Banks Just Say No

Legal pot, sounds like a great sector for investment but it's not without it's problems. Investing in ancillary/support industries is already booming as evidenced by a recent Bloomberg piece detailing the involvement of Pritzker Scion and others looking to invest.

Prospects for legalization of marijuana are also galvanizing stock market investors. While regulators warn of scams, some of the biggest percentage gains in the market this year are being harvested by investors speculating on marijuana penny stocks. GreenGro Technologies Inc., which provides management services for medical dispensaries, has soared 409 percent to 22 cents after touching 80 cents Jan. 8.

However, as bright as a future that legal pot might have as an investment vehicle, there's one major problem: Banks.

A recent article in the New York Times details some of the issues surrounding bank involvement in the bourgeoning marijuana industry:

Legal marijuana merchants like Mr. Kunkel — mainly medical marijuana outlets but also, starting this year, shops that sell recreational marijuana in Colorado and Washington — are grappling with a pressing predicament: Their businesses are conducted almost entirely in cash because it is exceedingly difficult for them to open and maintain bank accounts, and thus accept credit cards.

As a result, banks, including state-chartered ones, are reluctant to provide traditional services to marijuana businesses. They fear that federal regulators and law enforcement authorities might punish them, with measures like large fines, for violating prohibitions on money-laundering, among other federal laws and regulations.

Now, this isn't to say that there aren't any solutions. Some owners use their personal accounts and the owners of some banks aren't taking a chance on these new businesses. Also, some have taken to some more clever solutions:

Marijuana business owners have devised strategies to avoid the suspicions of bankers. A number of legal operations have opened accounts by establishing holding companies with names that obscure the nature of their business. Some owners simply use personal bank accounts. Others have relied on local bank managers willing to take chances and bring them on as clients, or even offer tips on how to choose nondescript company names.

Here's where things have become interesting. Enter private equity:

High Times magazine is starting a private equity fund to invest in marijuana businesses. But many investors may feel uneasy about marijuana businesses that do not have bank accounts. And without bank references, entrepreneurs say, it is much tougher to get lines of credit from vendors.

Pretty clever if I may say so. I've seen the idea of Pot PE before, but it's clearly an underutilized strategy. What do you monkeys think? Any PE guys looking at a possible entry into this market?