Cannabis companies in the US seeking to raise money have turned their attention to the Canadian public market, as the risk associated with the drug remains unaddressed.

Investors who have entered the cannabis space in Canada have seen a profusion of opportunities with new companies–and established ones–expanding their reach and product line into other markets. Across the border, though, lies additional opportunity with an added layer of risk.


The public cannabis market in the US has consisted of Canadian companies with listings on the OTC Markets as well as US-based companies making a push in various cannabis-related businesses, including operators of dispensaries and growing facilities, or companies offering their own cannabis-related products.

Besides OTC listings, the US-focused companies are able to raise money through another public exchange, the Canadian Securities Exchange (CSE). This network has been accepting companies operating in this space, in spite of the fuzzy legal issues.

However, besides the obtuse position of cannabis on a legal framework for investors, there have been companies that despite the promise, have left much to be desired, with some attempting to merely capitalize on the rush of money going into the business of marijuana.

 

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Alan Brochstein is a cannabis analyst with 420 Investor who follows new ventures in the U.S. and the development of existing public companies closely. He told the Investing News Network (INN) he makes a distinction between the lower tier companies seeking public funds and the more established multi-state operators.

Brochstein explained he looks for the differences between focused companies working on their goals and new companies which can sometimes be “reincarnations” of older ones. He said he’s not sure investors often see the difference between these two types of companies.

Despite the foggy regulatory position for cannabis, investors have clamored for an opportunity in a larger market share thanks to states like California and Nevada which legalized both recreational and medical sales of cannabis.

“The Canadian public markets offer access to a lot of capital, with a lot of certainty and a lot of speed, and there is this appetite among global investors to invest in a U.S. play,” MedMen CEO and co-founder Adam Bierman told CNBC. “Specifically, global investors want to invest in a U.S. play that has California exposure. Now is the time where it makes the most sense.”

MedMen is an operator based in California seeking to go public on the CSE. At the Canaccord Genuity Cannabis Investor Day Conference in Vancouver on (January 12), the company made its plans known to the investor audience.

Opportunity in the CSE comes with risk disclosures for investors

In order to list with the CSE, the exchange requests that companies are upfront with the risk factor shareholders could face when investing.

That request was largely met by signaling the Cole Memo as the protection for valid cannabis enterprises. This line of defense was erased in early January of this year when U.S. Attorney General Jeff Sessions rescinded the memo. Sessions has been vocal about his stance against marijuana, famously saying “good people don’t some marijuana.”

In 2013, former Deputy Attorney General Jim Cole sent a guidance memorandum, the Cole Memo, allowing states to legalize the drugs if their voters approved it, and as long as local officials kept it regulated within their state. This memo allowed the entrance of companies to the public markets, as long as they operated in legal states.

After Sessions established his own memorandum, the CSE announced it would be seeking a new risk disclosure from companies it believed needed them.

 

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Canadian Securities Exchange CEO Richard Carleton told Reuters they had reached out to 17 companies requesting public statements disclosing how the policy update from Sessions “could” impact their business.

“It seems to me the language has changed to ‘we’re relying on the principles of the Cole memo’ as opposed to the memo itself,” Brochstein told INN.

The list of companies the CSE contacted consisted of:

 

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Discussions circling marijuana legalitylegal-marijuana

Marijuana is an illegal substance classified as a schedule 1 drug, under the U.S. federal government. However, several states have worked to legalize the drug, either medically or recreationally and in some instances for both.

Thanks to Sessions’ update in policy, attorneys general all over the country can, if they chose to, enforce federal law when it comes to the cannabis companies. Despite this option, 18 attorneys general have joined forces in seeking Congress to enact policy that would allow companies to engage with U.S. banks.

Currently, the market is awaiting the agreement to keep the Rohrabacher-Blumenauer amendment. A policy protecting the marijuana industry by prohibiting the use of federal funds by the Department of Justice, to go after medical cannabis in the states where it has been declared legal.

