It’s no secret by now: many investors are ready to try their hand at making money with the ever-expanding legal cannabis industry in the U.S. Just as we discuss the various ways technology and innovation are improving the industry, advancements on the business end of things are imperative as well — which is exactly the type of mindset that many investors located in other countries are taking.
Within the past year, more and more foreign investors are looking into and inquiring about the U.S. cannabis industry. Most of the interest is coming from countries such as Canada, Spain, Israel, the Netherlands and Germany. Some investors from Croatia, Chile and China are also interested.
What exactly is a foreign direct investment?
Generally speaking, a foreign direct investment (FDI) is any type of transaction where a company or investor from one country invests in a company located in another country. When investment experts talk about FDIs, they typically aren’t referring to that of stocks and bonds. More specifically, FDIs are usually concentrated investments in one organization.
Different types of FDIs
“FDI” can mean a few different things. Foreign investors have the option to start their own new cannabis company with their own finances and build it from the ground up. Alternatively, foreign investors can form joint ventures with U.S. partners, or they can acquire a part of U.S.-based cannabis business, or even buy the business outright if they want total control. Arguably the most attractive option for foreign investors interested in getting into the cannabis industry is to take the basic franchise approach. By following the traditional franchise model, U.S. companies assume the thrust of the financial risk with the investor providing something on their end – such as marketing, branding, research, development, sales process support, web hosting, security, etc. The smartest of these investors are looking into developing affiliate programs to attract other investors and give them even more of a chance to boost their ROI (return on investment).
Foreign investors have help U.S. companies develop, manufacture and purchase cultivation equipment such grow lights and hydroponic equipment, processing equipment (like automated trimmers) and extraction machines, soil, fertilizer, vapor pen batteries and cartridges, etc. Perhaps the largest amount of foreign investment money in the space is being used for cannabis real estate projects and associated assets. On top of the real estate, entrepreneurs also require capital for greenhouses and grow houses, storage and processing facilities, and so on. Thankfully, foreign investment issues are largely similar to businesses in any other industry. Foreign investors must register as U.S. taxpayers (for partnership taxed businesses), comply with FIRPTA, and follow immigration protocols.
State restrictions are more of a concern for investors in firms directly involved with buying and selling cannabis. For example, states like Washington prohibit out-of-state Americans from having any profit interest in a legal cannabis business. Despite the various challenges, foreign investors remain bullish on the lucrative ROI potential that the U.S. cannabis industry presents.