Pending legislation creates uncertainty in U.S. markets
Depending on a number of factors, including the slowdown of Canadian public markets and how legislation in several states and at the federal level in the United States develops, 2019 may be a banner year for cannabis companies seeking to go public in the U.S. If these factors do not develop in favor of the cannabis industry, the trend for Canadian public deals may continue with investors and cannabis companies potentially looking at what happens in the U.S. presidential election in 2020 to determine when to jump into the U.S. public markets.
As of the writing of this article, 12 marijuana stocks trade on the United States’ national exchanges (five on the Nasdaq and six on the New York Stock Exchange):
– Aphria (NYSE:APHA), a Canadian cannabis cultivator;
– Aurora Cannabis Inc. (NYSE:ACB), a Canadian cannabis cultivator;
– CannTrust Holdings Inc. (NYSE:CTST), a Canadian cannabis cultivator;
– Cronos Group (NASDAQ:CRON), the first Canadian cannabis cultivator to list on the Nasdaq;
– Canopy Growth Corp. (NYSE:CGC), a Canadian cannabis cultivator that made news last year as a result of multiple investments in the company by spirits manufacturer Constellation Brands (NYSE:STZ);
– GW Pharmaceuticals plc (NASDAQ:GWPH), an English pharmaceutical company focused on the development of cannabinoid medicines, including Epidiolex, the only CBD-based drug to have been approved by the U.S. Food and Drug Administration;
– HEXO Corp. (NYSE:HEXO), a Canadian cannabis cultivator that made news with a joint venture with Molson Coors Brewing Co. (NYSE:TAP);
– Innovative Industrial Properties (NYSE:IIPR), a real estate investment trust (REIT) that is focused on indoor medical marijuana cultivation warehouses;
– Therapix Biosciences Ltd. (NASDAQ:TRPX), an Israeli pharmaceutical company focused on the development of cannabinoid pharmaceuticals;
– Tilray, Inc. (NASDAQ:TLRY), a Delaware-incorporated cultivator with all of its operations conducted outside of the United States. Like Canopy Growth and HEXO, Tilray also made news last year with its joint venture with spirits manufacturer Anheuser-Busch InBev NV (NYSE:BUD);
– Village Farms International (NASDAQ:VFF), a greenhouse operator that, through its joint venture Pure Sunfarms, is a licensed producer and supplier of cannabis cultivation products; and
– Zynerba Pharmaceuticals, Inc. (NASDAQ:ZYNE), a Delaware-incorporated pharmaceutical company focused on the development of cannabinoid pharmaceuticals.
Besides the spirits industry players listed above, there are numerous other exchange-listed companies that have involvement in the cannabis industry, but are not necessarily cannabis-only companies, such as Scotts Miracle-Gro Co. (NYSE:SMG) and Gardner Denver Holdings Inc. (NYSE:GDI). There are also hundreds of cannabis companies quoted on the OTC Markets Group’s various marketplace tiers, including a number of cannabis exchanged-traded funds (ETFs).
Putting aside OTC-quoted cannabis companies and companies not solely focused on cannabis, the exchange-listed companies can be placed in four categories: (a) Canada-based cannabis cultivators that first went public in Canada and then cross-listed onto American exchanges (Aphria, Aurora, CannTrust, Cronos, Canopy); (b) Canada-based cannabis companies that first went public in Canada, were quoted on the OTC and then uplisted to American exchanges (HEXO, Village Farms); (c) U.S.-based cannabis cultivators that do not have cultivation operations in the U.S. (Tilray); and (d) cannabis companies whose operations are only ancillary to the cultivation of cannabis (GW Pharma, IIPR, Therapix, Zynerba).
Trends for 2019
– Canadian companies: Many of the cannabis companies that went public in Canada used a transaction structure called a reverse takeover (RTO). In the RTO structure, a private company merges with and into a public shell company, taking over the shell company’s operations toward the private company’s cannabis business and then changing the name of the company to the private company’s name.
Because the cannabis companies that have already done RTOs have used up the most viable public company shells, it will become harder for companies to find “clean” shells to use for RTOs. Furthermore, as will be discussed further below, as market acceptance of certain areas of the cannabis industry open up in the United States, combined with Canada’s difficulties with handling legalized cannabis at volume, the appetite for new Canadian public deals will likely decrease significantly in 2019.
Similarly, as interest and appetite for Canadian public deals wane while U.S. markets wax with greater acceptance of cannabis companies, it seems that U.S.-based companies that are listed on Canadian exchanges will eventually look to the public markets on their home turf. However, this shift may not occur in 2019 as there is still a healthy amount of capital available in Canada, and the U.S. markets are still uncertain with legislation such as the SAFE Banking Act (Senate Bill 1152) and the STATES Act (Senate Bill 3032) working their way through Congress. Furthermore, it is not clear at this time how many more states will successfully legalize some form of marijuana in 2019.
– Companies without U.S. operations: Tilray may remain a lonely outlier in this category, and it is uncertain if the U.S. exchanges would still allow a company like Tilray with “plant-touching” operations only outside the U.S. to list in 2019.
However, an interesting development occurred with the passage of the Agriculture Improvement Act of 2018 (more commonly referred to as the Farm Bill). The Farm Bill legalized hemp by defining it as an agricultural commodity rather than a controlled substance. Thus, it is extremely likely that several hemp-only cultivators (whose operations are now legal in general) will file paperwork to conduct an initial public offering in the United States with the express goal of listing on Nasdaq or the NYSE. Hemp-based companies seeking to go public may be the hottest area for public transaction in the cannabis industry in 2019.
– Companies with ancillary operations: As interest in Canadian deals slows down and the U.S. markets open up, it is likely that a number of companies that don’t “touch the plant” will also go public domestically in 2019. While this category is currently dominated by pharmaceutical companies, it seems highly possible that another real estate investment trust (REIT) like IIPR will go public in 2019. As IIPR only focuses on medical cannabis cultivation facilities, there are plenty of verticals that a REIT wishing to differentiate itself could focus on, such as retail operations, logistics or genetic engineering. Another interesting twist on this differentiation concept is that a hemp-focused REIT would likely have a smoother road to listing on a national exchange, given the legalization provided by the Farm Bill.
Other “non-plant touching” business outside of the REIT strategy, such as vape pen manufacturers, LED lighting or hydroponic equipment providers focused on the cannabis industry (or even just the hemp industry), may also gain traction in offerings in the U.S. public markets in 2019.
Marc Adesso is an innovative capital markets, corporate finance and securities attorney representing clients across the nation. Issuers, investment banks and high net worth individuals in a wide range of industries rely on his unique insight with regard to capital markets matters ranging from IPOs, ICOs, REIT formations, follow-on offerings, shelf takedowns, Rule 144A offerings, block trades, ATMs, PIPEs, reverse mergers, debt offerings and other public company transactions, including takeover defense, proxy contests and matters involving shareholder activism.