A meteoric rise in cannabis special purpose acquisition companies – better known as SPACs – is providing private marijuana and hemp companies an unprecedented opportunity to raise money and go public.
“Cannabis SPAC IPOs (initial public offerings) raised more than $2.6 billion (in 2019) and more than $700 million in the first half of 2020, as institutional investors recognized the opportunities to acquire distressed/discounted assets in the industry,” Scott Greiper, president and founder of Viridian Capital Advisors, told Marijuana Business Daily.
SPACs, which have been around since the early 2000s, are so-called “blank check” entities created to bring private companies to the market.
They have gained prominence since 2019, as well-known players such as billionaire William Ackman, former speaker of the U.S. House of Representatives Paul Ryan and former Trump economic adviser Gary Cohn have made big splashes in financial circles by bankrolling and launching SPACs.
Mainstream companies taken public by SPACs include:
- Nikola, which plans to sell electric and hydrogen-powered trucks.
- DraftKings, a sports betting site.
- Virgin Galactic, the British spaceflight operation headed by British billionaire Richard Branson.
Publicly traded SPACs often are funded by institutional investors and family offices.
If a SPAC can’t find a company with which to merge, it must dissolve after a certain time period, usually 18-24 months.
Enter cannabis SPACs
In the cannabis industry, Bruce Linton, a former CEO of Canadian marijuana cultivator Canopy Growth, last March announced a $150 million SPAC called Collective Growth Corp., which initially plans to focus on hemp products, according to U.S. Securities and Exchange Commission filings.
The company trades on the NASDAQ under the ticker symbol CGROU.
And last June, a SPAC called Mtech Acquisition Corp. merged with MJFreeway, a Denver cannabis technology company, to create a NASDAQ-traded company named Akerna Corp.
The company trades under the ticker symbol KERN.
Some experts argue that SPACs are the “only game in town” if a marijuana company wants to go public.
“I think that is true for the vast majority of U.S. cannabis companies,” said Jamie Mendola. head of strategies and merger and acquisitions for a San Francisco-based marijuana-focused SPAC, Mercer Brand Acquisition Partners, which last May raised more than $400 million.
He said there hasn’t been a “significant capital raise” for any U.S. multistate operator through an IPO or reverse takeover (RTO) in almost 18 months.
SPACs offer a path to go public
By contrast, Mendola said, “SPAC’s have significant capital already raised and, perhaps as importantly, provide the sponsorship and stewardship for these emerging growth companies to be successful as public companies.”
In May 2019, Mercer Park Brand acquired marijuana operations in Massachusetts and Nevada and, this past August, in Pennsylvania through a company renamed Ayr Strategies. The company trades on the Canadian Securities Exchange under the ticker symbol AYR.A and the U.S. over-the-counter markets as AYRSF.
“We have built one of the most profitable MSOs in the industry,” Mendola said, noting that if original investors in the SPAC (initially called Cannabis Strategies Acquisition Corp.) in the fall of 2018 retained their common stock and warrants they would have experienced more than a 140% return.
But if a SPAC buys a plant-touching company, it would likely have to delist from a U.S. exchange and relist on a Canadian exchange because of marijuana’s illegal status under federal law, said Hauser, vice chair of the cannabis law team for the San Francisco office of Reed Smith.
“The NASDAQ has been more open to listing some U.S. ancillary businesses, but nothing is certain,” Hauser added.
In an SEC filing in June, the Austin, Texas-based company said it is targeting companies “operating in the Federally permissible cannabinoid industry.”
And on May 1, in its IPO prospectus, the company said it is focusing on acquiring businesses that “service or operate adjacent, or ancillary, to the cannabis industry but which are not directly involved in the production, distribution or sale of cannabis.”
For cannabis businesses seeking insights on how a SPAC such as Collective Growth finds acquisition targets, the company noted in its prospectus:
- It expects investment bankers and financial professionals to bring potential acquisitions to its attention.
- It’s directors and board members might learn of “proprietary deal flow opportunities” through contacts or by attending trade shows and conventions.
Finding a SPAC
A marijuana company that wants SPAC funds and to go public should seek advice from “a good financial adviser or investment banker, as well as the “right deal lawyer,” said attorney Hauser.
“They can help navigate the market, arrive at the right valuation for the company and ‘shop’ the deal,” he added.
Hauser offered this advice to marijuana companies seeking SPAC financing:
- Provide two to three years of audit history.
- Make sure the company has finance and accounting systems in place before going public.
- Realize that the “key feature” that makes a company attractive to a SPAC is that it has “capable management” that desires to be part of a larger organization, while having a “strong stand-alone business that can carry its weight in the combined company.”
Mendola, the Mercer Brands SPAC executive, said marijuana companies also should have questions for SPAC executives.
- What is the track record of the SPAC sponsors both within the cannabis space and their previous business endeavors?
- Will the sponsor “add credibility,” to the marijuana company?
- Can the SPAC board members add value by bringing talent, investors or deal flow to the company?
- What is the vision of the SPAC for corporate governance, decision-making and control?
- Are the sponsors hands-on or hands-off?
- How many board seats will the SPAC control?
- Is the SPAC looking to redeem the shares in the newly merged company quickly or is it a long-term cannabis investor?
The biggest risk (to a cannabis company from a SPAC) is having significant redemptions” from short-term investors looking to immediately sell their shares, noted Aaron Salz, principal of Stoic Advisory, a Toronto-based financial advisory firm for the cannabis industry.
A marijuana company needs a “significant amount of cash” as well as a “strong long-term investor” from a SPAC, he said.
At Stoic Advisory, a number of companies, including cultivators, processors and retailers in North America and abroad, have asked about SPACs, Salz said.
However, he added, it is “completely untrue” that SPACs are the only option for a marijuana company that wants to go public.
“There are still traditional avenues available to taking a cannabis company, including an RTO or direct listing,” Salz said.