Flood of Investment Money Flowing to Oregon Cannabis Firms After Residency Change

cannabis investments

By John Schroyer

Out-of-state investors are pumping millions of dollars into Oregon’s marijuana industry now that a restrictive residency requirement has been abolished, giving local cannabis businesses a sorely needed pipeline of money to tap as they grow.

In March, Oregon’s governor signed a law eliminating a rule that required every legal marijuana business to be at least 51% owned by an Oregon resident who lived in the state for at least two years.

As a result, cannabis companies are now free to raise money from out-of-state investors in exchange for equity, making the market much more attractive to deep-pocketed individuals and firms looking to fund marijuana businesses.

“For every five people who came into my office, three or four of them were looking for capital, and they couldn’t find it here in Oregon,” said Portland attorney Amy Margolis, who is also the executive director of the Oregon Cannabis Association, which pushed the new law through the legislative process. “It  became clear that unless people could reach outside the state for investment money, we weren’t going to have a very successful market.”

Since March, however, the number of deals that have been struck has been sky-high, with all types of cannabis companies – including retailers and cultivators – raising “hundreds of thousands of dollars” each to grow their companies, Margolis added.

“I think the typical raise is under half a million dollars,” Margolis said.

Sam Chapman, a co-founder of New Economy Consulting, said he’s even seen a few raises between $1 million and $5 million from out-of-state investors.

“Without a doubt, there’s more capital available in Oregon now than prior to the residency requirement being removed. Overall, that’s a positive outcome,” Chapman said.

Sara Batterby, the CEO and president of Hifi Farms, said her company has just completed a $1.375 million seed round with 12 investors thanks to the law change.

Only one of those investors is an Oregon resident. The rest are dispersed throughout the country, including Texas, Georgia, Illinois and Arizona. All threw in cash for controvertible notes that will eventually become equity in Hifi Farms.

Hifi will be using the money to fund an infrastructure expansion on a 50-acre farm in Hillsboro, west of Portland, Batterby said.

“It’s been critical,” Batterby said of the state’s move to nix the residency requirement. “There isn’t the same type of capital that exists in some other cities. It would have been a disaster for the industry if there had been no out-of-state investing.”

Chapman said most of the companies that have raised money in recent months plan to use the money to purchase equipment – such as extraction machines – and fund real estate needs, according to the deals he has examined.

So companies that offer such services to the industry “are going to be in a great spot” as the state starts licensing the first recreational marijuana businesses in the coming months, Chapman said.

There was some concern within the industry that doing away with the residency requirement would lead to outsiders taking over the Oregon cannabis trade.

So far, though,  most of the investments involve out-of-state money looking for local partners, as opposed to investors starting up their own companies and trying to muscle out local businesses, Margolis said.

“We have people who are thinking about moving here to open up a cannabis business, and very few of those people are coming here and saying, ‘I’m from Wisconsin, and I’m going to do this all on my own,'” she said. “They’re coming here, and they’re saying, ‘How do I find Oregon partners to invest in?’ And that is almost across the board.”

Chapman said the four states his office gets the most out-of-state investment inquires from are California, Colorado, New York and Florida.

At the same time, Chapman warned that in the long term, the rush of investment could lead to overproduction and an eventual price crash, which has started to materialize in Colorado, arguably because of a supply glut.

“In terms of the land rush that’s coming in for cultivation property right now, I really hope that people are looking at their pro formas and anticipating the eventual drop in price of cannabis, because when you’re going out there to buy that $3 million 100,000-square-foot warehouse, I hope you’re building in the overhead and the eventual drop in price,” Chapman said.

That price drop, he said, is basically guaranteed.

“If it’s $2,000 a pound today, two years from now, it’s probably going to be $1,200, and if you haven’t included that in your pro forma, you’re probably going to be hurting two years from now, and you might be out of business,” Chapman said. “There are a lot of people throwing a lot of money around right now without doing any due diligence, and they’re basically lighting some of that money on fire.”

John Schroyer can be reached at [email protected]

10 comments on “Flood of Investment Money Flowing to Oregon Cannabis Firms After Residency Change
  1. Toni on

    Greetings Oregon neighbors!

    We were about the 30th approved Wa producer/processor approved in June 2014 when my speculation ran along these lines:

    No operational flow charts ahead of us to follow
    it would be chaos in some form or another for a long time
    keeping costs trimmed to the bone would be critical to survive

    We produce organically/sun grown/zero pesticides flowers. Our first gram sold wholesale for $8g, 2015 we sold wholesale from $1.42 -$1.90g, that’s tested flower with THC 20-31%, packaged & delivered to the retailer. He must then exhaust himself by accepting delivery, scanning the bar code & putting onto his shelf.

    Not a single retail store has gone out of business, but multiple hundreds of producer/processors have…with more coming on board & going out of business after losing $$$$ & dreams.

    The state has surpassed the first $1B in tax income, has announced that industry is developing exactly as planned & anticipates prices to fall further this year. As you can imagine we are still in red ink, but gaining & can outlast the $10m start ups with 150 employees & $1-$2m yearly utility bills.

    Pioneers are slaughtered but prospectors prosper. So far Oregon is doing better than Wa with some rules/regs….but bigger investments mean greater debt & smaller slices of the profit pie.

    Enjoy the wild ride!

    If you plan on being able to sell your packaged flower for about $1g you will still be standing a year from your doors opening.

    Reply
    • bongstar420 on

      Wow…you don’t know whats coming.

      Good luck keeping your outdoors above average in quality which is the only thing worth anything in the cannabis market.

      Reply
  2. Michael Davis on

    Yes you are correct in your assumption regarding supply and demand. However quality products with the right exposure and marketing succeed in any industry. Cannabis included.

    Reply
  3. Roland on

    This OR resident was motivated by the 25% sales tax to become independent of the commercial system. 4 plants is enough for any household if you do it right. Sales taxes are regressive, not the Oregon way. I may buy a few cuttings next spring, other than that, nothing. Reduction to 17% won’t change that. There’s always been plenty of home gardeners around here.
    @Toni: you’re predicting $450/lb retail. Probably right.

    Reply
    • bongstar420 on

      Your drug habit is so intense you can’t afford a 25% tax?

      Your motivation to home grow should be from interest in growing or as a way to shut the low and mid quality growers out of the game with your own supply of low and mid quality (I’m assuming you have a life and cannot assure constant quality otherwise)

      Reply
  4. Eric on

    Wild ride is a understatement. We are in our third outdoor season here in washington. Still in the same boat. The gears are turning but not seeing much profit. We have sold over 2.5 million and have little to show for it. I will have to say that our indoor flower is the only thing keeping us alive.

    Reply
  5. holdingon on

    Investors wanting to give you money only means one thing… You have a product of mass value and you have found success.
    Make sure your contracts are rock solid or they will steal your dream. If they balk at your contract, move-on, there are plenty of investors with plenty of bad opportunities wrapped in empty promises. Don’t believe them in saying they’ll look out for you, money people only look out for themselves. They lie, manipulate and steal.

    Reply
    • bongstar420 on

      It means you are exploitable for their profit.

      Every investor I ever saw wanted way too much. They are absolutely worthless unless your access to capital is restricted artificially by the financial system (we do not allocate resources based on talent and skill).

      Also, “mass value” is not “top shelf.” Large operations can’t product top shelf over the long term without intense expenditures and elite horticulturalists (which btw, why allow your profits go to an “investor” if they can’t get anywhere without you in the long run?).

      Reply

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