The Bank of Montreal underwrote a major stock sale for Canopy Growth Corp. (facility pictured). REUTERS/Chris Wattie
CANNABIS, not very long ago the stuff of back-alley deals, is fast becoming a major player in public markets.
With recreational marijuana use set to become legal in Canada in July, and another 200 licensed companies joining the 84 already licensed for medical use, the sector has already seen consolidation, new financings and public offerings, not to mention a wave of research and development.
“In terms of a new industry that effectively didn’t exist two years ago, it’s a kind of once-in-a-career opportunity –– maybe twice-in-a-career. It smells a bit like the dot-com days,” says Mark Trachuk, a corporate and securities partner at Osler, Hoskin & Harcourt LLP in Toronto. “I’m thinking of the trading patterns, the rush to large capitalizations, the multiple-to-revenue [ratio], and in terms of the volume of trading. It’s enormous.”
Pot companies that trade on the Toronto Stock Exchange, such as Canopy Growth Corp., Aurora Cannabis Inc., Aphria Inc. and MedReleaf Corp., are often among the top stocks traded by volume change each day (in the first 10 days of January, they were the top traded stocks each day). Five of the top 12 companies by float capitalizations on the junior TSX Venture Exchange are cannabis companies. And the Canadian Securities Exchange (CSE) already has 60 marijuana-company listings and is gunning for more.
Trachuk sees a wave of consolidations coming, and predicts those companies with high share prices will use their stock price to buy smaller companies in order to grow. It’s already starting to happen, he says, pointing to Aphria, which acquired BC-based Broken Coast Cannabis Inc. earlier this month for $230 million –– paying for all but $10 million of the purchase in stock.
But there is a potential fly in the ointment that the dot-com companies didn’t have to deal with: the United States.
The US is a mess when it comes to its cannabis laws.
Federally, recreational cannabis use is illegal. But several states including California, Colorado, Maine, Massachusetts, Nevada, Oregon, and Washington have legalized it, while many others such as New York, Connecticut Minnesota and New Hampshire have largely decriminalized it, making possession a simple misdemeanor.
US Attorney General Jeff Sessions recently revoked the Obama-era guidelines known as the Cole Memo, which had directed federal prosecutors not to go after pot companies that have complied with state law— suggesting a showdown may be coming.
No one is sure what’s going to happen next, south of the border. “The real question is whether anyone is going to spend the money to enforce [the US feds going after cannabis companies],” says Cheryl Reicin, a partner at Torys LLP in New York and Toronto, and the head of Torys’ Life Sciences Practice.
What happens in the US affects Canadian cannabis companies invested in US companies that operate in states where it’s legal, or have operations such as grow ops there. Canadian pot companies with a US component cannot currently get a listing on the TSX or Venture Exchange, and in November the TSX announced it may delist any of its 25 cannabis companies that have US exposure.
Reicin is not convinced the Exchange will be so quick to walk away from the marijuana business.
“We have some very big companies with operations in the US and they have not yet been delisted,” Reicin says. “But the Exchange has sent letters to all the companies they believe have assets in the US, asking them to come in and have a conversation.”
Should the Toronto Stock Exchange decide to turf these companies, though, they have the option of simply moving to another exchange. The most likely beneficiary would be the Canadian Securities Exchange; traditionally a market for very early-stage companies, the CSE is cleaning up in the cannabis market.
Ranjeev Dhillon, co-head of the cannabis practice group at Bennett Jones LLP, says the CSE is “100 per cent” an alternative for cannabis companies wanting to list on the TSX. “It is very friendly to pot companies, and in terms of liquidity and analyst coverage the companies on that exchange are doing just fine.”
The CSE has made clear it hopes to hold on to its 60 cannabis companies as they grow, and add to that number. It says it will not delist pot companies with US assets, but simply require them to disclose that fact and the risks posed to potential investors. And US cannabis companies are coming to Canada for financing because they cannot go public in the US, on any exchange. Reicin says there are more than a dozen such companies now listed on the CSE.
The Toronto Stock Exchange is not the only institution concerned about the effects of US law on Canadian pot companies.
Canada’s big banks all have US operations, and don’t want to risk getting caught offside US law. That has made it difficult for cannabis companies to get loans, for example, and even the largest licensed and publicly traded Canadian medical marijuana producers have faced the same challenge as they grow: financing.
The banks’ stance has forced licensed pot companies to go one of two routes: rely on financing from private investors, or go public. Many that choose the latter route do so through reverse takeovers, which are much less expensive than initial public offerings. And with the big banks out of the picture, they’ve been using independent underwriters for their listings and financings.
WeedMD Inc., for example, recently closed a prospectus offering worth $34.5 million. The underwriters were Eight Capital, Mackie Research Capital Corp. and Haywood Securities Inc. Delta 9 Cannabis filed a $23-million financing using Canaccord Genuity Corp., PI Financial Corp., Beacon Securities Ltd., Haywood Securities and Mackie Research Capital Corp. Many are the same independent underwriters who once feasted on the junior resource sector, and the same ones who have been starved for work following its collapse. Over the past year or so, they have found new life.
But they may not have the market to themselves too much longer. With over $700 million in equity deals in the cannabis sector in January alone, and recreational use becoming legal this summer, the banks may simply not be able to afford to walk away from the many millions in underwriting fees much longer.
In fact, in mid-January the Bank of Montreal became the first major Canadian bank to lead an equity financing for a public company in the medical marijuana sector, underwriting a $175-million stock sale for Canopy Growth Corp., which has no US operations. The deal caused Canada's other bank-owned investment dealers to re-examine their policies, and an executive at a rival bank was reported to have said that “we are reviewing our interpretation of the rules as we speak, and I imagine every other bank is doing the same.”
Bennett Jones’s Dhillon says the sheer size of the pot industry is already giving rise to new service-type companies. For example, many people now choose to vape marijuana rather than smoke it, he says, because vaping is less harsh.
“Companies are looking for ways to extract oil in a better, more efficient way so you can get better vapes. That will create lots of research jobs. There will also be research jobs to develop better and better machinery to do the extraction. There will be all these ancillary plays coming up as the cannabis sector gets larger and larger. So I think this whole area will interesting to watch in 2018 and beyond.”