Cannabis Musings - October 27, 2022

Friends – I’ve been reading the Canopy Growth filings so you don’t have to. In case you missed it, Canadian licensed producer Canopy Growth Corporation, filed a dense press release on Tuesday announcing its plans to finally close on the acquisition of US-based Acreage, Jetty, and Wana, consolidating those assets into a single US holding company, buy back some debt at a discount, and adjust its relationship with Constellation Brands. There’s a lot going on, but I’m going to focus on trying to answer the question that I got from numerous Musings readers over the past two days – is this a way for MSOs to list on the Nasdaq? The short answer is “probably not”. The long answer is sort of explained below.

For some background, Canopy is a Canadian cannabis company whose common stock trades both on the Toronto Stock Exchange and the Nasdaq (so investors in both the US and Canada have direct access to those shares). Canopy, like other Canadian licensed producers, differs from US-based cannabis companies in that, as you most likely know, cannabis is legal in Canada. So, the TSX and Nasdaq are happy to take Canopy’s fees and list its stock. The TSX and Nasdaq don’t want to list the stock of US operators because, well, you know, so those companies list their stock on the Canadian Stock Exchange and Canada’s NEO Exchange, which have a higher tolerance for lawbreaking.

Canopy’s access to the TSX and Nasdaq is critical to its capital markets strategy, because those exchanges attract much more volume and liquidity, and therefore capital, relative to the CSE and NEO. It’s the reason why US companies are so eager to “uplist”, meaning shift their exchange listing to the TSX, Nasdaq, and, maybe, someday, the NYSE (interestingly, Canopy was listed on the NYSE, but moved to the Nasdaq in November 2020). So, Canopy wants to be careful to not doing anything that would jeopardize its TSX and Nasdaq listings.

You may recall that Canopy made headlines in April 2019 by acquiring an option to purchase US-based MSO Acreage Holdings, Inc., funded in part by Constellation Brands’ $4 billion investment into Canopy Growth eight months prior. In short, Canopy paid Acreage’s shareholders for the option (or “right”) to purchase all of the stock Acreage when (effectively) cannabis is legalized in the US, although they later changed that to also allow the option to be exercised (or “done” (kinda)) when the exchanges would allow it without delisting. The key was that they didn’t actually own Acreage – they only owned the right to purchase Acreage at a certain price in the future. Canopy then effectively did the same thing with US-based Wana Brands and Jetty Extracts.

Fast forward to this week, Canopy announced that it’s actually going to acquire Acreage, Wana, and Jetty by exercising those options into a US-based holding company subsidiary, Canopy USA. How, pray tell, are they going to do that without the TSX and Nasdaq, and the various state licensing authorities, thinking that Canopy will outright own US plant-touching assets? Well, it depends upon what the definition of “own” is.

In short, Canopy will reportedly only own non-voting stock of Canopy USA, and that non-voting stock may be exchanged, at Canopy’s option, into common stock of Canopy USA (which it presumably wouldn’t do until the US legalizes cannabis, or the TSX and Nasdaq tell Canopy that they won’t delist Canopy’s stock). This is sort of like “tracking stock”, which is stock of a company, or, more usually a division of a company, that’s issued to the public, but only has economic rights by contract, without any voting or liquidation rights.

Canopy also will not control the board of directors of Canopy USA. In other words, Canopy will have an economic stake in Canopy USA, but no right to direct Canopy USA’s actions. Instead, Canopy USA is agreeing to certain “negative covenants”, which means it won’t do certain things like sell itself or borrow too much money – this gives Canopy a level of assurance that its investment won’t be thwarted.

So, I presume Canopy’s argument to the exchanges and the state licensing authorities will be “See, we don’t own Canopy USA and its plant-touching assets because we have no control over it”. And, usually, the way these things go, the lawyers call the Nasdaq ahead of time and tell them about what’s going to happen, but the Nasdaq never says “oh, sure, go right ahead”. Instead, they either say “well, we’ll make a final decision when you’ve filed all of the documents, but we’re not yet going to tell you what we think,” or they laugh so hard that the lawyers hang up the phone and get their final invoice prepared.

I’m presuming the former happened here, but, apparently the Nasdaq isn’t totally in agreement yet. One of the reasons Canopy stated for closing the acquisitions of the US companies is to be able to consolidate those companies on its financial statements under US GAAP. Well, according to Canopy’s proxy statement it filed earlier today, Nasdaq doesn’t necessarily agree with that:

Nasdaq has objected to Canopy consolidating the financial results of Canopy USA in the event that Canopy USA closes on the acquisition of Wana, Jetty or the Fixed Shares of Acreage. Nasdaq has proposed that such consolidation is impermissible under Nasdaq’s general policies. The Company intends to comply with the SEC’s guidance on the application of U.S. GAAP for financial reporting purposes. The Company disagrees with Nasdaq’s potential application of its general policies as the basis for its objection since it contradicts the Company’s financial reporting requirements under U.S. GAAP including its application to THC plant touching businesses. While we are in regular dialogue with our auditors, regulatory bodies and the stock exchanges, there is no assurance that Nasdaq will harmonize their general policies with the SEC accounting guidance.

We’ll see how that plays out. The press has also picked up on this unexpected nugget in the proxy. In the meantime, back to the question of what this means for everyone else. Could a US-based MSO replicate this structure and somehow list its stock on the Nasdaq?

One way to think about this is whether Canopy could list Canopy USA’s non-voting stock separately on the Nasdaq (Canopy said publicly on a conference call that it hadn’t really thought about trying to list Canopy USA on the Canadian Securities Exchange). I suppose that, if the Nasdaq allows Canopy to remain listed while it owns non-voting stock of Canopy USA, because that non-voting stock isn’t “ownership”, then that same non-voting stock in the hands of a public shareholder would similarly not be “ownership” and should therefore be kosher (utilizing the “goose-gander principle”, to quote an old friend).

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.

We’ll have to see whether the Nasdaq blesses this approach. It would also require a very large lift to shift around an entire corporate structure, likely including approvals of every state and local licensing authority. It would require public investors to be willing to purchase stock in a company that only owns non-control interests in US assets, which is weird. Tracking stocks offer something of a precedent for that, but tracking stock tends to be used for, say, divisions of a larger public company, not the entire thing. I’m certain that I’m missing other issues, but I’m also highly confident that many smart lawyers and bankers are right now burning hours trying to figure out whether this same needle can be threaded twice.

To me, what I love about this transaction is that it showcases the boundless creativity of the cannabis industry, working within massive constraints to continue to move forward. It’s crazy, but it just might work.

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.