How Canadian Public Companies Invest in U.S. Cannabis

Coming to a cannabis business near you?We represent investors from all over the world making plays in state-legal cannabis. The phenomenon began in earnest a couple of years ago, when Oregon became the first U.S. state to open its marijuana industry to non-residents. Some of those early deals were backed by Canadian public money, and the phenomenon of Canadian investment has only increased over time. In 2018 alone, we have closed three good-sized acquisitions in Oregon on behalf of Canadian public companies, with still more in the hopper here and in California.
The fact that Canadian money is flowing into adult-use states has received an uptick in media attention lately, especially after Toronto-based Cronos Group Inc. became the first cannabis stock to list on the NASDAQ exchange last month. Cronos Group is a large company, although it is outside of the “big four” Canadian public cannabis companies—consisting of Canopy Growth Corp, Aurora Cannabis Inc., Aphria Inc. and MedReleaf Corp.—each of which is valued at more than C$1 billion. According to Bloomberg, pot companies on Canadian exchanges have a combined market value of about C$32 billion. That’s a lot of buying power.
Most of the Canadian companies we represent are not new companies, and most of them were not cannabis companies until recently. Instead, the preponderance were junior mining companies, of all things. These stagnant prospector vehicles generally ceased operations when the Canadian mining industry faltered around ten years ago. Some of them still hold permit rights to mining claims in Canada and other countries, which remain present as curious footnotes on their listing materials. Generally speaking, though, the companies are little more than resuscitated shells that have paid ongoing listing fees on the prominent Toronto Stock Exchange (TSX) or the more limited TSX Venture Exchange (TSXV) over the past decade.
Resuscitated junior mining companies have inherent value for cannabis investment because they are already publicly listed, and do not have to undergo a full securities commission review or file a prospectus in order to access public money. They are perfect vehicles to raise money quickly. As such, many new entrants go public via a reverse takeover and use the old mining company (or oil and gas company) shell as the listing vehicle. There are probably 40 or so of these former shells now operating in the cannabis space, and our understanding is that clean shells are getting harder to find.
As far as new cannabis listings in Canada, including for U.S. companies, the go-to exchange is the Canadian Stock Exchange (CSE). That exchange lists close to 60 cannabis-related companies, many of which are U.S. entities raising cash north of the border due to the near impossibility of acquiring a spot on a U.S. exchange. As with the junior mining companies, a significant portion of the cash raised by CSE marijuana companies is being plowed into U.S. based enterprises. Other CSE-listed companies are focused on the imminent Canadian national market, and a few are making inroads in Europe, South America and elsewhere.
Given the influx of new marijuana listings on Canadian exchanges, and the uptick of industry consolidation generally, we do not expect the surge in Canadian investment to slow down anytime soon. Most of the deals we are seeing involve the acquisition of a controlling interest in a closely-held U.S. pot venture by the widely-held Canadian entity (usually through a subsidiary). Valuation is all over the board, and consideration often includes a mix of cash, debt and stock in the public entity.
Back when most of these junior mining companies were formed, it’s safe to say that no one expected they would one day be prospecting cannabis in California, Oregon and further afield. Then again, regulators in those states likely did not foresee what foreign investment might look like back when they opened the gates. In all, the Canadian listing phenomenon is another fascinating turn in the development of state-legal cannabis. You can expect many more to come.

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