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Lessons of a Cannabis Ex-Billionaire - By - April 13, 2016 - SF Weekly
SF Weekly

Lessons of a Cannabis Ex-Billionaire

Vincent Mehdizadeh was in the medical cannabis business for a little more than five years when he made his first billion.

Before he could start year eight, it was all gone.

In 2010 and 2011, Mehdizadeh — one of those “born entrepreneur” types we hear so much about — was CEO of a company called Medbox. It filled what you could call a “niche market”: producing and selling vending machines that sold weed. A definite novelty, and one you could only legally see in a medical cannabis dispensary — and one actually seen in relatively few. (The only one in the Bay Area was, for a time, in San Jose.)

But anyone laughing at Mehdizadeh's business idea was crying after Washington and Colorado legalized recreational cannabis for adults in 2012. Investors around the world recognized legal weed as the next big thing — but they were still rightly terrified of the federal government using forfeiture laws to seize anything — a car, a house, a fortune, a copy of FORTUNE — remotely drug-related. So rather than invest in weed, they invested in something that touched weed. And oh, did they invest.

At the time, Medbox was a “pink sheet,” over-the-counter stock — meaning it had no reporting or filing requirements like stocks listed on NASDAQ or the NYSE. It could have been printed on acid blotter paper.

Within two weeks of the election — which saw Barack Obama re-elected as well as weed legalized in two states — stock that had been selling for under $3 a share gained 3,000 percent, to $215 a share.

“It just catapulted,” Mehdizadeh says now, in the understatement of the year.

Medbox's business was still extremely limited, and it had sold units only to 130 dispensaries in Arizona and California. Market experts kept warning that it was a risky buy, but frenzied investors — mom-and-pop retailers, private equity firms, and other smaller-label financial entities — didn't care. The stock price hiccupped down to $100 by January 2013, but for a stock that had been trading a few dollars not long before, it hardly mattered.

On paper, Medbox was worth $3 billion; Mehdizadeh himself, the chief shareholder, was worth $2 billion. With a few ups and downs, this stupendous value slowly decreased but stayed high enough (in the $40 range) for a year before internal disputes — and perhaps the inevitable crashing back down to earth — set in. Mehdizadeh was removed from the board. Employees were let go. Meanwhile, the company kept issuing more and more stock — over 200 million shares.

“Shares were being issued left and right,” he told me recently. “It was a recipe for disaster.”

By mid-2014, the stock was trading in the teens; a year after that, it was near-worthless. He retired with 13 million mostly worthless shares last August. The company, which rebranded earlier this year, is now a penny stock, attempting to get into the cannabis retail market.

Mehdizadeh, who documented his wild ride in a self-published book, Huma Rising, cashed out enough stock in time to net millions of dollars — and used some remaining shares to settle lawsuits from investors and from his former partners, who finally settled late last year.

He's not a billionaire, but he's doing just fine, working as a consultant with cannabis investment firm and branding outfit Pineapple Express.

But the industry doesn't appear to have learned the Medbox lesson. Rather than view his story as a cautionary tale, some firms are trying to use it as a roadmap.

This fall, some of the biggest states in the union — including California, Ohio, and Nevada — could vote to legalize recreational marijuana, while Florida could finally allow medical cannabis.

There will almost certainly be another Medbox-like cannabis stock bubble — especially if California goes legal. This is fueling untold speculation among the other marijuana-related stocks still on the “over the counter,” or OTC market — of which there are more than ever before.

OTC stocks, sold directly party-to-party outside of an exchange, have long been the realm of hucksters and fraudsters running “pump-and-dump” schemes. However, some marijuana stocks appear to be going legitimate.

This week, MassRoots, the social media site branding itself as the “Facebook of Weed” — an actually-valid version of the Silicon Valley trope “[Insert Successful Company Here] of Something” — filed an application with NASDAQ to be the first cannabis-related stock on a major trading floor. (There is another, G.W. Pharmaceuticals, that sells epilepsy medication derived from synthetic cannabinoids.)

In some cases, publicly traded companies are ahead of California law.

Over the past few months, Southern California-based Terra Tech Corp., which has interests in grow houses and dispensaries in Nevada, has been on a steady rise. (Disclosure: I own some Terra Tech, but can't tell you how much. I may have misplaced my Ameritrade password.)

Even though California dispensaries are technically not-quite-yet for-profit, the company announced a major investment in Oakland dispensary Blum in January, and then informed the world that it had bought the dispensary outright on March 31. The following day, according to the company's Facebook feed, the dispensary reported $60,000 in sales on April 1, fueled by 1,142 patients; its stock, predictably, jumped, more than doubling to its highest level — 41 cents — in several years.

But the best opportunities in cannabis are likely not publicly-traded.

In his Medbox days, Mehdizadeh also consulted on dispensaries, including some of the 76 dispensaries allowed in Arizona. Anyone ballsy enough to actually do business with the plant — and lucky enough to survive — has earned his envy.

“Those dispensary licenses,” he says. “Those are million-dollar golden tickets.”