Colorado marijuana growers hoping for a Rocky Mountain high

The pot industry in Colorado is undergoing a massive makeover as it prepares to begin selling marijuana legally for recreational use under state law. Businesses are ramping up production, and trade associations are cleaning up their image, anticipating what could be a billion-dollar industry.

But the entrepreneurs who are hoping to cash in on the "green rush" starting in 2014 are struggling with the unique challenges of conducting a business that the federal government considers a crime. Even after Coloradans voted in November to legalise marijuana, would-be pot producers and retailers have trouble securing business financing because banks won't give them loans – and most of the time, not even an account.

State lawmakers are about to shake up the marketplace in unpredictable ways with regulations covering everything from the shape of containers to the labelling required for pot-laced brownies and other "infused products". And business owners say they're anxious about the intentions of the federal government, which could seize millions of dollars they have invested or even send them to prison.

At a hearing in the Senate judiciary committee in March, attorney general Eric Holder said that he would soon announce a response to the initiatives in Colorado and Washington last year legalising pot. The federal government, which deems marijuana a controlled substance, could upend the plans of Colorado entrepreneurs at any moment.

Kristi Kelly, 35, went into business three years ago, selling marijuana for medical purposes, as was previously allowed by Colorado. She now runs three stores and two industrial indoor gardens that constitute her Good Meds company.

Wearing a blue blazer and knee-high leather boots, Kelly was more dressed up than most of her customers and employees. Some sat on couches trimming dried marijuana plants in hooded sweatshirts and dreadlocks. Jimi Hendrix played in the background.

She led the way through one of her "grow facilities", a 6,000 sq metre garden where plants at different stages were segregated into different rooms. "We have about 10 rooms that look exactly like this," Kelly said over the hum of a humidifier. A chain of 1,000-watt fixtures showered bright light on dozens of plants so heavily laden with large flowers that they were supported by a net. A valve on the wall periodically spurted carbon dioxide.

A Washington DC native, Kelly has a high-energy demeanour that seems more at home on the east coast than in laid-back Denver. A former ad agency executive who once managed accounts for government agencies such as the US Mint, she said she deals with the uncertainty of operating in a legal grey area by keeping a close watch on risks she can control, such as security and compliance with state rules. "I tend to stay as conservative as possible on as much as possible," Kelly said.

More than 500 businesses are already selling medical marijuana, and many are now preparing to burst into the new marketplace for recreational pot. These dispensaries sold $186m worth of cannabis for medical purposes in the last fiscal year, according to tax receipts. The Colorado legislative council predicts that figure could rise to $920m next year once the new constitutional amendment legalising recreational sales takes effect. This estimate does not account for the anticipated influx of pot tourists who are expected to arrive in search of a Rocky Mountain high. With steep excise and sales taxes proposed, the industry could be a big revenue booster for the state.

Many of the entrepreneurs, like Kelly, have had little previous experience with marijuana. "We're not those Woodstock hippies who have had secret grows in the mountains for decades," Kelly said. "We're business people."

This isn't business as usual, however. The federal government has cautioned many banks against handling marijuana finances. Many smaller pot businesses have been unable to find a bank to take their money and must operate on a cash-only basis, creating vexing problems with security and accounting. Kelly said she lost four bank accounts last year as one institution after another said it could not risk doing business with her company.

"The people who are lucky enough to have bank accounts guard them with their lives," she said.

In her Lakewood, Colorado store, a 2-tonne safe is bolted to the floor behind the counter, holding a dozen 4.5 litre-sized jars full of cannabis. With a doctor's prescription, you can buy marijuana in just about any form in this store: rolled into joints, filling an e-cigarette cartridge, baked into chocolates and cheesecake cupcakes, or concentrated in pills, lemon drops, Cheeba Chews, hard candies and liquid tinctures with flavours such as orange and agave.

Kelly says she has to pay premium rent for her storefront because landlords are wary of marijuana businesses, considering them risky ventures that can attract an undesirable clientele. She's also spent thousands of dollars upgrading her operation's security to guard against thieves who could be attracted to the copious amounts of cannabis and cash.

Making her financial situation even worse, distributing marijuana isn't a legitimate business expense under the tax code, so her company can't deduct most of its expenses. Kelly's business lost money last year, she said, after paying its income taxes. Nor can these retailers use many of the traditional means for promoting consumer goods, such as advertising. Denver bans outdoor ads for marijuana, and most mainstream media outlets won't run them. Kelly recently tried to sponsor a radio public service announcement about safe driving, but had her money returned by the station management.

Complying with a thick and evolving book of state regulations is another challenge. The rules, for instance, require each marijuana plant to be placed under video surveillance and tracked from seed to sale, at times by carrying a barcode.

Many more regulations are coming. Under Amendment 64, which voters approved in 2012 to "regulate marijuana like alcohol", the legislature must tax and oversee cannabis stores for the general public as well. A taskforce appointed by the governor has issued recommendations for those laws, which must be finalised before the legislative session ends this spring.

Many medical marijuana business owners, including Kelly, opposed Amendment 64 over concerns that it would upturn their growing businesses or prompt action from the federal government. But now she and many other owners see the legalisation of pot as a great business opportunity.

And medical marijuana businesses are seeking to have the tight regulations they follow expanded to recreational use, deploying a bevy of lobbyists to work the taskforce and the legislature. That has led advocates for liberalisation to complain that the industry is trying to limit competition. For the first year, only retailers that sell medical marijuana will be allowed to sell pot for recreational purposes.

Business owners counter that by tightly regulating their industry, Colorado has avoided the kind of federal scrutiny given to other states, such as California, which largely leave regulation of medical marijuana to local jurisdictions.

The US Drug Enforcement Agency is watching Colorado, but has yet to intervene in a dramatic way. The agency sent letters to some Colorado dispensaries within 300 metres of schools, warning them to shut their doors. Some business owners took that as a tacit endorsement of the state's approach.

Federal policy on marijuana businesses will likely be fluid for some time, and disruptions in the marketplace may yet come. For Kelly, it won't be the first time.

"We've changed our business plan, like, five times," she said.