Five tips marijuana executives should consider before their business becomes a publicly traded company
By Lisa Bernard-Kuhn
From initial public offerings to reverse takeovers, a growing number of cannabis companies are turning to public markets in the United States and Canada as they hustle to raise the capital needed to stay ahead in the green rush.
“These companies are really starting to see the public markets as a viable option for them to raise capital, and clearly over the past two and three years, we’ve seen the pace and number of firms going public really accelerate,” said Jason Paltrowitz, executive vice president of corporate services at OTC Markets Group, which manages trading platforms for more than 10,000 over-the-counter securities.
“Every year it has grown exponentially on itself, and this year will be no exception,” Paltrowitz added.
While making the leap to public markets offers a host of upsides, including quicker access to capital, the move is a complicated maneuver that carries risks for companies that fail to prepare, said Matt Karnes, founder of New York-based GreenWave Advisors.
“There are major costs and compliance issues to consider that could become burdensome if you’re not prepared,” said Karnes, a CPA who provides financial analysis, auditing and accounting services to cannabis firms in the United States.
As more companies consider taking the public plunge, Marijuana Business Magazine asked industry experts to offer their insights, lessons learned and top tips for making the move. Here’s a roundup of what they had to share:
1. Firm up Your Financial Management
“You have to get your financial house in order” once your business is committed to making the jump, Paltrowitz said. “For some cannabis companies, that’s a little tough, because that means culling through all that cash that’s in a vault in the back room.”
Even more seasoned, multibillion-dollar companies face a hefty checklist to prepare, said Danny Brody, vice president of investor relations at The Green Organic Dutchman, an Ontario, Canada, marijuana grower that trades on the TSX Venture Exchange.
“Transitioning from a private to public company involves an incredible shift in levels of disclosure, responsibility and transparency, and a company only has one chance to go public, so it must be done correctly,” said Brody, whose company raised $99.3 million (CA$132.2 million) with its early May initial public offering (IPO) – a record in the cannabis industry.
He said executives mulling an IPO should consider:
- Does your company have a rational corporate structure similar to that of peer group companies? You may not want a complicated structure such as multiple share classes, super voting rights or other things that can alienate investors.
- Does your company meet the exchange requirements for minimum shareholders? Remember, the only time you get to choose your shareholders is when you are private. Consider the type of shareholders, whether institutional, retail or distribution. Next, work backward to accomplish these goals before going public.
- Have you positioned your company to be exclusive or inclusive? Were retail investors allowed to participate? Did you market to institutions privately? Entrepreneurs need to work hard on their private funding efforts; by doing so, they will find support in their public listing.
- Have you spent the time to acquire talented senior executives, directors and compliance personnel to meet the rigorous demands of the public market and a fast-growing company?
2. Consider Canada Versus the United States
For now, U.S. plant-touching cannabis companies remain blocked from trading publicly on the largest exchanges – including the Nasdaq and New York Stock Exchange – because of marijuana’s federally illegal status.
Instead, many U.S. cannabis startups have turned to the over-the-counter markets, where reporting restrictions are less stringent and the process can be less time-intensive and costly.
According to OTC Markets Group, the number of cannabis firms trading in the top two venture markets – QTCQX and QTCQB – has grown to nearly 90 companies this year compared with 53 in 2015. The cannabis sector now accounts for $6.4 billion in overall dollar volume and more than 6% of total securities traded across those two markets.
But because of the lighter regulatory thresholds, OTC markets attract less interest from major institutional investors – limiting the potential sources for raising capital.
Increasingly, companies looking for larger injections of capital are seeking out listings on Canadian exchanges, where public cannabis firms raised nearly $3 billion in the first quarter of this year, according to market data.
Across Canada, a growing number of investment bankers and larger institutional investors are embracing the cannabis sector, opening access to a wider range of growth capital, said Pete Kadens, CEO at Chicago-based Green Thumb Industries (GTI), a multistate medical marijuana company that went public on the Canadian Securities Exchange in June.
“If want to continue to grow, we have to have access to cost-effective capital,” he said. “Given the timing and our need for more capital to expand, we needed to enter the market that had the best opportunity for liquidity, and that was the Canadian market.”
3. Weigh a Reverse Takeover Versus an Initial Public Offering
Companies considering going public have two main options to choose from:
- An IPO, where companies offer stock on a public market for the first time. This is the traditional way most businesses have entered the public market.
- A reverse takeover (RTO), which involves acquiring a majority stake in a company already traded on a public market. In many cases, the existing public entity is a shell company with limited operations that’s in the market to be acquired.
Knowing what’s right for your company depends on several variables, according to GTI’s Kadens. In June, his company went public on the Canadian Stock Exchange via a reverse takeover.
“There are pros and cons of each,” he said of IPOs and RTOs.
GTI weighed its options knowing the company wanted a cost-effective path with fewer regulatory hurdles, according to Kadens.
“Speed to market was important to us, and that’s why RTO became the clear winner,” he said. “It allowed us to get to market faster, with an existing company that had already been audited, and that just made it an easier process for us.”
Meanwhile, at The Green Organic Dutchman, Brody said an RTO was “never an option,” considering the firm’s size.
“The management of TGOD are all significant investors, and we protect the interest of all our shareholders,” Brody said. “An IPO may take longer and cost more, but it provides prospectus-level disclosure, the highest-level disclosure possible, with no dilution of cheap shell shares. For us, an IPO was the only option.”
4. Going Public Isn’t Cheap
Once you’ve committed to take your company public, be ready to invest time and money, Kadens said.
Even though his business chose what for GTI was the less costly and time-intensive RTO route, Kadens said the process “isn’t for the faint of heart, that’s for sure.”
“It is easily a seven-figure endeavor, and you have to understand that from the outset and commit to that,” he said.
Most of the costs are tied to lining up the experts needed to prepare your firm for the new regulatory reporting guidelines the company will face as a publicly traded entity.
“You just really have to be sure you’re hiring good advisers,” Kadens said. “The bankers, lawyers and accountants around you really need to know their stuff. The advice I’d give myself if we were going through this process again would be to just dial back the expectations on how long you think everything is going to take.”
5. Have a Post-Public Plan
Too often, companies consider going public “the end of the road,” said Paltrowitz of OTC Markets Group.
“The reality is, it’s the start of the race,” he said. “If you’re not ready to do what’s required of you and disclose the way the markets want you to disclose, respond when investors want you to respond … then you are going to fail, and all of the work you put into going public was a wasted exercise.”
Having a plan to market to investors, once public, is critical, according to Green Organic Dutchman’s Brody.
“The biggest change you need to be ready for is you will have a new division in your company that needs to be trained and up and running Day One,” he said.
Karnes agreed, noting that startups, in particular, have their work cut out for them.
“For a company that has operated largely in an entrepreneurial state, it takes a lot of work to adapt and become more regimented,” he said. “You just really have to be mindful that you’re going to be opening your company up to much more scrutiny, and generally you’re just going to have more people in your face.”