Bermuda is lifting a regulatory ban on marijuana investment funds, a move that could grow the pool of international capital available for the legal cannabis industry and blaze a trail for other offshore financial centers.
It is part of the British island territory’s plan to court the medical marijuana industry – both investment funds and cultivation – to boost its sagging economy.
In November, Premier David Burt said Bermuda will establish a regime for domestic medical cannabis production, followed by a Cabinet-level meeting with Ontario-based Canopy Growth CEO Bruce Linton.
The Bermuda Monetary Authority (BMA) will start registering funds with investment strategies linked to the cannabis industry, provided they do not break the law where business is being conducted, Melissa Morton, assistant director at the BMA, told Marijuana Business Daily.
She noted the caveat that any business activity must be legal at a federal level.
“This therefore rules out investments in the U.S., even if from states where cannabis use is not an offense,” she said.
Andrew J. Wilder, chairman of the cannabis group at the Torkin Manes law firm in Toronto, believes lifting the regulatory ban on funds could lead to greater capital access for legal cannabis businesses.
“People who wouldn’t otherwise be interested in investing, or who could perhaps invest more money, would likely find that by structuring some of their cannabis investments through a Bermuda fund to be an attractive option,” he said.
“… If they flow their money through such a fund, the taxes that would be payable in connection with monetizing the investments made by the fund should be less than they would otherwise be if the investor were to invest directly into the cannabis business, and as such, the return to the investor should generally be higher.”
“Investors smell opportunity,” Elizabeth Denman, director of Conyers Dill & Pearman, the first offshore law firm in Bermuda, wrote in a report. “The number of investment funds and exchange-traded funds (ETF) focusing on the sector has been growing steadily.”
Fund opportunities vary
She wrote that legal cannabis presents a promising alternative for institutional investors and asset allocators seeking new ways to diversify.
Denman noted that Bermuda’s investment funds regime falls into two broad categories:
- Open-ended funds, “where investors may redeem their investment as and when they desire on a predetermined schedule, which are subject to registration and/or authorization by the BMA.”
- Closed-ended private equity-style funds, “where only the fund itself can decide if and when to redeem investors, which require no regulatory approval and are treated more like traditional holding structures.”
Investment funds can take various forms in the country, including companies, limited partnerships, unit trusts and limited liability companies.
Denman, who specializes in investment funds, wrote that those involved in raising and deploying capital for investment in the newly legalized cannabis industry will be interested in the professional categories of open-ended investment funds.
“Aimed at sophisticated investors and their advisors, the Professional Funds range offers operators swift access to market,” she wrote.
“While these funds must be registered with the BMA, they are subject to streamlined regulation by the BMA ensuring speed to market and the utmost agility in raising capital quickly.”
Cheryl Reicin, a partner at Torys in New York and Toronto and the head of Torys’ Life Sciences practice, said it’s a big step forward, and she expects other offshore centers will follow suit.
“What this solves is it allows for more funds to be set up in a more tax-efficient way,” she said, noting that it ultimately opens the door to more funding options for cannabis-related companies.
“The trend here is the world is seeing this as a legal industry, and (there’s) a willingness to differentiate between the illegal cannabis industry and the legal cannabis industry.”
Bermuda’s move not only opens the door for funds but also for intellectual property (IP) holding companies in offshore jurisdictions, Reicin said.
IP is becoming increasingly important for cannabis companies as they look to differentiate themselves from peers still focused on trying to squeeze a profit out of a commodity.
“Many of the jurisdictions where we normally build offshore tax structures for IP holding companies have not been available for cannabis-related companies due to concerns regarding money laundering,” Reicin said.
She drew a parallel to pharmaceutical companies, many of which have offshore IP strategies intended to maximize returns to shareholders.
“As the cannabis industry becomes global,” Reicin said, “more companies will need to consider their tax structures in order to remain competitive in the industry.”
Matt Lamers can be reached at email@example.com
To sign up for our weekly Canada marijuana business newsletter, click here.