Pitchbook recently released its 2018 results for cannabis related investments, and the data is impressive: 139 deals scooped up a whopping $881 million. Those numbers are up over the prior year by 26 percent (number of transactions) and 120 percent (total amount invested), reflecting larger average deal sizes.  Leading the way, Privateer Holdings closed a $100 million Series C financing.

Clearly, the success of Canadian public offerings in the space is creating a “chimney” effect where a few big exits result in early-stage capital being pulled into the ecosystem.

For example, Green Organic Dutchman Holdings, Ltd. (TSX: TGOD) IPO’d in May of 2018 is currently trading at $1.0 billion market cap; Privateer’s Tilray (NASDAQ: TLRY) went out for $153 million in July and currently enjoys a $6.0 billion market cap. Canopy Growth Corp (NYSE CGC) is valued at $17.0 billion.

The Pitchbook report also lists the top dozen cannabis-related venture investors, led by Altitude Investment Manage, Casa Verde Capital and Salveo Capital, each with six or more investments in 2018.

The addition of sophisticated, institutional capital to the cannabis marketplace is, from our perspective, a welcome game-changer. The net result is likely to be increased scrutiny on the quality of management teams, the scalability and defensibility of business models and heightened attention to corporate governance. All of which should lead to a more stable and ultimately more profitable industry for stakeholders.

Justin Hobson made a guest appearance on episode #6 of CFN Insider’s “Profit From Cannabis” podcast. The episode, entitled “The US Cannabis Marker: New Promise, Persistent Constraints,” covers:

  • The FDA’s approval of GW Pharma’s Epidiolex,
  • Impact of rescheduling cannabis and DEA’s rescheduling possibilities (isolate vs. cannabis plant),
  • Resulting investment plays (cannabinoid drug developers, hemp extracts), and
  • A legalization roundtable that discussed how state cannabis programs are faring under the Trump Administration.

Hobson commented on the growing risks investors’ face since the rescission of the Cole Memo, the increased scrutiny that applicants have observed from the Oregon Liquor Control Commission, and the industry’s problem with product diversion. Have a listen!

Constellation Brands Inc. — the company behind Corona beer — will invest nearly $200 million for a 9.9 percent stake in Canopy Growth Corporation, a publicly traded Canadian cannabis company, plus the right to acquire a greater ownership interest over the next 30 months.  In addition to the Corona brand, Constellation sells a variety of beer, wine and spirits.  The business reasons for the investment appear to be twofold.  First, the U.S. market for beer in states with adult-use cannabis laws are experiencing declining sales while cannabis sales are increasing.  Second, Constellation Brands Inc. notes the potential to develop cannabis-infused drinks.

Our colleague and HoochLaw blogger, Brian DeFoe, paints a dismal picture for non-craft beer sales in states that regulate adult-use cannabis:

“Beer sales in Colorado, Oregon and Washington (three states with laws permitting adult-use cannabis) fell by 4.4% from January 2015 through December 2016. Correlation does not necessarily equal causation, however.  And overall trends for beer were pretty dreadful during most of that time — with sales in the category down 1.5% (or 2.8% if you exclude the craft beer segment) during 2016.”

The press release issued by Canopy Growth Corporation ignores the product diversification issue, but highlights the potential benefits of Constellation’s branding and marketing teams:

“The strategic relationship will see Constellation provide broad support in the areas of consumer analytics, market trending, marketing and brand development to Canopy Growth. In addition, the Companies will collaborate to develop and market cannabis-based beverages that can be marketed as adult-use products in markets where and when such products are federally legal.”

This suggests that we will not see THC-infused Corona until we deschedule cannabis in the U.S.  However, Canada may provide a significant test market in the interim.  While Constellation and Canopy Growth test the Canadian waters, it is worth noting that state regulated adult-use markets are not chomping at the bit for alcohol-infused cannabis products given the federal control over alcohol by the Alcohol and Tobacco Tax and Trade Bureau (TTB).

Ethanol is commonly used to chemically separate THC and other cannabinoids from cannabis flower and other plant material.  Oregon permits the use of ethanol in the separation process, but requires its removal before sale as a cannabis product.  Further, ORS 471.446(2) provides the OLCC with the authority to prevent the sale of alcohol containing adulterated ingredients.  Washington and Colorado similarly prohibit the sale of THC-infused alcohol.  Therefore, we should expect to see U.S. based investment in ethanol based extraction techniques, but zero alcohol-infused products until we see change at the federal level.  Until then, the bulk of product development should occur outside the U.S.

The notable exception is CBD-infused alcohol containing hemp-derived CBD.  The TTB has approved CBD-infused formulas, but recent guidance from the DEA suggests conflict between the federal agencies.  The continued availability of CBD-infused alcoholic beverages is uncertain.  For better or worse, the U.S. is unlikely to be at the forefront of cannabis-infused alcoholic beverages.

Lane Powell supports the Cannabis Investor Network (CIN) in Seattle.  The mission of CIN is to connect accredited investors with state-legal cannabis businesses that need additional capital.  Lane Powell hosted the inaugural event in our Seattle office earlier this year with about 40 guests, and hosted the second event last night with about twice that number.  Pitches from several segments of the cannabis industry were very well received and everyone seemed to welcome the opportunity to connect with other business people in the industry.  CIN is based in Seattle and open to Accredited Investors and cannabis businesses seeking capital.

How it works:

Those interested in pitching their company to the Cannabis Investment Network begin by submitting their application and materials online through this Deal Funding page. Companies must be beyond the idea phase though they need not have revenue. Candidates for presentation should submit a comprehensive pitch deck, which includes your business plan, financial projections and other relevant company background and information.

Following submission of your application and supporting documentation, CIN will review and evaluate your proposal to ensure it has everything needed to make an informed decision. During this review process, CIN representatives will be in contact with you to source additional details about your company, the management team, operations, marketing plans and financial projections. Once CIN has what it needs and thinks your company would be a good fit to present to its Investor Network, CIN will schedule an in-person meeting or phone screen with you where you walk through your pitch deck.

After the screening meeting, if CIN decides to proceed, CIN will schedule your company to present at an upcoming meeting.

At the investor event, you will be given approximately ten minutes to present and five minutes for Q&A. You should expect that you will be participating with several other companies at the meeting.

Considering diversifying with a high-risk investment? Heard the lure of the “green rush” toward a possible $100 billion legal marijuana industry?

Before you write that check:

  • First, research the company, related persons, and the business, industry and legal risks.
  • Next, if you decide to make the leap, consider having legal counsel assist you in documenting your equity position.

Pressing escape or reboot can be difficult, after you have already signed documents. If you’re investing in a partnership or limited liability company, state law imposes default rules, unless you have an agreement modifying them. If the business — or you — fail to comply with the state’s rules on ownership and investors, the state regulator may impose penalties including cancellation or suspension of license and fines.

Continue Reading High Stakes: Investing in a Legal Marijuana Business