What is that aroma?
Could it be the waft of weed from the guy ahead of me as we round the corner on Queen St. in Parkdale?
Or could it be the fragrance of a stock bubble in the making?
As we count the minutes until legalization, the reefer madness that has taken hold can be found not at the sedate dispensaries that have popped up hither and yon, but on the Canadian Securities Exchange. The CSE brands itself as the Exchange for Entrepreneurs and offers plentiful listing opportunities through the ease of reverse takeovers of, principally, junior mining companies. This fast-tracking of securities has turned into a big deal: a quarter of the 400-plus companies listed on the CSE are pot companies and in increasing numbers they are U.S. cannabis purveyors in search of a happy home.
Consider Green Thumb Industries Inc. (GTI), which has zoomed from a short-form prospectus filed in July to the closing of its bought deal financing for $80.3 million in August to inclusion in the CSE Composite Index in the third quarter of September to granting an over-allotment option to its underwriters before September was out.
In this instance, Bayswater Uranium Corp., a reporting issuer in British Columbia, provided the shell for GTI, which delisted from the TSX Venture Exchange and relisted on the CSE. On Wednesday, Cresco Labs, also in Chicago, announced its planned reverse takeover of B.C.’s Randsburg International Gold Corp., noting how “supportive” the Canadian market has been to U.S.-based cannabis companies.
On Friday, shareholders were scheduled to vote on the reverse takeover of Lead Ventures Inc., a junior exploration company in B.C., which, it seems only yesterday, was searching for copper up near Powell River. You will now know the company as Curaleaf Inc., a cannabis cultivating/processing/dispensing outfit based in Wakefield, Mass., with operations spread across 12 states. And so on.
The excitement gives a whole new meaning to the word “enabler.”
The U.S. operators have a number of shared characteristics and a common dilemma. The cannabis industry is illegal under U.S. federal law, as we know, though it is legal in certain states, as Elon Musk’s recent on-air toking performance in California attests. This is not a new state of affairs: 30 U.S. states, plus Washington, D.C., have legalized the use of cannabis in some form. Nine states have legalized marijuana for recreational use.
What is new-ish is the January memorandum from U.S. Attorney General Jeff Sessions, which added a new level of concern for U.S. cannabis companies that already face a patchwork of legislation and regulation. Sessions’s marijuana enforcement memo rescinded a pre-Trump federal directive acknowledging the regulatory and enforcement mechanisms put in place in those states where cannabis is legal. The Sessions language affirms “Congress’s determination that marijuana is a dangerous drug and that marijuana activity is a serious crime.”
Little wonder that emerging American cannabis companies, faced with legal uncertainty, and the onerous regulatory and financial hurdles that need to be cleared in order to gain a U.S. listing, are rushing to Canada.
A U.S. company does not have to be incorporated in Canada to be listed on the CSE. The exchange’s qualifications for listing are, well, how to put this charitably? Let’s look at working capital: for industry segments other than mining or oil and gas, the company must demonstrate either positive cash flow ($100,000 in revenue for operation, $100,000 in development expenditures) or $200,000 in business development expenses for its three most recent fiscal years. The guidelines are tailor-made for penny hopeful junior mining companies. The exchange promotes itself as the lowest cost route to public capital.
Green Thumb Industries retails in both what it once called “the booze” (cannabis packaged goods) and “the bar” (through retail dispensaries called Rise). For the second quarter of this year it announced revenues of $13.6 million (U.S.), a 291-per-cent year-over-year increase. Glen Senk, ex-president of Anthropologie and past CEO of jeweller David Yurman, joined the board in June, lending the cachet of a marquee director who understands the power of branding.
In a recent investor presentation, CEO Ben Kovler dismissed the Canadian market, in which the market cap of cannabis companies dwarfs the revenue potential. The big game is the U.S., where no one company, Kovler said, has more than one per cent market share. He put a present dollar value on the size of the industry in the U.S, legal and non, at $75 billion. The battle of the brands as they attack that market is bound to be brutal.
The question arises: given the potential size of the cannabis market and the corporate ambitions of the players, is the CSE an appropriate home and is existing regulatory oversight sufficient? Should it be the case, as it is now, that the CSE is the only market in Canada that will list cannabis companies with operations in the U.S?
Jennifer Wells is a business columnist based in Toronto. Reach her on email: firstname.lastname@example.org