Cannabis companies in the United States currently face a tough environment in terms of raising money.
However, as an example of how marijuana businesses are looking to address this funding challenge, one California producer is turning to mom-and-pop investors as opposed to venture capital.
Goldenseed, a privately owned Santa Cruz-based cultivator and processor, said it has qualified to offer the general public shares through the U.S. Securities and Exchange Commission (SEC) ahead of any potential listing, claiming it is the first such plant-touching company to do so.
“I do think it is the right time to be offering this as the capital markets have tightened, but we would have done it anyway,” Goldenseed CEO Scott Goldie told Marijuana Business Daily.
“We have tried to stay away from private equity and venture capital. It is important to us to maintain control.”
Such an offering will appeal to product advocates rather than returns-focused investors and should not be viewed in the same way as analyzing and investing in publicly traded cannabis companies, said Mike Regan, an equity analyst for MJBizDaily’s Investor Intelligence.
“This alternative source of financing can give a branded consumer product with a fervent customer base – like many cannabis companies – the opportunity to develop a deeper connection with its customers while also raising cash.
“Participants should focus more on the value of the perks and supporting the company’s mission and view any long-term potential return as a risky secondary consideration.”
Reg A offerings not new in industry
While Goldenseed appears to be the first private cannabis cultivator and processor to get SEC approval to sell its stock in such a way, Regulation A offerings in the industry aren’t new.
Other cannabis companies that have ventured down this route have had mixed success.
One of the more high-profile companies in the industry to tread this path has been media group High Times Holding. The Los Angeles-based company this week again extended its so-called Regulation A+ offering deadline, this time to March 31, 2020.
That news came as High Times Holding announced the hiring of a new CEO after Kraig Fox left his role after only nine months on the job.
Regulation A+ is a variant of Regulation A and is typically even more highly regulated. Regulation A was a law passed as part of the 2012 Jumpstart Our Business Startups (JOBS) Act, allowing small and emerging companies to raise capital by selling stock online.
Other cannabis companies that also have explored the Regulation A fundraising route include California-based lab testing group Alchemy Ventures and research and publishing company Med-X.
Alchemy last filed news of its venture in August 2018 and has reported not selling as much stock as it had hoped.
Med-X, whose initial Regulation A+ offering was suspended by the SEC in 2016, relaunched the offering last year and currently has over $7 million invested from more than 2,400 parties, according to its website.
Goldenseed to remain majority-owned
In reality, the amount of ownership of Goldenseed for the public from the initial Regulation A offering would be small – only about 4% compared to the majority shareholders who control the rest, including CEO Goldie and other senior executives.
But the current offering is planned to be only the first of many for the company.
Potential investors should look at this as a longer-term opportunity, said Kendall Almerico, a Washington DC-based attorney who has experience raising money for companies outside the cannabis industry through such initiatives.
“This was a strategic decision we made purposely not to list on a Canadian exchange or through the OTC,” Almerico told Marijuana Business Daily.
“We could do an IPO three or four years down the line or we could get to be an acquisition target, but there is no guarantee and people should be investing in this for a few years.”
All about the brand
The company, which owns about 110 acres of land for sustainable cultivation and processing of both marijuana and hemp, plans to build brand awareness through the offering. Its products are currently in approximately 50 dispensaries.
“This is really a way to raise brand awareness not only in California but across the country,” Goldie said. “This will allow people to invest at an early stage to promote the company and to build an army of brand ambassadors.”
Almerico said he had been approached by about 200 other cannabis companies looking to try the Regulation A avenue as a way to raise money but has turned them all down.
He has helped Scotland-based craft beer company Brew Dog raise about $30 million for its U.S. operations through a similar process.
“This is the one (cannabis company) that will work for Reg A,” he said. “Goldenseed are doing it the right way.”
Perks for Goldenseed investors as currently listed include an annual party, discounts at the company store, farm tours, private dinners and branded clothing.
The company will be cash-flow positive in the first quarter of 2020, Goldie said, a good time to be offering such shares to the general public.
Proceeds from the Regulation A offering would go toward expansion of Goldenseed’s facilities, capital improvements, debt reduction and marketing.
Nick Thomas can be reached at email@example.com
For analysis and in-depth looks at the investment trends and deals driving the cannabis industry forward, sign up for our premium subscription service, Investor Intelligence.