Why the Trend of Going Public in Canada May be Ending
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Greenlane Holdings, Inc., a U.S. vape distributor, went public on the Nasdaq in April. Greenlane is the first U.S. cannabis company to obtain a Nasdaq listing and may well bode the beginning of the end of the prior trend of U.S. companies going public in Canada, where cannabis is federally legal. The New York Stock Exchange also recently reversed its prior ban on listing U.S. pot companies by allowing the name and symbol change for Kathy Ireland’s company, formerly known as Level Brands, Inc. The company changed its name to cbdMD with the new symbol YCBD, reflecting its change to primarily a CBD company. The NYSE also reversed its own initial delisting decision on India Globalization, now a CBD company as well, back in February. (As we know, cannabidiol, or CBD, derived from the cannabis plant, is believed to contain much of the plant’s medical benefit without the psychoactive “getting high” features of THC).
A number of U.S. cannabis companies decided to go public in Canada in the last few years, mainly under the belief that fundraising would be easier there and the company’s valuation in trading would fare better than if they traded only in the U.S. over the counter markets. Canada’s senior exchange, the Toronto Stock Exchange, had declined to list U.S. companies, so they trade on its lower exchange known as the Canadian Securities Exchange or CSE.
In addition, until Greenlane, the Nasdaq had declined to list any U.S. company, including ancillary businesses that do not “touch the plant.” The NYSE had agreed to list one company, Innovative Industrial Properties (IIPR), just before Jeff Sessions was nominated to be U.S. Attorney General. After that the NYSE let the word out that they would not list any additional U.S. cannabis companies- that is until the recent decisions noted above.
In order to go public in Canada, the U.S. companies pursued reverse mergers as opposed to traditional initial public offerings. In a reverse merger, a private company combines with an already existing public entity, taking over the majority of the stock and instantly going public, in this case with the Canadian public vehicle remaining in existence and trading. Some merged with public operating businesses and others with “shell” companies formed for the purpose of combining with a private company. Most raised money before, contemporaneous with, or right after these transactions.
As a result, the U.S. cannabis companies effectively reincorporated in Canada, most with complex dual stock structures to ensure they retain their status as “foreign private issuers” in the U.S. and obtain certain other Canadian benefits. Some, with no business or operations in Canada, did indeed, for a time, find it a bit easier to raise money through Canadian investment banks and investors. In addition, in general the stocks of Canadian companies had traded a bit better than those trading in the U.S. exclusively.
This trend, however, appears to be ending. Why? First, the delta in trading valuations has been reduced in recent months in volatile and uncertain trading patterns for cannabis companies in both markets. In addition, a number of active U.S. investment banks, including most prominently Cowen & Co., which underwrote the Greenlane IPO, have stepped in to raise money in the U.S. for U.S. cannabis businesses.
Add to this the fact that most observers believe we are closer than ever to a path in the U.S. either to full federal legalization or an end to federal enforcement in states that have legalized (currently contained in the proposed STATES Act in Congress as noted below). Public opinion in the U.S. has been strongly in favor of legalization for a number of years, even including a majority of Republicans polled in the last few years. Every candidate for U.S. President in 2020 from both parties has stated his or her desire for some significant reduction in criminalization of cannabis. More large U.S. states, particularly New York, New Jersey and Illinois, appear ready to legalize adult use in their states in the next year or two.
Former Attorney General Sessions had unnerved many in the industry when, in January 2018, he rescinded the Obama-era Cole Memorandum, which had deemphasized federal prosecution of state legal cannabis enterprises. Even after doing so, however, actual enforcement activity did not noticeably change and the feds appeared to stay away from those operating under local law. In addition, current Attorney General Barr, in his confirmation hearing, stated he believes that rescinding Cole was a mistake and that he had no interest in pursuing enforcement against state legal businesses.
With the U.S. House now in the hands of the Democrats, who tend to favor legalizing cannabis, a number of legislative efforts to move towards that goal have been launched. There is also support from Republicans, particularly those from cannabis-legal states, where multi-millions in taxes have been collected from cannabis sales and many jobs have been created. One example of those efforts, the SAFE Banking Act, which has passed the House Financial Services Committee with some bipartisan support, would open up more opportunities for cannabis companies to access bank accounts and obtain loans. As noted below, is not clear what the future portends for this bill and dozens of others currently pending in both houses of Congress.
The U.S. Securities and Exchange Commission made clear a number of years ago that it had no objection to U.S. cannabis companies going public and trading their stock in U.S. markets and trading platforms, as long as those companies clearly identified to investors the risk factors of doing so. The Financial Industry Regulatory Authority (FINRA), which oversees trading and brokerage firms, also accepts trading of these stocks.
The passage of the Agriculture Improvement Act of 2018 (also known as the Farm Bill) last December was a key turning point. The Farm Bill legalized hemp federally, as well as CBD derived from hemp, subject to finalizing regulations to implement the bill and obtaining guidance from the FDA on certain CBD products. The bill was championed by Sen. Majority Leader Mitch McConnell, who believed that legalizing hemp could provide a needed jolt to his beleaguered Kentucky farmers. This appears to be one reason the exchanges have warmed to the idea of listing CBD companies.
These positive developments must be tempered by statements by McConnell that he is not really interested in further legislative moves towards cannabis legalization at this point. The powerful Chair of the Senate Rules Committee, Lindsay Graham (R-SC), has made similar statements. Republican supporters of reduced criminalization, like Colorado Senator Cory Gardner, are presenting “states’ rights” bills like the STATES Act, which would not legalize cannabis but would declare state-legal cannabis not subject to the Controlled Substances Act or federal enforcement. This could give Republicans, who tend to favor federalism, cover by saying they did not legalize marijuana but left the decision to the states. It is not clear if the Senate currently has the stomach to move ahead with a bill like this.
Even moving from “no way this will ever happen” to “not clear if the Senate currently has the stomach” is a major change in affecting the level of optimism in the industry towards the eventual move to legalization. So with all the developments above, especially regarding public opinion, the exchange listing of a few companies and the new willingness of U.S. investment banks to enter the space, U.S. cannabis companies feel more positively than ever about the future of the industry and trading publicly here.
All these trends together have led companies considering a public trading stock to reconsider the need to move to Canada to do so. So as we move into summer in the Northern Hemisphere, Canada remains an awesome place to visit and learn, but it appears we are moving away from the use of their stock exchanges for U.S. cannabis companies.