By John Schroyer
Out-of-state investors are pumping millions of dollars into Oregon’s marijuana industry now that a restrictive residency requirement has been abolished, giving local cannabis businesses a sorely needed pipeline of money to tap as they grow.
In March, Oregon’s governor signed a law eliminating a rule that required every legal marijuana business to be at least 51% owned by an Oregon resident who lived in the state for at least two years.
As a result, cannabis companies are now free to raise money from out-of-state investors in exchange for equity, making the market much more attractive to deep-pocketed individuals and firms looking to fund marijuana businesses.
“For every five people who came into my office, three or four of them were looking for capital, and they couldn’t find it here in Oregon,” said Portland attorney Amy Margolis, who is also the executive director of the Oregon Cannabis Association, which pushed the new law through the legislative process. “It became clear that unless people could reach outside the state for investment money, we weren’t going to have a very successful market.”
Since March, however, the number of deals that have been struck has been sky-high, with all types of cannabis companies – including retailers and cultivators – raising “hundreds of thousands of dollars” each to grow their companies, Margolis added.
“I think the typical raise is under half a million dollars,” Margolis said.
Sam Chapman, a co-founder of New Economy Consulting, said he’s even seen a few raises between $1 million and $5 million from out-of-state investors.
“Without a doubt, there’s more capital available in Oregon now than prior to the residency requirement being removed. Overall, that’s a positive outcome,” Chapman said.
Sara Batterby, the CEO and president of Hifi Farms, said her company has just completed a $1.375 million seed round with 12 investors thanks to the law change.
Only one of those investors is an Oregon resident. The rest are dispersed throughout the country, including Texas, Georgia, Illinois and Arizona. All threw in cash for controvertible notes that will eventually become equity in Hifi Farms.
Hifi will be using the money to fund an infrastructure expansion on a 50-acre farm in Hillsboro, west of Portland, Batterby said.
“It’s been critical,” Batterby said of the state’s move to nix the residency requirement. “There isn’t the same type of capital that exists in some other cities. It would have been a disaster for the industry if there had been no out-of-state investing.”
Chapman said most of the companies that have raised money in recent months plan to use the money to purchase equipment – such as extraction machines – and fund real estate needs, according to the deals he has examined.
So companies that offer such services to the industry “are going to be in a great spot” as the state starts licensing the first recreational marijuana businesses in the coming months, Chapman said.
There was some concern within the industry that doing away with the residency requirement would lead to outsiders taking over the Oregon cannabis trade.
So far, though, most of the investments involve out-of-state money looking for local partners, as opposed to investors starting up their own companies and trying to muscle out local businesses, Margolis said.
“We have people who are thinking about moving here to open up a cannabis business, and very few of those people are coming here and saying, ‘I’m from Wisconsin, and I’m going to do this all on my own,'” she said. “They’re coming here, and they’re saying, ‘How do I find Oregon partners to invest in?’ And that is almost across the board.”
Chapman said the four states his office gets the most out-of-state investment inquires from are California, Colorado, New York and Florida.
At the same time, Chapman warned that in the long term, the rush of investment could lead to overproduction and an eventual price crash, which has started to materialize in Colorado, arguably because of a supply glut.
“In terms of the land rush that’s coming in for cultivation property right now, I really hope that people are looking at their pro formas and anticipating the eventual drop in price of cannabis, because when you’re going out there to buy that $3 million 100,000-square-foot warehouse, I hope you’re building in the overhead and the eventual drop in price,” Chapman said.
That price drop, he said, is basically guaranteed.
“If it’s $2,000 a pound today, two years from now, it’s probably going to be $1,200, and if you haven’t included that in your pro forma, you’re probably going to be hurting two years from now, and you might be out of business,” Chapman said. “There are a lot of people throwing a lot of money around right now without doing any due diligence, and they’re basically lighting some of that money on fire.”
John Schroyer can be reached at email@example.com