The risk that Federal authorities might crack down on the market he serves, cultivation of a substance illegal by Federal statute, has loomed large in Derek Peterson’s business and financial strategy. In 2010, the former Morgan Stanley banker founded a company called GrowOp Technology to provide equipment for medical marijuana growers, and took it public in 2012 via a reverse merger that renamed the company Terra Tech Corp. TRTC +12.69%

When legal risk proved to be an obstacle to raising institutional capital, he developed  a secondary business of indoor agriculture, and acquired greenhouse operators to develop that business, offering reassurance to investors that the company wasn’t entirely dependent on sales of an illegal substance.

Now, with marijuana increasingly legal at the state level, and in the wake of Attorney General Eric Holder ’s clarification in August that the U.S. Department of Justice would not seek to block those state laws, Terra Tech’s greenhouse infrastructure may pay off in an unexpected way. Mr. Peterson hopes to see some relaxation of the Federal prohibition of cannabis, and is looking forward to making that greenhouse infrastructure the basis for a national marijuana business. In fact, he says he is already working on a branded marijuana product for nationwide distribution. He spoke with Risk & Compliance Journal about managing strategic risk in an illegal industry.

How has the legal status of marijuana affected your growth?

Peterson: What people had a difficult time assessing was the dichotomy between state and federal law.  Since Holder’s statement, I wouldn’t say that the floodgates have opened up, but they have loosened in terms of investor interest. We have taken sales from half a million to a little over $2 million this year, and are expecting next year something a lot more significant than that. That brings in some level of confidence, and capital behind it, so we are seeing a resurgence of interest from institutions. We teamed up with a mid-tier investment bank, Aegis Capital in New York, who raised around $2 million this year, and we raised about a million dollars on our own, for a total of about $3 million in 2013.

How is your strategy changing as the legal risk of the business changes?

Peterson: What we are looking to do in 2014 is put a lot more focus back on the medical cannabis side of things. The macro business plan is pretty similar. We have a fiduciary responsibility for shareholders’ money and live in the reality that the Feds could still come in and shut the industry down. Administrations can change, points of view, etc. can change.

How have you dealt with that risk?

Peterson: I didn’t want to be a one-trick pony, so I started looking for ancillary businesses. That’s when we started looking into urban gardening, making acquisitions and doing joint ventures with farms around the country that were growing flowers, and convincing them to grow food – herbs, produce and leafy greens, etc. We had good access points with major retailers, so it made sense for us to diversify.

Fast forwarding a couple of years from today, one reason we wanted to build a large sustainable hydroponic footprint was, yes, to grow food,  but down line when the Feds do remove restrictions and begin to ease, you will be able to cross state lines with cannabis. Here was a way for us to build out an infrastructure ahead of time, put in an operating business that was shareholder friendly, and our ultimate goal was to release a brand of cannabis in the industry. We believe it is timely, and have worked on branding. We will probably be announcing some brands this year in anticipation of Federal regulators reclassifying cannabis from schedule 1 to less than schedule 1.

What are the risk-opportunity tradeoffs ahead?

Peterson: We are obviously looking at moving closer to the plant. We may not wait for a complete green flag from the Feds. We are trying to balance our entry to be in the market before competitors arrive. If Philip Morris comes in, or pharma companies, we want to grow for them. Look at the indoor cannabis farming that takes place in the U.S. now, warehouse farming, with high intensity lights. It’s not sustainable and it’s not scalable. It’s not the healthiest way to grow for people and the planet. The only way to grow cannabis on a large scale commercially and maintain quality is in closed, Dutch-style greenhouses.  I want to make sure we have one in every major city.

You mentioned that you are developing a brand. How can you do that while the product is still federally illegal?

Peterson: The thought process is we will incubate that privately, test it privately, and then when we feel tolerance is there, introduce it. We can test market the branding through our club [permitted under California medical marijuana laws], introduce it into the High Times cup and other competitions. Meanwhile we can develop the brand protocols, begin to put best practices together, develop strains we want to carry, etc., and we can develop the branding around that.  Everything we do with branding will be done under the private company with the ultimate goal of migrating into the public vehicle.