond a financial commitment,” McGrath said.

Some in the new industry say they’re surprised to learn license-holders are seeking new backers.

“That type of financial structure was supposed to have been in place at the time the application was made,” said attorney Brian Rosenblatt, who has represented patient advocates and marijuana businesses. “The question now is: Why wasn’t this better vetted during the application process?”

One license-holder said costs are piling up for companies after delays in awarding the licenses.

“This is how business is done,” said the businessman, who said he already has secured financing but spoke only on the condition of not being identified because he said he did not want to be involved in a public dispute with his rivals while the state finalizes the permitting process. “A lot of people probably needed to get more money because they burned so much through the [application] process.

“If you don’t have enough in reserves, if you didn’t have a good marketing strategy . . . if you have any deficiencies anywhere, they’re going to be magnified greatly in this highly restrictive environment,” and you’ll need more capital, he said.

The extremely low number of patients approved so far to use marijuana has license-holders worried, the businessman said. To qualify, a patient must have one of 37 state-approved medical conditions. So far, only 1,600 patients have been approved by the state.

“The bigger story here — we have a thousand patients on the books, and we’re going to have a million square feet of growing space . . . without expanding [the medical] conditions, the program itself — it’s scary,” said the businessman, who noted that Colorado’s looser restrictions on marijuana use have generated the sort of big tax revenues he said could help Illinois deal with the state’s financial problems.

“If these businesses don’t succeed, the program doesn’t succeed,” he said.

Uncertainty over the industry might have been a factor in the decision of GTI-Clinic Holdings LLC to turn down one of the three licenses Gov. Bruce Rauner’s administration granted it last month. GTI declined to address why it gave up rights to operate in downstate Dixon but said it was focusing on its two other sites to “ensure long-term stability.”

It’s unlikely Cresco, In Grown and Ieso are the only businesses looking for new financing for medical pot in Illinois. Chicago-based Salveo Capital is looking to cash in on that need. It has formed a private equity fund offering to help bankroll licensed marijuana businesses.

Salveo Capital managing principal Alex Thiersch said Salveo isn’t trying to help investors get around ownership-disclosure rules. He said he expects any investors in Salveo’s fund who benefit from business it does with Illinois licensees will have to be vetted by the state.

But he said the situation with subcontractors who, like Free Market Ventures, build medical marijuana farms and rent them to license-holders, is less clear.

“If they’re just building the facility, I don’t believe that they have to be vetted,” Thiersch said. “But if they’re actually operating the facility, that’s another matter.”

Thiersch said the small number of patients approved to use medical marijuana in Illinois is making licensees “very, very nervous” about the “mammoth” investment needed in the next year or two.

“There’s going to be a lot of creative ways people are going to get financing,” he said.