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- Investors have poured nearly $3 billion into blank-check companies, or SPACs, designed to take advantage of deals in the cannabis industry since the start of 2019.
- SPACs provide an alternative pathway for companies to go public. It’s a method that’s attractive in cannabis as many investors got burned when the industry underwent a sharp correction in the middle of last year.
- SPACs have a limited timeframe to close deals, and there’s lots of competition to capture a small pool of suitable targets.
- The clock is ticking on many of these SPACs, according to data BI obtained, meaning that they need to either find targets quickly — or fold.
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Blank check companies are all the rage in the financial world, and there is perhaps no sector with as many flashy deals as cannabis.
Investors have poured almost $3 billion into blank check companies since the start of 2019. These massive bets on special purpose acquisition companies or SPACs are an effort to ride the upside of the rapidly growing legal cannabis industry in the US.
Cannabis is still considered an illegal Schedule I drug by the federal government. That’s despite the fact that five states voted to legalize cannabis in November, and the House passed the MORE Act, a bill to federally decriminalize cannabis, earlier this month.
SPACs have a limited timeframe, typically around 18-24 months, to put investors’ money to work by closing deals. The clock is ticking on many of these cannabis SPACs, according to data provided to Business Insider by Viridian Capital Advisors, a cannabis-focused advisory firm.
So far, four out of 17 cannabis-focused SPACs have successfully “de-SPACed,” or found merger targets. That still leaves over $1.5 billion sitting on the sidelines, waiting to be invested.
If SPACs are unable to close deals, the money gets returned to investors and SPAC sponsors can lose a significant chunk of their investment, said Ari Edelman, a partner at the law firm Reed Smith who focuses on SPACs.
SPAC sponsors, or the team that actually manages the SPAC, are required to put up what’s known as “risk capital,” which is typically around 3% of the total raised, Edelman said.
“That money will go away if a deal doesn’t get done or a deal isn’t successful,” Edelman said. Because of the specific rules as to which companies SPACs can invest in, it will only get more difficult to close deals as competitors sweep up the most attractive targets.
A range of experts including M&A lawyers, cannabis executives, and bankers that Business Insider spoke to for this story say that they expect to see a flurry of SPAC deals close in the first quarter of 2021. But they also expect to see some SPACs fold, look for deals outside of cannabis, or pursue multiple small deals, potentially putting the SPAC sponsors in conflict with their investors who may have wanted to focus on investing in cannabis rather than other emerging industries.
Stock Market What are SPACs? Why do they work for cannabis?
Major stock exchanges like the NYSE or Nasdaq don’t allow companies that sell THC in the US to list, since cannabis is still federally illegal. That’s forced most of these firms to fund their growth by listing in Canada.
Traditional investors, like pension-backed venture capital or private-equity firms, are reticent to get involved in cannabis due to agreements with their investors — who may be sovereign wealth funds or religious groups, for example — that prohibit the funds from being invested in “vice” industries.
So cannabis companies can only tap a narrow pool of investors compared to other industries, giving them few options and forcing some companies to go public earlier.
That’s where SPACs come in. SPACs pool money from investors into a “blank check” public company. Once public, the SPAC can go out and make acquisitions or investments based on a strategy defined by the company’s managers. The process is often viewed as a way for a company to go public that couldn’t otherwise do so, and therefore doesn’t hold as much prestige as a traditional IPO.
Viridian President Scott Greiper said the SPAC market in cannabis started to heat up in early 2019 in Canada.
At the time, both US and Canadian cannabis firms that overpromised and underdelivered were forced to cut staff and close down. That made investors reluctant to bet on IPOs or reverse takeovers, and SPACs became the chief way for cannabis companies to raise money.
Stock Market SPACs have ‘saved the day’ in cannabis
Capital markets, in other words, shut the door on most cannabis deals by the middle of 2019. Except for SPACs.
“The SPAC market in cannabis has absolutely saved the day in regards to go-public transactions,” Greiper said. He added that because institutional investors are able to invest in SPACs and that these SPACs are listed on marquee exchanges, it’s a strong vote of confidence by the financial sector in the cannabis industry.
To Marc Hauser, an attorney who co-leads Reed Smith’s cannabis law team, investors that took a longer view of the cannabis industry tried to take advantage of a “trough in valuations” in the middle of 2019 by raising SPACs to hunt down distressed assets.
Those early cannabis SPACs, like Silver Spike Capital and Subversive Capital Acquisition Corp, have since closed major deals, though others are left figuring out where to invest, as valuations rise and attractive targets get scooped by competitors.
Stock Market From Jay-Z to Weedmaps, a flurry of high-profile SPAC deals
Among the deals:
- Subversive Capital Acquisition Corp., which raised $575 million and is listed on Canada’s NEO Exchange, signed a deal to acquire California cannabis companies Caliva — which counts Jay-Z as its “chief visionary officer” — and Left Coast Ventures in November.
- On Thursday, Silver Spike Acquisition Corp said it was merging with cannabis e-commerce platform Weedmaps, giving Weedmaps a $1.5 billion valuation and a coveted Nasdaq listing. The stock popped 49% on the news.
Weedmaps CEO Chris Beals said he chose to go the SPAC route because it “affords you more time to tell the story,” versus a traditional IPO roadshow. “We wanted to make sure people understood the complexity of what we do, as well as the complexity of the cannabis space — that was important.”
Weedmaps, for its part, is not a “plant-touching” company (as it’s known in industry parlance) and is not subject to the same regulations as a company that sells marijuana directly.
Since cannabis is legal in Canada, SPACs listed on Canadian exchanges are one of the few pathways left available for plant-touching companies to go public given the market’s wariness of cannabis after the market contraction last year.
But since many SPACs are listed on US exchanges, they’re not able to do plant-touching deals and are left to look elsewhere.
“It’s forcing their hand to look at the ancillary side of the industry, whether that’s hemp or software or ag-tech,” Greiper said of the SPACs listed on the US exchanges. “What does that mean? They’re having trouble finding targets because they waste so much money.”
There are very few non-plant touching companies — whether cannabis tech or hemp — that meet those size requirements, Greiper explains.
Canadian-listed SPACs, like Subversive Capital, have the advantage of looking at acquisition targets that touch the plant, giving them a bigger pool of candidates.
While it is fairly common for SPACs to get extensions on deadlines, that decision is up to the exchange where the SPAC is listed, and it could come with extra costs.
SPAC sponsors, who already put up risk capital in the deal, may give financial incentives to their investors to stay in the deal if the deadline passes, says Edelman, the Reed Smith partner.
“Investors have a choice at that point: I could either get my money back, or I could stay in and get something extra special when the deal closes,” Edelman said.
Hauser of Reed Smith says that the outlook for the SPAC market in cannabis is still rosy, despite the challenges in finding suitable targets.
“The cannabis marketplace in terms of investor sentiment, in terms of M&A activity, and in terms of opportunity, is much stronger than it has been all year,” he said. “Even if you’ve got these companies that haven’t been able to find a target yet, the opportunities are only going to increase.”
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