Plenty of smoke clouds the future of legalized pot in Washington

SEATTLE — Customers have been drifting into Jay Fratt’s alternative pipe and tobacco shop, Smokin J’s, in the days since Washington state’s marijuana law took effect, wondering when cannabis would take its place on the shelves next to the handblown glass pipes.

Hold on, he told them. Fratt is, before anything else, a businessman, and he quickly realized there was a lot of smoke in the details.

First of all, the law setting up the nation’s first legal regulatory system for retail pot won’t allow sales until next year. And the federal government still considers marijuana illegal.

Then there are the taxation provisions: Can legal retailers compete with the black market when they have to pay over 25% in taxes? What about the provision that says marijuana shops can’t stock anything but pot and pot supplies? What would happen to the Vancouver, Wash., shopkeeper’s tie-dye baby jumpsuits, his “Stoner” trivia games, his meditating Buddha tapestries?

The euphoria that accompanied the debut of the initiative making it legal in Washington for adults to possess an ounce or less of marijuana faded shortly after midnight Thursday, when about 150 people gathered at the base of the Space Needle in Seattle to toke up in celebration.

By Friday morning, the bureaucrats, the lawyers and the suits from Wall Street were pulling into town as state regulators began setting up what could become a $1-billion industry, built precariously on a product whose possession the federal government considers a felony.

State officials estimate that pot will soon be selling legally for about $12 a gram, with annual consumption of 85 million grams — a potential bonanza in state tax revenue of nearly $2 billion over the first five years.

“I’m telling my clients, if I had a collective and I knew that legalization was coming and I knew they were going to be licensing people and I was already in the business, I’d be one of the first people going to apply for a license,” said Jay Berneburg, a Tacoma, Wash., lawyer who held a seminar recently about getting into the retail trade.

“You could make a million dollars in five days. There’s going to be people lined up to buy marijuana, just because they can,” he said.

Venture capitalists are moving in. Brendan Kennedy and Michael Blue, two Yale University MBA graduates with backgrounds in Silicon Valley, have raised $5 million through their private equity firm, Privateer Holdings, believed to be the first in the nation to focus strictly on marijuana-related companies.

“We realized this was and is the biggest opportunity we think we’ll probably see in our lifetimes,” Blue said.

Their first acquisition was Leafly.com, a website that rates strains of marijuana for their medicinal properties. Users can plug in their ZIP codes and find out which products available in their areas produce the effects they’re looking for, from “giggly” to the ability to treat migraines.

Vaporizers are another product they’re looking at — anything that doesn’t directly involve buying or selling marijuana. Privateer is offering investors the chance to make money in an arena most venture capitalists can’t touch under standard partnership agreements, which normally spell out that investments not in compliance with federal law are prohibited. That means, they figure, an opportunity for stunning profits with little competition from other investment firms — though one has to listen to a lot of Bob Marley at trade shows.

“I’ve studied a lot of industries. I’ve never seen one that had this unique set of circumstances,” Kennedy said. “It’s highly fragmented, it’s very unstructured, there’s no leaders, there’s no standards. The entire topic is taboo, and there’s no involvement by Wall Street ... which is a unique opportunity, right?”

The state Liquor Control Board is asking for a staff of 40 to help set up a network of possibly 300 or more state-licensed retail stores. The board must also figure out how to regulate growers and packagers.

That process will take much of the next year. Though it has been legal since Thursday for adults to use small amounts of marijuana away from public view, they can’t buy it, sell it or grow it until regulations are in place. Exemptions remain for medical users under existing law.

“Nowhere in the nation, or in the world, have they set up a regulatory system for recreational marijuana use. I think that’s where we’re kind of charting new ground,” said Pat Kohler, director of the board.

“There will have to be a set of regulations set up on how much they can grow, what kind of security they need to have, can they grow it indoors — all these things need to be discussed.”

In part, Kohler said, Washington will be looking to Colorado — where voters approved a similar statute that goes into effect in January — which has in place regulations for medical marijuana more comprehensive than Washington’s laissez-faire approach.

She said it would also be logical to model regulations on rules governing the liquor industry. Until this year, when alcohol sales were privatized, hard liquor in Washington was sold at state-licensed stores that, like those to be set up under the marijuana law, sold nothing but alcohol under tight regulation and taxation.

For Fratt and other potential pot entrepreneurs, the idea has allure but is also fraught with peril.

One big concern is that taxation — a 25% excise tax on each wholesale and retail transaction, along with sales and business and occupation taxes — will boost the price so high that a cheaper black market will persist.

An even bigger worry is that the federal government will step in and shut down the new industry. The Justice Department said last week that it was reviewing the laws in Washington and Colorado and warned that growing, selling or possessing any amount of marijuana remained illegal under federal law.

“If you take someone like me who’s been doing business for 15 years and knows how to pay taxes, does everything on the straight up and up, naturally the state would want somebody like me to get into that business. But without federal assurances, there’s no way someone like me would be interested,” Fratt said.

Also problematic is the strict standard for driving under the influence, which already has been challenged in court. A judge Friday declined a request to suspend the law until that’s resolved, but critics have said they will press their case, arguing that under existing rules a driver could be subject to arrest days after smoking a joint.

Berneburg, the Tacoma lawyer, said that while he was advising his clients to apply for a license, he was also telling them not to expect any gold-rush profits to last for long. The novelty will wear off, he predicts.

“You take away the outlaw mystique, and people won’t want it anymore,” he said.

That’s why some entrepreneurs are hoping to cash in on business from outside Washington state, where marijuana retains the charm of forbidden fruit. A new startup in the southern town of Camas, Wash., Washington Freedom Tours, is offering “the first legal cannabis freedom tour in the United States” and has three bookings, owner Robert Flatt said.

“We’re getting emails from Italy, France, the U.K.,” Flatt said. “It seems like there’s going to be an international interest in coming to the free state of Washington.”

Trips include a journey through the Columbia River Gorge and a wine and cheese tasting in a private residence featuring, of course, organically grown Northwest cannabis.

kim.murphy@latimes.com