In the second and final part of this interview (read Part One here), Brochstein looks at what makes the cannabis industry unique:
This is one of these, once-in-a-generation investment themes that excites people for a lot of reasons. I always like to tell people, this is a cause, like it or not. There's no 3D printer “cause,” there's no biotech “cause” for the most part. These things are all fun and exciting, but this a really important cause – and it's pulled in people – and they're not all young.
Some of them are hippies from the 70s and 60s that, maybe they lost money in 2000, they lost money in 2007, they'd sworn off stocks. (But) they have something they can believe in again.
This is good and bad. It's good, it gets people in the market. It's bad, at least (in terms) of volatility, because you have uninformed investors. And that just leads to more volatility; they buy high, sell low, things like that.
Can you explain what went on with the SEC and what will keep that from happening again?
So, this is a really tough situation, because the SEC – on the record – has really only said one thing. They put out a press release that was a warning. So we know that they have some concern.
If you take a step back, FINRA, which is a self-regulatory organization that's chartered with protecting the public, that's part of their mission, they came out last August -- pretty much at the lows of the market, right when I was starting 420 Investor – and warned people.
Stock prices had fallen 70 percent and now they're warning people. I had been warning people for months. No one really heeded that warning. Then they came out in early January and repeated their warning, and the stocks just kept going up.
So FINRA is a toothless dog, unfortunately. They can speak, speak, speak but they don't have any sort of enforcement power. Well, the SEC has enforcement power.
We started to see the SEC suspensions in March. And they selected companies that weren't really widely followed. And it wasn't much of an issue. And I'd already been speaking about the potential risks to the market, in this bubble type of mentality, and with all these companies putting out these press releases, and FINRA warning again that we could see this. And, sure enough, we did see it.
The SEC did a series of relatively mild suspensions, like where people would have said, 'oh, well, it doesn't matter, nobody knew that company, anyway.' But then they did Growlife PHOT. Then they did Advanced Cannabis Solutions CANN.
That one was the first Tier One company, with a multiple, $100 million market cap, well-respected management team, a business plan that people thought made sense. And it turned out that was not anything to do with management, but with the reverse merger. And so this is a very technical issue, not someone who was affiliated with the company (and) not really in control of the company. So the company apparently didn't do anything wrong.
During the Gold Rush, the people who made the money then were the people who sold the picks and shovels to the miners. Are we at the end of that first Gold Rush “bubble” for the cannabis industry?
The bubble was just an investment bubble, it wasn't like a business bubble. There weren't funds that were flowing into parts of the business. People like to say that those who supply the picks and shovels, will be the winners. It's not true. That is a good play, but it's not like either/or.
Unlike energy exploration or mining, growing cannabis is not a hit-or-miss thing. Yes, there can be losers at it, but there's a lot of knowledge out there. So you're not taking a big risk. If you can get one of these highly-regulated licenses, a medical license, for instance, it's just a license to print money. You'll make a ton of money investing in that operation at the right price. But there are a lot of opportunities, and right now the public markets are restricted to those, quite frankly.
This is a grey area. It's not like the SEC says, thou shall not touch cannabis or thou shall not get anywhere near cannabis. There's been no official proclamation. It's more a process; somebody has to be first. The first one to do it is going to be taking a big risk, because if it gets shot down the shareholders are going to be very upset.
Do you think that five years from now the Feds are just going to wave the white flag and say, okay, let it roll?
My official view has been 2020, which is about five years. It will be the end of the first term of the next president. So it can become a second term issue. Hopefully, we'll have 15, 20 states (with completely legalized cannabis) by then.
What ends up happening is the federal government, like (during) the Vietnam War, has to figure out how to get out and save face. You don't want to just keep imprisoning people and wasting resources.
So would you describe yourself as optimistic about this sector?
I'm really optimistic that we're going to have more second-wave companies. The first-wave companies have had their chance to shine and they just haven't done so, for whatever reason.
It's just a question of trying to balance the number of investors with the amount of investment, So I guess I'm most optimistic that we're going to get better and better potential investments in this second-wave.
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