“This is a wait and see type of moment and we really don’t know exactly how things are going to play out,” Brochstein said, since the continuation of Rohrabacher-Blumenauer depends on the pending budget policy.

Brochstein said the deadline is slated for February 9, but he has heard it could be pushed all the way to March. “They just keep, kicking the can. I rather them just kicking the can than to have a new budget that excludes Rohrabacher–Blumenauer,” Brochstein said.

Could the risk for investment in American cannabis be overblown?

When it comes to all the risk involved with the stocks on the CSE operating in the US, many advisors have, at times, dismissed these companies. This conversation surrounding these stocks was demonstrated at the Lift Cannabis Expo in Vancouver, as a panel of cannabis financial advisors said their attention was mostly on Canadian companies only–except for one panelist.

John Medland is a partner with Blair Franklin Capital Partners and acted as an outlier on his stance with cannabis stocks focused on the US market. During the panel, he said the risk associated with the US market is overblown.

“I think there is more opportunity for the CSE-listed companies than people sometimes give them credit for,” Medland told the audience. When asked why exactly he saw it this way, Medland later told INN he doesn’t see the worst case scenario becoming true for cannabis companies in the US.

“I think there is this grassroots movement from the states and the local government that the feds won’t want to push back on and also I don’t think it’s going to be popular politically,” Medland said.

Medland added the increase of companies operating in the US and seeking to list on the CSE could push for a resolution on the issue of clarity. However, he doesn’t expect market regulators to take a clear stance.

“[W]e could see some very large companies come north to list on the CSE and I think that may make the TSX uncomfortable and push the regulator to get more clarity,” Medland said.

Investor Takeaway

A risk is inherent with investments, but when it comes to the US cannabis market investors have to understand there’s an extra level of risk that comes from the unclear policy in the country. The unpredictability of the current administration makes it even harder for experts to predict the outcome of this case.

“I think the whole US cannabis market may not be accurately reflecting some of the risks in general,” Brochstein said when asked on the level of risk associated with investments in the US cannabis market.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

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

Editorial Disclosure: Friday Night and High Hampton Holdings are clients of the Investing News Network. This article is not paid-for content.

 

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Cannabis Market Update: Q3 2020 in Review

Click here to read the previous cannabis market update.

During the first few months of investment time in 2021, cannabis faced some volatility alongside optimism about federal changes in the most important market for the drug.

The cannabis business found its stride during Q1 thanks to policy change signals and consolidation.

To find out more, the Investing News Network (INN) asked experts about progress in the market during the first major period of the new year, and which developments investors should watch out for.

 

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Cannabis market update: New York and US potential boost operations

New York state’s legalization of recreational cannabis was a huge Q1 announcement that added pressure to the US federal government when it comes to cannabis policy, said George Mancheril, co-founder and CEO of Bespoke Financial, a debt financing business with a particular focus on servicing cannabis businesses.

“It’s going to add to the chorus of voices in the federal scene to basically move sooner rather than later,” he explained to INN.

Following the US election in 2020, the momentum for cannabis businesses went on the upswing, as did company valuations, with the idea of expansion at the heart of it all, according to Mancheril.

Before starting Bespoke Financial, Mancheril learned from traditional investment banks, working in the lending, fixed income and debt markets with Goldman Sachs (NYSE:GS) and Guggenheim Partners.

Nawan Butt, portfolio manager with Purpose Investments, agrees with Mancheril. The financial expert told INN the ongoing legalization process seen in the US market is leading to expansion.

“It’s becoming more of a national move, then small pockets of proliferation. That’s very exciting about cannabis right now,” said Butt, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ).

This proliferation effect is causing a change in valuations and enthusiasm for US-based operations. Mancheril told INN that by the end of Q1, multi-state operators (MSOs) had raised approximately US$3.3 billion.

The cannabis lender said he sees the industry as having grown from the woes of 2019; it is now undergoing a return to form as excitement about the US opening up increases.

The expert explained that there is likely to be a windfall of capital in the wake of major federal changes in US cannabis policy, although the timeline for these changes is becoming increasingly hard to predict.

