SACRAMENTO, Calif. — Venture capitalist Steve Berg figured he had an unassailable business model.

Berg’s San Francisco firm, The ArcView Group, was pledging to find “angel investors” for start-ups offering products and services for California’s $1.5 billion medical marijuana industry.

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The chief federal prosecutor in San Diego is contemplating expanding a federal crackdown on the medical marijuana industry by going after newspapers, radio stations and other outlets that run advertisements for California's pot dispensaries. AP

But last week, U.S. prosecutors in California announced criminal prosecutions against targeted marijuana dispensaries and threatened landlords with property seizures.

Suddenly, the state’s burgeoning medical marijuana sector is dealing with fear and introspection. Industry advocates are calling for increased state regulation, thinking that could weed out bad actors in the trade — and ward off the feds.

The government’s action has left politicians, medical marijuana businesses and would-be investors weighing the risks of operating in the industry.

Berg, whose firm is looking to fund companies that provide legal services, sales software, marijuana vaporizers and other items for dispensaries, was a panelist last weekend at a pre-scheduled San Francisco forum on “jobs in the legal cannabis industry.”

The mood at the event was unexpectedly dour. The day before, California’s four U.S. Attorneys declared that the state’s medical marijuana law had been “hijacked by profiteers” and trumpeted charges against dispensaries and speculators allegedly raking in cash from purportedly nonprofit marijuana stores.

“Is this scaring the (expletive) out of investors?” Berg asked. “The answer is it’s not making it any easier.”

Assemblyman Tom Ammiano, D-San Francisco, said the federal actions are a signal that California lawmakers must enact state regulations “to provide clear lines” for legal medical marijuana distribution.

He pointed to Colorado, America’s second-largest medicinal pot market. Colorado has avoided federal raids while sanctioning for-profit marijuana stores and commercial cultivation with strict oversight, including mandatory video surveillance and state licensing of all marijuana workers.

“What is happening in Colorado is something we should emulate here,” said Ammiano, adding he would like to see a regulatory program but not necessarily for-profit operations.

But Sam Kamin, a University of Denver law professor who studies marijuana policy, said the federal crackdown in California is shaking the foundations of the medical marijuana economy everwhere, including Colorado.

“The bottom can fall out at any time,” Kamin said. “If the federal government decides right now it’s the end, it’s over tomorrow.”

Along with federal enforcement actions, the outcome of legal battles over Internal Revenue Service rules for marijuana stores could be a major factor in their survival.

Harborside Health Center in Oakland, Calif., is girding for a December court fight over an IRS demand for $2.4 million in penalties. Director Steve DeAngelo said the government, citing federal drug-trafficking laws, is prohibiting the dispensary from claiming routine business tax deductions, such as salaries for Harborside’s 100 employees.

“The legal medical marijuana industry has created tens of thousands of jobs,” said DeAngelo, who boasts that Harborside paid $1.1 million in taxes to Oakland and $2 million to California last year. “And the Obama administration wants to shut that down? Talk about a job killer. Talk about a tax killer.”

DeAngelo said he is telling “traumatized” medical marijuana users that Harborside will stay in business despite the federal threats.

The government says it isn’t targeting medical use. Criminal cases to date include a North Hollywood dispensary accused of shipping up to 600 pounds of marijuana a month to the East Coast and a Los Angeles attorney accused of reaping millions of dollars organizing cultivation networks for marijuana stores.

“They went after drug dealers,” said Lanette Davies, whose family operates the Canna Care dispensary in Sacramento. “I think their intention is to stop the abuses in the system.”

Davies blames some dispensaries’ marketing campaigns featuring women “with marijuana leaves over their breasts” for fueling federal authorities’ contention that the industry serves recreational users, not people with serious medical needs.

The irony of the current crackdown is that a 2009 U.S. Justice Department memo, by Deputy Attorney General David Ogden, is widely credited with spurring the explosion of medical marijuana businesses in California.

That memo said the government would target drug traffickers, not individuals who are “in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”

But a new memo this summer by Deputy Attorney General James Cole asserted the government would enforce U.S. drug laws in the face of a boom “in the scope of commercial cultivation, sale distribution and use of marijuana for purported medical purposes.”

“It was never the (Justice) Department’s policy to have a hands-off policy towards marijuana stores,” Sacramento U.S. Attorney Benjamin Wagner said Thursday on Capital Public Radio. He said pot stores surged in California in a “virtually unregulated free-for-all.”

U.S. Attorney Laura Duffy in San Diego said she may target TV and radio stations and print publications that run medical marijuana ads.

But the man who led the drive for California’s 1996 medical marijuana law scoffed at the notion the government could shutter the state’s teeming medical marijuana trade.

“It’s a lot of hot air,” said Dennis Peron, who years ago battled authorities over his pioneering San Francisco Cannabis Buyers Club. “There’s no way they’re going to do 2,000 jury trials” for marijuana stores.

Dan Rush, director of the “medical cannabis and hemp division” for the United Food and Commercial Workers International Union, said he will push for a ballot initiative to legalize a for-profit medical marijuana industry in California. Despite federal enforcement threats, his union continues to organize pot workers in the state.

George Mull, a Sacramento attorney who heads the California Cannabis Association, said he hopes lawmakers will put a ballot measure before voters to create state oversight for a “well-regulated” marijuana industry so that federal authorities “would be less likely to use their enforcement powers.”

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