Cannabis Musings - December 7, 2022

Friends – just a quick note about the SAFE Banking Act. Long-time readers of these Cannabis Musings know that I’ve been a deep pessimist for years about the likelihood of its passage. I’ve said time and again, as recently as about a week ago, that the entire state-legal cannabis industry exists as a matter of grace of the Federal government. Indeed, the Department of Justice could change its mind tomorrow and shut the entire thing down, but so far it hasn’t for somewhat vague-ish but kinda rational reasons, and that’s unlikely to change any time soon (not legal advice!).

However, just because the Federal government is allowing a multi-billion-dollar industry to thrive (okay, maybe that’s the wrong word given the industry’s current struggles) doesn’t mean that it has to, or is going to, make life easy. To date, it seems to me like the unstated message has been “you get what you get and you don’t get upset, so don’t be a schnorrer.” I’m reminded of this fact as I’ve followed the recent chatter and breathless expectations about the SAFE Banking Act being added to the National Defense Authorization Act by the Senate in order to get it passed, and watched the industry’s deflation in real time once news broke that, once again, Senate Minority Leader Mitch McConnell is opposed to adding SAFE to the NADA.

Now, there’s plenty of blame to go around for SAFE still not being passed by the Senate. In my opinion, this is a bipartisan failure. And who knows – maybe SAFE will still be introduced and pass on a standalone basis during the lame duck session. My point, however, is that, anytime we think that something might happen at the Federal level that might benefit the cannabis industry, we should go back and remind ourselves of the Peanuts trope of Lucy repeatedly convincing Charlie Brown to try to kick the football.

A larger question still remains for me about whether SAFE is really the prize that the cannabis industry wants (or needs). Years ago, I heard former Attorney General James M. Cole (the author of the “Cole Memorandum”) ask the same question about SAFE, so I can’t really take credit for this thought, but his theory was, if Congress were to actually pass SAFE, then the chances of Congress doing anything else for the cannabis industry for a long time would drop significantly. I particularly agree with this realpolitik perspective on Congress and cannabis, and I think it’s still mostly true, although certainly public opinion has changed in the years since he made that comment, and cannabis is much more in the political discussion. Nonetheless, I’m still of the opinion that SAFE doesn’t really do that much, and the industry should be more focused on lobbying for more useful change.

We discussed my thoughts on why SAFE is kinda useless a while back, but because I can’t repost that particular Cannabis Musings without potentially incurring the wrath of a certain ex-employer of mine, I’ll reiterate my general point that it only would protect “depository institutions” (banks and savings associations), federal and state credit unions, and insurance companies providing certain lines of business with State-compliant cannabis businesses, and protect ancillary businesses from violating federal money laundering rules. That’s it.

Now, there’s quite a bit of focus (particularly on #Cannabis Twitter, if you’re a shumuck like me and actively follow that chatter) on the safety aspects of reducing the amount of cash handled by dispensaries, which may be true if the credit card companies were to allow payments based on SAFE, which isn’t guaranteed. Nor is “uplisting” certain, meaning that the Nasdaq and NYSE would allow US cannabis companies to list their stocks for trading. Even if uplisting were to occur, you’d still need to see major trading clearinghouses and custodians allowing trade clearing and custody (critical functions in stock trading). Most importantly, you’d really want to see pension guidelines change to allow for investment into US cannabis stocks – only would then significant institutional capital potentially flow into the space.

To me, the more interesting provision in SAFE is the protection for ancillary businesses. Risk of being prosecuted for money laundering tends to be the primary concern of companies doing business with cannabis, so if SAFE were to provide an exemption, that could potentially open up a host of ancillary services to the industry. Moreso, we could see some significant M&A activity from outside providers, such as major SaaS companies buying up (with inexpensive capital) cannabis software companies for the relationships and contracts, porting customers to existing platforms.

