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Medical Marijuana, Inc: How Business Shapes The Industry's Growth

|Includes: CBIS, Medical Marijuana, Inc. (MJNA)

Medical Marijuana, Inc. (OTCPK:MJNA) recently released a press releasetitled Medical Marijuana Inc Reviews State of the Industry and Prospects for Future Growth that outlined the progressive expansion of the various forms of marijuana legalization in the United States. I believe that the overview was a message to shareholders to help simplify this very complex transformation of the industry. The company has recently been the focus on many positive and negative articles that have posted on its Yahoo Finance Page. This is to be expected when a new and significant opportunity unfolds. I have written three of them myself:

Many investors are trying to absorb all the information and of course, some misinformation. So I wanted to take a broader look at the subject. As many great philosophers have alluded to, if you don't understand the history, you are doomed to repeat it. With that thought in mind, I offer the following:

Many believe that the recent trend towards decriminalization of marijuana is contrary to what the government knows about the effects of marijuana on society. It's obvious that society is leaning towards medical and recreational use, but is limited in deciding its own fate. The congressional representatives of this nation must act on our behalf. As a society we elect representatives to carry out the actions and initiatives that are thought to be of the most benefit for societies collective good. We elect these officials at the state and the federal levels. Our state representative tend to be more in tune with what's important to their citizens while our federal representatives try to balance reelection by their constituents and the federal policy that affects the nation as a whole.

Getting elected or reelected to public office costs a lot of money. That money can come from individuals, businesses and special interest groups. Of course businesses can and often do have or support special interest groups. This allows those with biggest purse strings to exert the most influence over the decisions that our elected officials make. Most people know this, but what they may not know is how this has affected the criminalization of marijuana.

It's common knowledge that it is the Controlled Substances Act [CSA] that criminalizes marijuana. When these types of legislation are put into place, they are not done so at the whim of just a few politicians with agendas. As you would expect, there is a significant amount of due diligence to be done to support decisions such as criminalizing marijuana. In fact, this due diligence was done, and surprisingly, when it didn't recommend criminalization, it was ignored. As investors or potential investors in the marijuana industry, you need to understand that the government knew back in 1970 that criminalizing marijuana was not in the best interest of society. It was really more of a decision based on popular political opinion and support of businesses that supported the current administration.

The Controlled Substances Act was established as Title II of the Comprehensive Drug Abuse and Control Act of 1970. Part F of that Act created the National Commission on Marijuana and Drug Abuse which was chaired by Raymond P. Shafer. The commission was known as theShafer Commission. While the commission was conducting its review, Roger O. Egeberg who was the Assistant Secretary of Health, recommended that marijuana be placed in Schedule I of the Controlled Substance Act.

The Shafer Commission was more formally known as Marijuana: A Signal of Misunderstanding. It's an exhaustive report that ultimately recommended the removal of the prohibition of marijuana. The report focused on social discouragement of use such as with alcohol and cigarettes instead of criminalization. The report even suggested that prohibition might be contrary to the Constitution as prohibiting use might not be in line with the "the value of privacy in our constitutional scheme".

So why isn't everyone freely smoking and/or eating marijuana? Well, because the Nixon administration who had commissioned the report, refused to implement the recommendations. It's well known that President Nixon actually tried to influence Shafer s report by telling him that "You're enough of a pro to know that for you to come out with something that would run counter to what the Congress feels and what the country feels, and what we're planning to do, would make your commission just look bad as hell." Nixon was smart and new that Shafer's report would be political suicide. That was 43 years ago and only now has change started to take hold.

Change can be slow, but with the right catalyst, it can happen with extraordinary and unexpected speed. This is unique opportunity that investors have before them. It is essentially an uprising of the states to do what their elected officials won't do. U.S. Attorney General Eric Holder recently said that he will release his decision on how to handle the conflict with state laws. His decision will lay the foundation on which the battle for decriminalization will be fought. At worst, he could intensify the conflict between federal and state laws. At best, he could open a door for meaningful dialog to take place that could help unburden law enforcement with outdated mandates on society.

What investors need to understand is that the criminalization of marijuana is about business, both private and government. It actually has very little to do with society from a moral standpoint. But the business model of criminalization is outdated and has lost relevancy. Let's look at some of the industries both legal and illegal that benefit from the criminalization of marijuana.

Law Enforcement

Many law enforcement agencies are allocated budgets based on the crime fighting activities that they must engage in. You can be sure that marijuana is a significant revenue generator for the various agencies. The Drug Enforcement Administration (NYSE:DEA) is no different. When Michele Leonhart who is the top administrator at the DEA was asked while giving testimony to congress if marijuana was as bad a "Crack Cocaine", "Meth Amphetamines" and "Heroin", she refused to give a definitive answer. The testimony can be seen at this YouTube video link. It is a textbook example of how to not answer a question no matter how simply it is phrased.

Alcohol & Tobacco

These industries are based on vices and are at risk of users transferring to marijuana products. Companies like MJNA could actually benefit from partnerships with these industries as they have well established marketing and distribution channels. Big tobacco also has the agricultural expertise to grow (no pun intended) the marijuana industry. As a side, current legislation is suggesting that the current federal agency be expanded to include the oversight of marijuana and be renamed the Bureau of Alcohol, Tobacco, Marijuana, Firearms and Explosives.


The medicinal side of marijuana has a tremendous potential for growth. In my opinion, Cannabis Science, Inc (OTCPK:CBIS) is the leader in this area of marijuana medical research with MJNA a close second. Big pharmaceutical companies have deep pockets and will either aggressively fight competitors or look for acquisition opportunities. Some are suggesting that 2013 is the year "Big Pharma" will make its move.

Drug Traffickers & Other Organized Crime

This is the area that I think most people think about the least. These illegal entities stand to lose a tremendous amount of money with the legalization of marijuana. Some suggest that the Drug Cartels could be stopped as they make around 60% of their revenues from sales in the United States alone. But what is important here is to understand that with legalization, law enforcement could allocate resources away from marijuana and focus on drugs that are more detrimental to our society. But many only see enforcing existing marijuana laws as a way to stay in business. As mentioned above, the business model is outdated.

An investor would be very naive to think that these industries aren't already trying to shape the media and trust in the industry. Mavericks such as MJNA and CBIS are easy targets as their share prices have rapidly expanded and their business transactions are becoming more complex. The complexity of the business transactions is often pushed to current or potential investors as cannon fodder to strategically sway investors. They will say things like "I'm no expert, but this seems awfully suspicious to me". They will then say to you that if you don't believe that it is suspicious then explain it. They can't explain it, but they want you to. Of course there is more risk with small caps than with more established issues. But investing in stocks is a risk reward proposition.

So, beware of those who ask numerous questions instead of providing you information. The model is more of a manipulation technique than it is a true analysis. And also beware when there are an unusual number of posters and authors taking one side of a position. This can be an example of an organized effort to promote the selling of an investment.

Medical Marijuana is forecasting revenues of $47M in 2013 and $155M in 2014. That's a whopping 229.7% increase. And with recent sale of the PhytoSHERE assets to CannaVEST (FCLS.OB) for $35M in cash and stock, the company plans to expand its branded product offerings through internal growth and acquisition. As always, make sure you research your investments carefully, and also make sure that the information you get is factual and not innuendo.

Disclosure: I am long OTCPK:MJNA, OTCPK:CBIS.