Fear of intervention by the federal government, as well as strict regulations, is forcing American cannabis companies to consider going public in Canada instead of in the United States.
One of the latest U.S.-based cannabis businesses looking to list shares in the “Great White North” is MedMen.
MedMen, which has its headquarters in California, operates 18 modern cannabis retail stores and cannabis production facilities in three states: California, Nevada, and New York. The company also employs 700 people.
Moreover, MedMen has two funds with $150 million to encourage cannabis investments. Most of the company’s assets were rolled into MedMen Enterprises. This move is in preparation for a reverse takeover (RTO) to list on the Canadian Securities Exchange (CSE), which is an alternative exchange.
According to MedMen co-founder and CEO Adam Bierman, the company is planning an RTO with a listed shell entity rather than an IPO or initial public offering. Bierman anticipates that the company will list within the year’s second quarter. Currently, it is looking for a partner.
What is a reverse takeover?
An RTO is a kind of merger that a private company uses to become publicly traded without resorting to an IPO. Initially, the private company purchases enough shares in order to control a publicly traded company. Then the private company’s shareholder uses its shares to exchange for shares the publicly traded company. Effectively, at this point, the private company has already become a public company. An RTO is also called a reverse IPO or a reverse merger.
With this kind of merger, there is no need for the private company to pay the expensive fees that are commonly associated with arranging an IPO. The company, however, does not get any additional funds through the merger. Moreover, the company has to have enough funds needed to complete the transaction by itself.
Bierman explained that the Canadian public markets are offering access to a good deal of capital, with a lot of speed and certainty. He also said that there is an appetite among global investors for a U.S. play, especially a U.S. play with a California exposure. Now, he added, is the time where getting into the Canadian public market makes the most sense.
The major exchanges in the U.S. – such as the New York Stock Exchange and Nasdaq – have very strict listing requirements, which include market capitalization and revenue hurdles. A company has to be huge to get on these exchanges.
These stringent requirements pose a major problem for American cannabis companies. The hurdles, coupled with continued legal restrictions, involved in listing on major U.S. exchanges are forcing more U.S.-based cannabis companies to consider going to Canadian exchanges instead.
In Canada, a small company can continue to develop in the public space.
And why CSE?
The country’s largest stock exchange, the Toronto Stock Exchange (TSX), already has a few cannabis companies on its list. And the combined capitalization of the big cannabis companies that are listed there – including Aphria and Canopy Growth – exceeds $20 billion. Currently, all of the cannabis-related companies that are listed on the TSX are based in Canada.
Compared to TSX, the CSE is more lenient. It currently trades close to 60 cannabis companies, many of which are based in the U.S. For these companies, the market caps are significantly smaller. U.S. companies that are listed on the CSE have a combined market capitalization of around $230 million.
According to CSE CEO Richard Carleton, they know how to do smaller deals for the smaller companies on the stock exchange.
Carleton said that they have a strong pipeline of both Canadian and U.S. cannabis companies applying to list on the CSE. This, according to him, is an indication that there is plenty of room to grow when it comes to the build-out of the U.S. legal cannabis structure.
What does Canada have to gain?
Canada’s local financial system will benefit from allowing U.S. companies to come in. In this case, Canada is going to have an advantage on investment dollars, intellectual property, and tax money from the cannabis industry. It will also have the advantage of developing cannabis-related investment opportunities.
Troy Dayton, cannabis investment and market research firm Arcview Group’s CEO, this is a loss for the United States. Because of the conflict between federal and state governments in the U.S., other countries like Canada, Germany, Israel, and Brazil have a unique opportunity to take the cannabis industry out of its hands.