Now, you may be wondering “But Marc, if SAFE provides a money laundering exemption for ancillary businesses, wouldn’t, say, the Nasdaq be considered an ancillary business?” The answer to that question is “I don’t know! Remember, I never give legal or investment advice in this free newsletter, but it’s an interesting question! You should ask a practicing lawyer that one.”

It would be nice if the Senate were to step up and pass SAFE before the end of this term. If not, I really think the industry should cut its losses and refocus on the recent momentum towards legalization. Otherwise, it’ll never learn its lesson about that football.

© 2022 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 - November 29, 2022

Friends – I hope your MJBizCon was as productive and fun as mine. The conference remains vital, still being the only one that seemingly the entire industry attends (in an industry that still has way too many conferences). It makes for a busy week.

At breakfast one morning with a keen observer of the hustle and flow of the cannabis business, my dining partner commented that it seemed to them like a number of the bigger deals lately have been geared towards pushing the NYSE and the Nasdaq to finally open up listing to cannabis companies. Sadly, I can’t take credit for this astute observation, but I’ll expand upon the idea. To me, a number of things have happened lately that are testing the limits that have constrained cannabis companies for years. We’re indeed primarily seeing this in deal activity:

• Canopy’s very highly structured transactions to consolidate the Acreage and TerrAscend assets into its financials while trying to maintain TSX and Nasdaq listings.

• GTI’s deal to co-locate dispensaries in Florida with Circle K gas stations, although one has to wonder how Circle K’s Canadian parent, Alimentation Couche-Tard, stays listed on the TSX if it’s a landlord to a US-based cannabis company, directly violating the Controlled Substances Act (the reason US exchanges and the TSX won’t list US cannabis REITs).

• British American Tobacco’s large and curious investment into CBD-manufacturer Charlotte’s Web, which I assume was made because Charlotte’s Web has an option to acquire cannabis MSO Stanley Brothers.

• Cresco’s agreement to sell a bissel of cannabis assets to A-list celebrity Sean “Diddy” Combs, which made national news well beyond the cannabis press.

Each of these transactions seems to be pushing the envelope – against the exchanges, against federal legal risks, against public perceptions. However, I think a recently-filed lawsuit highlights best this trend of rejecting the status quo. Recently, an Oregon-based wholesale cultivator filed a federal lawsuit challenging the constitutionality of Oregon’s laws prohibiting the interstate transport and sale of cannabis products.

We’ve been talking about the challenge/opportunity of interstate commerce in these Cannabis Musings for years (most recently a few weeks ago, and certainly well before it was cool). I’ve always been a little skeptical that someone would actually file this lawsuit, given the substantial cost of fighting the state through appeal and the existential cost of suing your regulator, as well as the fact that I’m not sure anyone really wants to know what happens when the dog catches the car it’s chasing. Interstate commerce is inevitable, but I think it’s going to dramatically alter the national marketplace, particularly for cultivators, so it surprises me that someone (the plaintiff here is a wholesale cultivator) would actively want to (metaphorically) summon Gozer the Gozerian in its destructor form at a time when yields are high and prices remain seriously depressed. And yet, here we are.

All of this tells me that companies are getting bolder in their actions and pushing the limits of lawyer creativity to try to make things work and gain an edge – they’re not gonna take it anymore. Granted, poking the bee’s nest to get honey of course always comes with the risk that the swarm gets angry and attacks – the Nasdaq delists Canopy; the TSX delists Couche-Tard; the federal government slows down investment activity (like what happened under Attorney General Bill Barr); the federal courts decide that, even though state laws prohibiting interstate commerce violate the constitution, for policy reasons they’re not going to strike them down. And it’s always good to remember that this industry exists solely as a result of the grace of the federal government. But without bold action, nothing can change.

Be seeing you.

