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'Next Great American Industry'? Investors High on Legal Marijuana's Potential

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Updated: 11/08/2013 3:02 pm

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Investment action is ramping up as the two states that have legalized recreational "adult use" pot — Washington and Colorado — begin to issue licenses and the first retail outlets prepare to open. The federal government said in August that the Justice Department would not stop states from creating their own regulatory and taxation frameworks.

That federal decision to step back in turn unleashed "pent-up demand" from investors, said Troy Dayton, co-founder and CEO of the ArcView Group, which conducts market research on the pot industry. It recently released a report predicting that the legal marijuana business will increase 64 percent this year and top $10 billion within five years.

"This is the next great American industry," Dayton said.

Banking and taxes

But there are a few weeds in the weed patch. One is banking. Though the federal government is looking the other way, banks remain reluctant to offer a place for growers and sellers to safely store their cash.

At the same time, new private equity and venture capital investors are coming out of the woodwork. Many want to invest in products and services not directly related to pot itself, such as security systems and software programs.

"Mark Twain had a great quote," said Dayton. "He said that when there is a gold rush on, it's a good time to be in the pick and shovel business."

The larger dilemma, however, may be the taxes on recreational pot. How high is too high? Colorado voters passed a 25 percent tax on it, more than three times the state tax on medical pot. Washington has mandated a tax of at least 50 percent, versus no tax on medical marijuana.

"I don't think it has gone very well," said Shy Sadis on the rollout of Washington's new law.

Sadis, a longtime owner of several medical pot dispensaries in Seattle, is applying for retail licenses to sell recreational cannabis. State officials want to close all untaxed, unregulated medical outlets and move everyone into the taxed, regulated recreational side — even though there will be far fewer outlets and the product will cost a lot more.

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"A lot of patients come in here and are upset that medical is going to be gone, and they're thinking, 'Wow, maybe my vote should have went the other way,'" Sadis said.

Keber is confident that buyers will eventually migrate to a taxed, regulated, tested, legitimate system. "The alcohol industry has had 80 years to get the process right," he said.

Whether it takes 80 years or 80 days, few believe the momentum toward legalization will go up in smoke.

"No one knows how this is going to play out," said editor Walsh. "We're going to find out in a couple months."

—By CNBC's Jane Wells. Follow her on Twitter @janewells

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