A trifecta of democratic elections – control of the White House and both houses of Congress – gives marijuana industry executives hope for federal reform and encourages investors to pump a record amount into cannabis companies in the first few weeks of the year.
According to an analysis by Denver-based MJResearchCo, North American cannabis companies either closed or announced more than $ 1.6 billion in capital increases in January after the Democrats took control of the U.S. Senate.
“The capital drought that began in late summer 2019 appears to be over. Since the Democratic victory in January, cannabis operators have raised $ 2 billion in new capital, including announced deals,” said Michael Regan, founder and analyst at MJResearchCo.
“The market is investing in improved chances of favorable cannabis legislation with the Democrats in control of the House, Senate and presidency.”
A record year in store?
According to experts, the industry could well bring in a record amount of funding this year.
An upturn in financing activity would be a clear contrast to the previous year, when the financing rose from USD 11.6 billion in 2019 to USD 4.2 billion in 2019 and from USD 14.2 billion, according to data from Viridian Capital Advisors from New York. USD fell in 2018.
Marijuana investors stopped writing checks in 2019 because many companies spent a lot of money trying to gain market share but failed to show a profit. That caused their stock prices to crater.
But investors made a U-turn after the Democrats won both seats in the Georgia Senate runoff on Jan. 5.
In the first two weeks of January alone, North American marijuana companies raised an unprecedented $ 619 million. This is evident from the deals made by Viridian. (See table above).
The money raised so early in the New Year was 100 times the amount cannabis companies bagged in the first two weeks of 2016, and almost double the previous record for that period, according to Viridian January 2018.
“We got off to a good start and a few stars are matched, which could make this a record year,” said Frank Colombo, director of data analytics at Viridian.
For the full January, Viridian counted 21 company raises, with companies closing debt and stock deals worth $ 899.7 million.
The most important deals that have already been closed this year include:
- Massachusetts-based Curaleaf Holdings raised $ 217 million through the sale of 16.5 million shares. Boris Jordan, the company’s chairman, commented, “With the Georgia results confirming the Senate’s democratic scrutiny, we expect the acceleration of federal legalization and, consequently, new opportunities in the sector.”
- Village Farms International, based in Vancouver, British Columbia, raised $ 175 million through the sale of 10.9 million shares to institutional investors.
- TerrAscend, with offices in New York and Toronto, raised $ 175 million for a private placement sale to institutional investors, including Wasatch Capital of Utah.
Multiple sources of funding
Morgan Paxhia, executive director of Poseidon Investment Management, a San Francisco-based cannabis investment firm, is one of those who believes the amount of capital raised in 2021 could surpass the previous high of $ 14.2 billion in 2018.
According to Paxhia, the capital’s sources include:
- Special-Purpose Acquisition Company, better known by the acronym SPAC.
- Traditional IPOs.
- Undo takeovers.
- Mergers and acquisitions.
- Institutional investors.
Emily Paxhia, also a director at Poseidon, is already paying off for the cannabis industry.
“In many ways, perception is more important than reality,” said Paxhia, who is Morgan’s sister.
For example, she noted that industry banking laws for cannabis companies are much more likely to be liberalized under democratically controlled government.
“Any improvements in banking will be better than what we have today,” she said, adding that President Joe Biden has already said he is in favor of decriminalizing marijuana, which could be the first step towards legalization.
And if recreational marijuana is legalized at the federal level, it would open the door for plant-contacting companies to trade on the New York Stock Exchange and Nasdaq, noted Emily Paxhia.
Viridians Colombo said he believes there will be a “280E reform” that will allow marijuana companies to write off equipment and property and other tax write-offs that mainstream companies are now doing.
In addition, large institutional investors will increasingly be willing to provide capital to cannabis companies, according to Colombo.
In the past, cannabis companies often relied on wealthy private individuals and family offices for financing.
Emily Paxhia said she expected more cannabis companies to seek debt financing when reforms go into effect.
Debt, she said, doesn’t dilute existing stocks like equity increases.
“Debt is currently expensive, usually over 10% but more often in the 12.5% to 15% range,” said Emily Paxhia.
In the coming years, if marijuana is legalized at the federal level, debt-related interest rates could become more aligned with traditional businesses, making it worthwhile for many businesses to refinance their double-digit debt.
Yet even if the Democrats were in control at the federal level, Morgan Paxhia warned that captains of industry “should not give up their vigilance and greed”.
For example, the growing cannabis industry could face increased regulatory pressure from federal agencies such as the U.S. Securities and Exchange Commission.
“The SEC is like a glacier – it moves slowly at first, but it crushes everything in its path,” he said, repeating a quote he’d heard.
Similarly, Colombo warned of “potential potholes along the way” noting that federal legalization may take longer than many expected.