Key Cannabis Players Launch Venture Capital Companies

- September 19th, 2018

Canopy Rivers and Australis, new public cannabis investment companies from two of Canada’s major producers, are hitting the public market this week.

Investors will gain two new options in the public cannabis space this week, and they’re backed by two of the biggest Canadian cannabis companies out there.

Canopy Rivers, a division of Canadian licensed producer behemoth Canopy Growth (NYSE:CGC,TSX:WEED), is expected to launch on Thursday (September 20), while Australis (CSE:AUSA), a spinoff of Aurora Cannabis (TSX:ACB), listed on Wednesday (September 19).

Canopy Rivers will trade under the ticker symbol “RIV” on the TSX Venture Exchange, while Australis is on the Canadian Securities Exchange under the ticker symbol “AUSA.”

The debut of these two stocks represents a move from leading cannabis producers to seek additional entry points in the space: investment in technologies and businesses within the cannabis market.

These venture capital companies will monitor the space and seek businesses worthy of investment. A key difference between the two will be the level of involvement from the respective producers.

Australis will seek opportunities in the US market, and Aurora has announced no involvement in the management or decisions of the company. However, the cannabis producer holds the right to purchase back an ownership stake within the next 10 years.

This type of restriction is similar to the one implemented by Aphria (TSX:APH) for Liberty Health Sciences (CSE:LHS). Both Aphria and Aurora want to retain the option to enter the US market once the laws are more favorable.

“With the completion of our over-subscribed private placement, we have the funds to start executing on these opportunities immediately and deliver growth,” Scott Dowty, CEO of Australis, said in a statement.

Selected shareholders of Aurora were given one unit of Australis for every 34 outstanding Aurora shares as of August 24. The company further explained:

Each unit consists of one common share and one share purchase warrant of Australis. Each warrant entitles the holder thereof to acquire one share at an exercise price of C$0.25 per Australis share, on or prior to 4:00 p.m. (Eastern Time) on the date that is one year after the Distribution [September 19, 2018].

Alternatively, Canopy management will be heavily involved in decision making from Canopy Rivers. The investing venture has been operating throughout 2018, and is only now launching publicly.

Canopy Rivers completed a business combination with shell company AIM2 Ventures. The company’s subordinated shares will still give a vote per share on shareholder matters.

Canopy will will retain 25 percent of the stock, and will control nearly 90 percent of voting power due to dual-class, multi-voting share structure in Canopy Rivers, according to the Financial Post.

Bruce Linton, co-CEO of Canopy and acting CEO for the new venture, explained that the company continues to see a pattern in the overall space in terms of the companies it wishes to invest in or that are seeking investment from Canopy:

“There was this theme that kept coming up in the cannabis space — companies that either wanted our money and help, or that we wanted a small percentage of. And they were all somewhere along the mistake-making spectrum, but some of them had really good ideas, so we thought ‘OK, how about we have a dedicated company that really tries to figure out what might work, what might not work, and become early minority investors’.”

Linton also compared the public trajectory of Canopy Rivers to an exchange-traded fund (ETF). However, he stopped short of saying the company is intending to outperform ETFs.

As part of its most recent quarterly release, Canopy said that Canopy Rivers holds a joint venture for the creation of a new company called PharmHouse, which will seek to become a cannabis licensed producer in Ontario.

“PharmHouse has also agreed to provide Canopy Rivers with a right of first offer of up to 50 [percent] to the cannabis produced by PharmHouse,” company documents state.

Investor takeaway

These new ventures open the door for investors to support investments in the cannabis space as leading companies seek to fill in the gaps with emerging businesses.

During Australis’ first day of trading, the company’s share price soared to a high price point of C$14.48. At market close the stock finished the day valued at C$2.93 per share.

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

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