Leading up to that capital influx, Mancheril said he wants to see operators really drill down on the value of desired assets and whether they make sense.

“What I’d hope is that we continue to see bullish sentiment, but with some measure of responsibility, and let’s not just get over ahead of ourselves,” Mancheril told INN. “The idea is let’s minimize the volatility and continue growing responsibly.”

 

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As far as struggles go, Butt explained that the cannabis industry has cemented itself as a growth-type sector, and as such there are macro pressures affecting the way these assets operate.

“We’ve seen this preference for cash flows at growth in the current or in the near future, rather than in the far future, and that’s what we’re seeing as far as valuations go in the broad market,” Butt said.

Cannabis market update: Volatility continues to rule as industry foundations build

Despite the industry’s potential and the growing pains it has gone through as a whole in both the US and Canada, volatility remains a key factor in the cannabis investment scene.

Butt explained that the current shareholder base, which is dominated by hedge funds and retail investors, still lacks enough institutional support to avoid the day-to-day volatility cannabis has come to be known for.

These two investor groups, Butt said, can be easily spooked and excited by the news of the day when it comes to their investments.

“A lot of these institutions’ strategies are not about short-term profits, but they’re about long-term sustainability of the businesses themselves,” Butt said.

“That’s why you see a lot of volatility in the space, and that’s essentially what we’ve seen over the past, I’d say, three to two months as well,” he added.

That means investors shouldn’t expect an end to volatility anytime soon.

“It’s not about whether we continue to expect volatility, because we do,” Butt said. “We really think that the volatility will be taken out when the shareholder base becomes more institutional, but it’s really about understanding why there is volatility in the first place.”

Cannabis market update: Canadians talk up US business, but questions remain

A surge of mergers and acquisitions has taken over the Canadian cannabis sector recently as more producers see potential in America.

One of the biggest announcements in this regard came when Organigram Holdings (NASDAQ:OGI,TSX:OGI) secured a C$221 million investment deal from British American Tobacco (NYSE:BTI,LSE:BATS).

Using the funds, the two will work in tandem to develop new branded products designed for the international stage, including in the US. Organigram CEO Greg Engel previously told INN that the US represents a critical opportunity for Canadian companies, but the entry point isn’t as clean as it could be.

 

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While the long-term potential may be exciting for investors, Butt told INN he’s still unsure how the approach will work for Canadian companies.

The Purpose Investments expert said there will be plenty of space for the biggest Canadian names to pursue US market entries, beyond the initial hemp-derived CBD moves some operators have mde, since the US represents the biggest market in the world.

“But there’s just way too many unknowns right now to say exactly what that participation is going to look like, or when that participation will happen,” he said.

“What we do know is that currently the US MSOs are in a wonderful sort of position to expand on their market leadership that they have. And it will be tough for Canadians to come in and compete with them,” Butt said.

Canadian players still retain the upper hand at times in terms of valuation, which is confusing for both Butt and Dan Ahrens, chief operating officer and portfolio manager at AdvisorShares.

“The performance in quarterly earnings of US companies has been rather spectacular. They’ve knocked it out of the park in most instances,” Ahrens told INN.

Butt praised the recent performance reports from MSOs across the board, pointing to year-over-year growth lines and projections for continued positive performance. In his view, share prices still don’t reflect company value. “Those are really being discounted at this point,” Butt told INN.

“We’ve seen the Canadian licensed producers be really hot stock performance-wise, outpacing the US (MSOs), and I’ll say it’s rather nonsensical to me,” said Ahrens, who oversees the AdvisorShares Pure Cannabis ETF (ARCA:YOLO) and the recently launched AdvisorShares Pure US Cannabis ETF (ARCA:MSOS).

Cannabis market update: Investor takeaway

The cannabis investment proposition finds itself at an interesting moment in time, as the entire sector eagerly awaits confirmation in the US at the federal level.

While for the Canadian companies waiting on the sidelines, this development may feel like a major necessity to address current financial struggles, for US-based operators, the heat around the corner could represent future positivity for already thriving operations.

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