Has Investing in Cannabis gone mainstream? In “As Marijuana Goes Mainstream, Investors Rush In,” The New York Times answered this question affirmatively, but that article focused primarily on publicly traded companies. What about industry-wide?
As our attorneys regularly put together investment rounds for cannabis companies we see these macro trends at the deal level. And in recent months we are increasingly seeing a wider variety in types of investors — often private investors more familiar with commercial real estate, tech investing, or other private company financing — crossing over into cannabis. These investors bring a wealth of knowledge on terms, structures, and business strategy. For many tech-focused startup companies providing services to the cannabis industry, the deals may look nearly identical to those in other industries; in fact, we’ve done equity financings where the documents are identical to a typical tech startup.
However, particularly for investors working with “direct operator” cannabis companies for the first time, there will be certain aspects of the cannabis industry that do not translate and other aspects that are shocking or incomprehensible to investors coming over from other industries. Now that cannabis has gone “mainstream,” investors may believe all the kinks have been worked out, but as those in the cannabis industry know, that’s not true. Not by a long shot.
- Banking remains imperfect, and there still are gaps by geography or company size and type. Many cannabis companies still operate on an all-cash basis.
- Company Execs (and others involved in “direct operators”) can still go to jail for this. That’s what federal illegality means. This comes as a shock to many.
- Many investors and funds are still going to be unable to invest, depending on their source of funds. For example, state or public pension funds are a non-starter.
- Many cannabis businesses are limited by state borders.
- Regulators are still catching up at the state level and their timing may not meet with your spreadsheet projections.
- Regulators at the local level are highly unpredictable. On cannabis financing, our corporate finance lawyers often must contend with municipalities that had permit processes up and running and then completely changed their minds.
The above contribute to the “green tax” in the cannabis industry — factors that complicate and add expense to doing business in the industry — and these often surprise investors coming from other industries. Investors that are open-minded and have a “growth mindset” can make the shift pretty quickly. But other investors may grow frustrated and impatient with having to face the hurdles faced by all cannabis companies. Companies are wise to evaluate potential investors and test their mettle, as the industry will soon enough.