Marijuana Business Magazine July 2019

July 2019 | mjbizdaily.com 67 U .S. cannabis companies needing to raise a large pot of capital can’t list on the New York Stock Exchange or the Nasdaq. Both exchanges continue to bar U.S. plant- touching companies. Blame it on the federal government’s ban on marijuana. The Canadian Securities Exchange (CSE), however, remains a welcoming public option. Roughly 70 U.S. marijuana businesses traded on the CSE as of early May. They include some of the best-known names in the industry, including Acreage Holdings, Cresco Labs, Curaleaf, Dixie Brands and iAnthus Holdings, to name a few. More recently, the newer NEO Exchange in Toronto has also started taking American marijuana companies, including New York-based Columbia Care, led by Goldman Sachs alumnus Nicholas Vita, in April, and Florida-based Jushi Holdings, led by former Deutsche Bank executive Erich Mauff, in June. Canada’s biggest exchange, the Toronto Securities Exchange, also won’t accept U.S. marijuana firms. But it will take licensed Canadian marijuana companies. Listing on the CSE requires loads of work, money and time. But it can give your expansion-minded business the kind of capital that U.S. companies raising private rounds can only dream of. That’s why multistate marijuana company Cresco listed in December 2018. “It comes down to the cost of capital. It’s having your stock freely traded, which puts a defined market value on your stock and almost creates a currency. To the extent that we want to be aggressive with M&A activity, you can use your stock, your paper, to complete transactions. And when your stock is performing, you don’t have to pay all cash,” said Ken Amann, the Chicago-based company’s chief financial officer. Amann points to his firm’s $823 million all-stock acquisition in April of Origin House, a Canadian company with a large portfolio of brands and a major California presence. “That would have been a tough lift in cash,” Amann said. “The only reason we can do that is because we’re listed on the CSE with a market cap in excess of $4 billion. That gives us the ability to do a transaction of that size.” Hadley Ford, CEO of multistate cannabis company iAnthus Holdings in New York, which listed on the CSE in 2015, agreed that it’s better to pursue acquisitions with Canadian shares than U.S. greenbacks. “If you’re going to be acquiring people, you can use cash, but there’s a big tax associated with that. You have to pay fees, and your stock usually trades down any time you need cash. It’s more efficient to use shares for acquisitions.” IPO VERSUS RTO U.S. companies typically take one of two routes to list on the CSE: initial public offerings (IPOs) or reverse takeovers (RTOs). Unlike the United States, where securities trading is regulated at the federal level by the U.S. Securities and Exchange Commission, Canada gives that responsibility to provincial securities regulators. Assembling a Canadian Team and Preparing for Audit While Initial Public Offerings and Reverse Takeovers have their differences, it’s important in both cases that the Canadian Securities Exchange- minded cannabis company puts together a strong team of accountants, lawyers, investment bankers and other advisers—both in the United States and Canada—that have experience taking U.S. companies public on the CSE. For example, although Cresco Labs’ board had members who had taken companies public before, none had done so in Canada. “Before we decided to go public on the CSE, we made at least seven, eight trips to Toronto and met all the large investment banks: Cannacord (Genuity), GMP, Cormark. We spent a lot of time with outside counsel trying to understand the basics of the process,” said Ken Amann, Cresco’s chief financial officer. “Nobody had done that in Canada. So, that’s why you want to do your diligence and talk with as many people as possible. We discuss legal structure, valuation, doing some of the basics of putting a road show together and getting familiar with the institutional investors who are going to hopefully take part in your round.” Perhaps the biggest favor a company can do itself and its advisers is having its financial and legal records organized and readily available for an audit (see “Applying for a Listing on the CSE”). “Audit the numbers and the financials; that’s a critical first step,” said Scott Hammon, a partner in the cannabis practice at California-based MGO, an international business services firm that has helped several U.S. cannabis companies get listed on the CSE. According to MGO’s “Going Public in Canada: A Roadmap for Cannabis Industry IPOs and RTOs,” the audit process usually takes three months— four weeks of planning, four weeks of fieldwork and four weeks to compile the audit report. When the process is complete, “your cannabis company should be able to close the books and generate the information required of a public company at least one quarter before going public,” the MGO report noted. After either the IPO or RTO, there is a 90- to 180- day lockup period when company executives, major investors and other large shareholders are restricted from selling their shares. The lockup period helps stabilize the stock’s price after it hits the market. – Omar Sacirbey