© 2022 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 - November 12, 2022

Friends – you may have noticed that the business world has demonstrated an unusual amount of weirdness in the past week or so. I’m thinking in particular about Elon Musk’s take-private of Twitter and the debacle in the crypto industry capped by the implosion of crypto exchange FTX this week. Intelligent people making seemingly poor decisions with other people’s money (yes, Musk put up a lot of money to acquire Twitter, but he also raised outside equity and borrowed a pile of bank debt that remains unsold). These two threads both have interesting lessons to teach the cannabis industry. Bear with me here.

The way I see it, Musk bought Twitter because he thought he could improve it – economically, operationally, and existentially. I could be wrong about that, but I don’t think I’m totally off base. He’s had outsized (to put it mildly) success building other companies, so how hard could it be to wrestle Twitter into shape? Granted, it’s still quite early days, but if you’ve spent any time on Twitter over the past week, it’s gone all farpatshket.

Whenever I talk with someone who’s thinking about getting into the cannabis industry, particularly if they think that they have some novel approach, I give them my free advice that you can’t adapt the cannabis industry to what works in any other industry – you have to adapt what works elsewhere to how things work (or don’t) in the cannabis industry. I’ve watched too many people think they can walk in and easily apply to a cannabis business the basic techniques that work everywhere else, and that clearly no one else in this industry is smart enough to have even thought of doing that. Oh, and they’re easily gonna make a pile of money. They’re smart, and they’ve proven themselves before, so of course it’ll work again. (Narrator: “it won’t.”) To me, this is Elon Musk vis-à-vis Twitter.

(In case you’re wondering whether this is a commentary on Diddy’s signing of a deal to buy various cannabis assets from Cresco for up to $185 million last week, it’s not. From what I can tell, the motivation is totally different. Look for example at Combs’ reported comment: “My mission has always been to create opportunities for Black entrepreneurs in industries where we’ve traditionally been denied access, and this acquisition provides the immediate scale and impact needed to create a more equitable future in cannabis.”)

Samuel Bankman-Fried built crypto exchange FTX into one of the space’s largest players. Bankman-Fried was touted as the face of crypto for helping to build the nascent crypto industry. As FTX all came crashing down this week, ending in a bankruptcy filing on Friday (a luxury not enjoyed by the cannabis industry), it’s been reported that FTX was apparently not only massively overlevered (particularly by providing leverage on its own tokens), but also possibly self-dealing by lending customer holdings to Bankman-Fried’s own crypto hedge fund. The tale seems to get weirder by the hour. In properly-regulated finance, there’s rules against that.

Piles of capital were raised by cannabis companies in 2017-19 based on meshuge valuations and expectations, with companies generally taking a blitzscaling approach to build an infrastructure base to grow the state-legal industry. Some succeeded, some spectacularly didn’t, and most are still hanging in there. While many were led by people trying to do the right thing by investors, I’ve seen my fair share of self-dealing, poor disclosure, and all-around cuspy and untoward behavior, the kind of stuff that gives lawyers nightmares. They believe in the transformative nature of cannabis, as a product and as a business, but they don’t care a single whit about things like fiduciary duties and good corporate governance (perhaps it’s because they figure, “hey, I’m breaking the law anyway”?). To me, this is Sam Bankman-Friend vis-à-vis FTX.

What’s my point? Well, the space has seen a real transformation over the past five-ish years that I’ve been involved. Many of the macro problems that the cannabis industry is facing are not very different from those faced by other newborn industries. (The rise of the crypto industry (if that’s even the right word for it) is I think a pretty good analogue for the development of the state-legal cannabis industry (though without the Ponzi schemes), but the first tech bubble provides a particularly useful history lesson for understanding the cannabis industry’s first wave.) Just like elsewhere, success for cannabis companies won’t (and can’t) be found by overconfidence, opportunism, or carelessness (do your diligence!). From what I’ve seen, success has been found with the right balance of professionalism, care, and sheer love of cannabis. If you’re gonna put up with all of the tsuris, you really need to believe in the product.

Be seeing you.

© 2022 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.