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Investment banks can now look forward to another round of financing and M&A activity, as medical marijuana producers gear up to produce enough weed to satisfy the recreational market.LARS HAGBERG

When marijuana is being passed around and someone holds the spliff a little too long, that's called bogarting the joint.

Right now, a handful of Canada's independent investment banks are bogarting the legal and lucrative medical marijuana market, raising more than $230-million to fund fledgling companies in the past two years. These dealers in dope stocks have created firms expected to be valued at $5-billion or more by the time lighting a joint is totally legal.

The high times are not going to last for the independent dealers. Canada's banks have been just saying no to doing business with weed companies – for a variety of reasons. But the big banks – dominant players in capital markets – plan to target the marijuana business as soon as the federal government signs off on recreational pot with rules it pledged this week to have in place by 2019.

"When marijuana is totally legal, the banks will rush in," predicts lawyer Barbara Miller at Fasken Martineau DuMoulin LLP. Ms. Miller and finance executives compare the emerging marijuana sector to the Canadian liquor business during U.S. Prohibition: Fortunes will be made, but there are considerable risks.

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The comparison to Prohibition helps explain why the bank-owned dealers steered clear of the sector. The banks fear the reputational risks that would come with backing a pot producer who got ahead of the law. It was always a stretch to believe medical marijuana was only going to patients with a prescription.

Risk tolerances were higher at independent investment dealers that have long focused on raising money for small companies with plenty of promise, but unproven plans. GMP Securities, Dundee Securities Corp., Infor Financial Group Inc., Clarus Securities Inc. and Cormark Securities Inc. led stock sales for start-up medical marijuana companies such as Canopy Growth Corp., Apria, Mettrum Health Corp. and OrganiGram Holdings Inc.

Collectively, these dealers earned approximately $13-million in fees over the past two years by selling shares in pot producers. While that's decent money for firms that have been hit hard by the slump in financing for junior mining and energy plays, investment banks earned $104-million in fees for underwriting just one massive equity sale from utility TransCanada Corp.

Early investors got a tremendous buzz off the pot stocks, as all of them soared after the federal Liberals were elected. Investment banks can now look forward to another round of financing and M&A activity, as medical marijuana producers gear up to produce enough weed to satisfy the recreational market. However, some financiers caution the bull market for Canadian pot stocks cannot last. There are concerns about putting relatively risky stocks into the portfolios of retail clients. An executive at one bank-owned firm said: "These are concept stocks – unproven businesses with unproven management – and we've seen that movie before with everything from fuel cells to IPOs from China-based companies." There has already been a shakeout in stores that sell pot in markets such as Colorado, where recreational weed was legalized last year. The same sort of rationalization is expected to happen among Canadian producers.

In the not-too-distant future, the marijuana sector is likely to look like alcohol and tobacco: a regulated industry dominated by large companies with economies of scale in production and sophisticated marketing and distribution. Only Seagram made the leap from local whisky distiller to global player following the repeal of Prohibition. Independent dealers are going to keep financing pot producers, and the bank-owned firms will jump in just as soon as recreational weed is legal on the prospect of backing a leader in an emerging consumer product sector. But not every small medical marijuana player will make it into the big leagues.

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