Cannabis Musings - March 27, 2023

Friends – long-time readers of these Cannabis Musings will remember that we’ve been talking about the intersection between wine and cannabis for years. Although those early Musings (since 2018!) are lost to the ether, I’ve been kvetching that the two industries should find ways to work together (even if they’re currently limited due to federal law) in anticipation of eventual legalization. Large alcohol companies have the infrastructure, know-how, and capital to build brands and execute. Small alcohol companies capture the enthusiasts who care about the craft, the people, and the aesthetic (see, e.g., Pabst Labs). It’s not perfect, but to me, it makes a lot of sense.

Relatedly, I’ve been saying for years that the big legalization lobbying fight will be over distribution. Specifically, I think the alcohol distribution companies will push hard for federal law to require distribution of cannabis similar to how alcohol is required to be sold interstate through a three-tier system. Heck, I even kinda wrote about this back in 2019 for Bloomberg Law (which was also one of my early missives about interstate commerce).

This is for good reason from their perspective – in short, the three-tier distribution system requires that alcohol be sold wholesale through a federally-licensed distribution company, rather than directly to the retailer (with some exceptions). Similar to alcohol producers, the alcohol distributors have the equipment, infrastructure, capital, and logistics know-how and experience to also distribute cannabis (once it’s legal, of course).

Indeed, we’ve seen some US alcohol distribution companies dip their big toes into cannabis – consider Johnson Brothers’ circuitous investments into Humble & Fume in 2021 and 2022; and Southern Glazer’s 2021 agreement to distribute Canopy’s CBD beverages in the U.S. What keeps them from diving in fully is the same thing that keeps other highly-regulated industries (alcohol, tobacco, financial services) from playing directly in the space – cannabis is still illegal (but they’re getting ready). (Full disclosure: when I was a practicing lawyer, I advised cannabis, alcohol, and alcohol distribution companies on all of this, but I don’t currently have any such representations.)

Fast forward to last week, when the Wine & Spirits Wholesalers of America, the alcohol distribution trade association, issued a paper outlining its “Principles for Comprehensive Federal Regulation and Oversight” of U.S. adult-use cannabis. Among other things, this position paper recommends a federal licensing system for cannabis operators that imposes a three-tier distribution system just like what’s required in alcohol (and in some ways, even more restrictive):

May a producer sell cannabis to a consumer? A producer can sell cannabis to a consumer in the state in which the cannabis is manufactured if permitted by state law. Sales and shipments from producers to consumers across state lines are not permitted.

What activities does a distributor FBP [the contemplated license] allow? A distributor FBP allows the holder to engage in the business of purchasing cannabis for resale (from an FBP producer or another FBP distributor) and receive, sell, offer or deliver for sale, contract to sell, or ship in interstate or foreign commerce, directly or indirectly or through an affiliate, the products purchased for resale.

The alcohol distribution industry has thrown down the gauntlet, and it’s very interesting to me that they’ve chosen now to do so. I was right in my prediction - this is going to be a major lobbying battle over the structure of the national cannabis marketplace, one that will be as profound a change as interstate commerce (if not more so), and this paper is merely the first salvo.

I’m not necessarily taking sides in this, but I’ve got the popcorn popping.

Be seeing you!

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Hauser Advisory provides advice and strategy on business lifecycle events and cannabis

industry navigation, tapping into a deep, national network

and twenty-five years of dealmaking and capital markets experience.

© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.

Cannabis Musings - March 21, 2023

Friends – it seems like now you can’t swing a dead cat without hitting a beverage infused with hemp-derived Delta-9 THC. Not only that, they’re available for nationwide shipping. What’s next – mail order Delta-9 THC-infused knishes? These products generally claim that they’re “federally legal” because the Delta-9 THC is derived from hemp and no more than 0.3% of the weight of the entire product.

Ever since the 2018 Farm Bill came into effect and someone read the hemp language a little too closely, we’ve been talking about the debate over the legality of hemp-derived Delta-8 THC (most recently mentioned a few weeks ago). The cannabis bar has been at odds for some time over whether the 2018 Farm Bill legalizes hemp-derived Delta-8 THC because the broad wording exempts it. My argument was that this interpretation “proves too much” (to use a term that was favored by a certain Constitutional Law professor who taught at Northwestern Law in the 90’s, but which I never really understood – I think that it means that a certain conclusion would also allow for truly absurd results, maybe). In other words, if the law would allow hemp-derived Delta-8 THC, then why wouldn’t it also allow hemp-derived Delta-9 THC (synthesized or not) in concentrations high enough to have noticeable psychoactive effects? (By the way, all signs point to Congress clearing this up when the 2018 Farm Bill gets replaced later this year, or sooner if Congress finally forces the FDA to regulate hemp derivatives, as teased a few days ago.)

Few people listened to me (even those to whom I was giving actual legal advice, which this newsletter is not). Then the Federal appellate court decision in AK Futures last May only made things even more confusing, leaving more questions than answers about whether and how the court’s formulation could ever be implemented, and why they kind of misread the language of the 2018 Farm Bill themselves. Nonetheless, many in the industry read that opinion to nationally legalize any psychoactive cannabinoid so long as it’s derived from hemp. So here we are.

