Medical marijuana is big business. Some governments are taking a sympathetic approach to it, and some investors smell an opportunity. But there's a problem hanging in the air: Pot is still illegal.

Hard times, meet high times.

Freewheeling California and Colorado typically come to mind whenever anyone mentions easy access to marijuana, even for medical purposes. But with state-budget crunches forcing lawmakers nationwide to expand their minds to new revenue sources, opposition to pot is going up in smoke.

In a trend that experts say is likely to continue, even a number of states you don't normally associate with flower power or the '60s are approving medical-marijuana sales.

Two recent examples:
Which states have legalized medical marijuana?
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•In New Jersey, Republican Gov. Chris Christie -- a presidential favorite among many conservatives (though he's not a candidate) -- last month issued licenses to several pot dispensaries that hope to be up and running by the end of the summer. Lawmakers approved the sale of medical marijuana last year, something Christie had opposed.
•In Arizona, which has voted for the Republican presidential candidate in nine of the past 10 presidential elections, the state's Department of Health Services is currently handing out medical marijuana cards. Legalized medical marijuana was approved in a referendum last November by voters, many of whom presumably had tax dollars on their minds.
Meanwhile, in California, local governments are skimming ever more off the medical-marijuana business. In the past year, Berkeley and Los Angeles have imposed new taxes on legalized pot sales.

"One of the reasons we are seeing states having more of an interest in cannabis is because of the revenue it can generate," says James Pakulis, the CEO of General Cannabis (CANA, news).

His company is one of a number of emerging businesses that help get medical marijuana to users. The sector is seeing rapid growth and by some estimates could double over the next few years.

As with any moneymaking trend, there are investing plays in this medical-marijuana boom that present "unique opportunities to entrepreneurs and investors," says Kris Lotlikar of See Change Strategy, a firm that specializes in analyzing new industries.

But this industry faces some unusual dilemmas, including this huge one: A lot of it is still illegal. So while there are some very mainstream ways to invest in this trend, others definitely walk a thin line.

Is prohibition passé?
So should pot be illegal? Opinions differ, but polls show broad public support for legalized medical marijuana. And given budget needs, lots more states will likely be joining the 15 that have already approved the sale of marijuana for medicinal purposes. Justin Hartfield, the CEO of WeedMaps.com, an online guide to medical-marijuana dispensaries that sell the plants, thinks most states will approve medical marijuana over the next 10 to 15 years.


The big business of Pot
It's already a big business. Hartfield puts the number of pot dispensaries nationwide at about 2,000, mostly in California and Colorado. They sell about $1.7 billion worth of marijuana a year, which will double over the next five years, according to a See Change Strategy report called "The State of the Medical Marijuana Markets 2011." Pakulis, of General Cannabis, thinks that estimate is way too low. He puts annual sales at $4 billion to $5 billion.

Whatever the numbers -- and it's notoriously difficult to cut through the haze in this shadowy commodity sector -- sales are likely to grow rapidly over the next five years, especially if President Barack Obama stays in office.

Despite approvals in some states, marijuana possession of any sort is still illegal under federal law. But in 2009, the Obama administration instructed Drug Enforcement Administration (DEA) offices across the country to mellow out and de-emphasize busts of marijuana dispensaries and their customers, in a dramatic policy shift from that of the previous administration.

If this policy continues, expect to see many more dispensaries pop up across the nation.

Entrepreneurs looking to start dispensaries or get into crop production need capital from investors. It means growth of ancillary businesses for such wide-ranging products and services as bongs, security, insurance, hydroponic equipment used to grow pot indoors, and fertilizer.

But the legal dispute also means that the medical marijuana industry could disappear if the mood in Washington changes.

Investing in pot
There are other reasons for investors looking to make money on this trend to be careful. Most of the pure-play marijuana stocks are the market equivalent of a bunch of stoners stumbling out of a Grateful Dead concert -- penny stocks with little in the way of earnings or revenue growth. I looked at just about all of the ones trading for under 50 cents a share, and they all look to me like bad seeds to be avoided.

But there are a few ways to invest in medical marijuana that look reasonably solid.

The most obvious pure play is General Cannabis, which trades at around $4.50 a share as a pink-sheet stock. It has two main lines of business in medical marijuana that produced $1.2 million in profit on $7.7 million in revenue last year.

Its General Health Solutions division helps manage medical-cannabis clinics. It assists doctors with things like billing, collections, hiring, site location and marketing. Its call center, part of its marketing effort, was recently getting about 800 calls per day and making hundreds of doctor's appointments each day for marijuana smokers. A doctor can write a "letter of recommendation" -- because you can't write a prescription for an illegal drug -- that lets users buy from pot dispensaries. This division manages 14 medical offices in California and hopes to move into new states and increase clinics under management to 20 this year.

The other main division, WeedMaps Media, operates the WeedMaps.com website. The site helps people find medicinal-cannabis dispensaries, which pay a fee to be listed. WeedMaps already covers 1,800 of the country's roughly 2,000 dispensaries. So growth here will depend in part on more states approving medical marijuana.

Another way to get pure-play exposure to medical marijuana is through ArcView Angel Network. It's a startup that helps people with at least $50,000 find and invest in medical-marijuana-related business in areas like insurance, packaging, consumption devices and growing supplies. It doesn't raise money for dispensaries or growers.

ArcView Group CEO Troy Dayton says a few hundred investors and entrepreneurs have already contacted him. Dayton's partner, Steve DeAngelo, runs a large dispensary called Harborside Health Center in Oakland, Calif., so they have some direct experience with the business.

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