By Chris Walsh
Publicly traded companies in the cannabis space have traditionally shied away from handling marijuana directly, focusing instead on hemp-based products and ancillary offerings such as growing equipment and real estate.
That’s starting to change amid a shift in regulations and laws, growing public support and less perceived risk in general.
Two U.S. companies that trade on the over-the-counter markets recently announced that they are vying for licenses to grow medical cannabis (one in Nevada and another in Ontario), while another public firm bought a majority stake in a leading edibles company.
The developments signal the further maturation of the cannabis industry and could pave the way for other publicly traded companies that handle marijuana, either directly or via unique business structures. At the very least, the moves show that companies are getting more aggressive as cannabis goes mainstream.
“Based on my conversations with companies that are public and private, it’s likely that we’re going to see licensing models emerge, whereby proprietary strains, extraction processes or edible brands are put into public company vehicles,” said Alan Brochstein, a Chartered Financial Analyst who runs a cannabis-focused stock website for investors. “We are headed in this direction because investors want it that badly.”
Positioning for the Future
Terra Tech (stock symbol: TRTC) is one of the companies positioning itself to handle cannabis, announcing in early April the formation of a subsidiary that will compete for cultivation permits in Nevada. The company – which primarily sells hydroponics equipment and locally grown produce – still isn’t 100% sure it will use the licenses given the current risk levels, but it preparing for the future if the climate changes.
Ideally, Terra Tech is hoping federal regulatory agencies – such as the SEC – will issue guidance clearing the way for public companies to get involved in growing cannabis, said Derek Peterson, the company’s chief executive officer. The company figures it has at least two years to make a final decision, as the first licenses won’t be awarded until later in 2014 and winners will have 18 months after that to actually start their operations.
Absent clear indications from the government, Terra Tech will make its decision based on its own intel in discussions with regulators. Alternatively, if other publicly traded companies that handle marijuana move forward successfully, that could be enough for Terra Tech to pull the trigger.
Otherwise, the company could sell the license, lease out the facility to another company, structure some other type of operation around the permit, or abandon it all together.
Why not wait to apply for a license until the climate definitively changes? There might not be any cultivation licenses left.
“We don’t know where SEC stands right now. It’s a gray area,” Peterson said, adding that the company has built up other areas of its business that don’t involve handling marijuana to diversify and limit risk going forward. “But we don’t want to miss the window in what we expect to be a big new market. We don’t have concerns about a public company competing for these licenses.”
Other companies are taking a different approach.
The publicly traded firm Mentor Capital (MNTR) bought a 60% stake in Bhang Chocolates, one of the most well-known edibles companies in the industry. At the same time, Michigan-based Creative Edge Nutrition (FITX) is vying for a cultivation license in Canada, where medical marijuana is officially recognized by the government.
Bill Chaaban, the chief executive officer of Creative Edge, said the recent change in Canada’s medical marijuana laws spurred the move to get involved with the plant there. The company, however, will not be looking to grow cannabis in the United States until there’s a change in federal law.
“We’re not violating U.S. federal law. We’re [going to cultivate] only in Canada through a Canadian subsidiary,” Chaaban said. “I would never even think of doing it in Colorado, Washington State or California at this time. When you violate federal law in the United States, you have a problem.”
Canada offers a glimpse of what could happen in the United States if the government changes its position on medical cannabis: Earlier this month, a cultivation company debuted on the Toronto Venture Exchange to much fanfare. Other publicly traded companies up north are pursuing similar opportunities.
Risks vs. Rewards
In the United States, companies are becoming a bit more aggressive in part because of a surge in interest in cannabis stocks.
“Basically, higher valuations are encouraging entrepreneurs to take more chances, because they are getting paid more to take these chances,” Brochstein said. “The public market caps are really high, and I think investors are recognizing a lot of these companies are not as leveraged as much as they really want them to be. People want to invest in cannabis, so they’re really willing to pay a lot right now.”
The successful implementation of recreational cannabis in Colorado and the release of new federal guidance on the marijuana industry (the so-called Cole Memo) have encouraged executives to take on more risk as well.
That said, there are still valid fears that the SEC will crack down and halt trading of companies that deal with marijuana, which could wipe out the entire business.
The SEC hasn’t issued any guidance on this issue one way or the other, but the uncertainty over how it will respond is high enough to deter most cannabis-touching companies from going public.
“No one wants a worst-case scenario of waking up one morning and having their shares halted,” Peterson said. “Public companies live and die by trading, and when that shuts off it’s a dangerous thing for shareholders and the company.”
Still, the opportunities in the cannabis market are so immense that some companies are now willing to shoulder additional risk – particularly if it means positioning themselves for the future.
“We have a fiduciary responsibility to shareholders to not move in front of a moving bus, but also to not sit and wait while significant opportunities pass us by,” Peterson said. “We can’t wait and watch others come in with appetite in this space and grab a bunch of market share quickly.”