To me, it’s hard to imagine how the industry thinks it will win favor with the Federal politicians who are holding back legalization, let alone their base voters who still oppose legalization and see the product as dangerous, when companies are making psychoactive products really easy to buy (without any restrictions!) outside of the licensed structure. I know that many of my colleagues in the industry disagree with this sentiment, but I try not to be a nuchshlepper.

Also, in case you missed it, Lowell Farms announced that it’s going to swap its senior secured debt for 49% of the company and intellectual property – another example of the kind of rough-and-ready restructuring that we talked about earlier this year.

Be seeing you!

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Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network

and twenty-five years of dealmaking and capital markets experience.

© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.

Cannabis Musings - March 15, 2023

Friends – TerrAscend, a publicly-traded MSO that holds both US and Canadian assets, announced on Tuesday that it has applied to list its stock, which is currently traded on the Canadian Securities Exchange (CSE), for trading on the Toronto Stock Exchange (TSX). Generally, the TSX won’t allow US-based cannabis operators to list because, well, cannabis is still illegal down here – a concern that the CSE doesn’t share. The press release provided no information about how they’re going to do this, other than referring to an upcoming shareholder vote to restructure the company in order to achieve this.

David George-Cosh, a reporter for BNN Bloomberg (Canada), noted that an analyst for Jefferies (a large investment bank) is speculating that TerrAscend is going to isolate out its US-based cannabis assets in order to convince the TSX to allow the listing, similar to Canopy’s announced plans for its own US-based assets (such as Acreage). Astute readers will remember we talked about this in October:

“What then would prevent an MSO from restructuring so that it becomes a holding company with Nasdaq-listed stock that’s sold to the public, and that owns only non-voting stock of the US plant-touching assets, which may be flipped into common stock upon legalization? Well, I’m no longer a practicing lawyer, and none of these Cannabis Musings were ever legal advice anyway, but I think that, in theory, it could maybe work. In theory.”

Now, I’m not saying that TerrAscend reads these Cannabis Musings, but I’m not not saying that they do.

But I’m not filling your inbox to gloat. I thought this might be a good reason to delve into what it means to a more prominent stock exchange, known as “uplisting”. We discussed this briefly back in December (shortly after Curaleaf also announced it was considering an uplisting).

The conventional wisdom is that uplisting makes a company’s stock more attractive to institutional investors. The CSE and the NEO Exchange (which also lists some US-based cannabis operators) are generally considered to be secondary exchanges with less vigorous listing standards and reporting requirements, as well as lower trading volumes. So, if a company’s stock were traded on a top-tier exchange (the TSX, the Nasdaq, or the New York Stock Exchange), institutional capital would be more willing to invest.

I’m not convinced that’s the case. Here’s why:

• Institutional Capital – this generally means investments from funds (hedge, venture capital, private equity, mutual), pensions, sovereigns, very high net worth families, insurance companies, banks, and the like. That’s compared to “retail investors”, regular zhlubs like me. Institutional capital doesn’t like illegal companies, unfortunately. Pensions are highly regulated and have very tight investment guidelines and policies. They not only invest directly, but are also significant investors into PE, VC, and hedge funds. Sovereign wealth funds generally don’t like cannabis because of the perceived vice. Funds are hesitant to risk their Federal licensing. This is why so much of the capital that’s been invested into the cannabis industry to date has come from high net worth (and not so high net worth) investors. Uplisting wouldn’t change this at all.

• Clearing – this is the process whereby brokers settle up stock trades between each other. I won’t bore you with the details, but suffice to say, it’s a vital component to modern finance. It’s what allows you to go onto e-Trade and buy shares of, say, Bigfoot Project Investments (this was a real company and it did what you think it did!) with a click of a button, instead of having to deliver cash to someone in exchange for a physical stock certificate. The problem is that the major companies providing this service generally won’t “clear” trades in US cannabis stocks, making it harder, and thus less attractive, to trade these stocks. Uplisiting wouldn’t change this either.

• Custody – most institutional investors are highly-regulated so they won’t steal their investors’ money or subject that money to certain risks. One way that’s done is by requiring institutional investments to be “custodied”, meaning basically that they’re held by brokers in separate accounts with specific reporting and limitations so those assets won’t be mixed with others. I think you know where this is going – major brokerage houses generally don’t like to custody, or even execute trades in, US cannabis stocks because they’re concerned about their Federal licensing, aiding-and-abetting, etc. Whether that’s rational or not, uplisiting won’t change this either.

What, then, is the benefit of uplisting? Well, it would improve trading volumes for MSO stocks, meaning that traders would probably be able to buy and sell stocks with better liquidity and price discovery. Maybe that also attracts more investors towards these stocks, which would likely help boost stock prices, but that doesn’t translate into cash being invested into the companies – these are all secondary trades between investors.

Now, I’m not trying to say that uplisting is a bad idea (although it’s not an inexpensive endeavor, particularly if you need to restructure your company to get it done). One can imagine a scenario where certain institutional investors are willing to spend the extra time and money to navigate the process and find ways to invest into these companies. Knowing that those shares may someday be sold on a “better” exchange certainly makes that more attractive. But I’m not convinced that better liquidity on a preferred exchange is alone enough to move the needle. (Of course, for any MSOs that want to consider this – my email is marc@hauseradvisory.com)

Be seeing you!

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Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network,

and twenty-five years of dealmaking and capital markets experience.

© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.