Profits and Potential

Money. Everyone thinks cannabis businesses are swimming in it. Cannabis businesses, however, know better. For many reasons—federal illegality, IRC Code Section 280, licensing restrictions, cash-only businesses, etc.—cannabis businesses have struggled to raise capital. In Colorado, prior to the opening of retail stores in 2014, most businesses raised capital from friends and family or took high interest loans from private lenders. Many still do.

“For some time, cannabis businesses have sought access to the public markets, as is the case in other states (e.g., California).”

In January 2017, licensed cannabis businesses in Colorado were finally permitted to have out-of-state owners (a maximum of 14), and private equity funds may now own up to 30 percent of a licensed business (no takers yet). Nevertheless, the capital markets in 2018 remain relatively closed to Colorado cannabis businesses. Banks unsurprisingly remain unwilling to lend, and out-of-state investors have often been stymied by a slow-moving and intrusive regulatory apparatus.

These restrictive rules have caused cannabis companies to become creative, as best they can within the stringent rules of Colorado’s Marijuana Enforcement Division (MED). Because so many capital sources cannot (or will not) take equity in a licensed business that “touches the plant,” cannabis businesses sometimes form separate entities for their non-cannabis assets (such as real estate and intellectual property). But these structures create other problems, by making it difficult to spread risk, increasing legal and administrative costs, and confusing regulators and potential investors. Despite these creative “solutions,” however, only legislative fixes can truly open the capital markets for cannabis companies.

For some time, cannabis businesses have sought access to the public markets, as is the case in other states (e.g., California). Business owners have complained, with good reason, that Colorado is at risk of losing its status as a leader in the industry if they cannot access the public markets.

When the Colorado General Assembly convened in early January, one of the first bills to be introduced in the Colorado House of Representatives was HB-18-1011, which would, in addition to allowing an unlimited number of out-of-state investors, allow for public company ownership, presumably beginning in 2019. One of the bill’s sponsors, Rep. Dan Pabon, has been a champion for the industry in the legislature, but he is term-limited, and this will be his last year in the state House of Representatives. The bill would allow the MED to draft rules “substantively identical” to those in the gaming industry for ownership by public companies. This means not only would cannabis businesses be able to sell equity stakes to public companies, but they would be permitted to trade on the public markets, including an initial public offering.

Precedent exists for licensed cannabis companies to trade publicly and to own licensed cannabis businesses that “touch the plant.” Terra Tech, Corp., based in California, owns cultivation and production facilities and stores in California and Nevada. General Cannabis Corp., based in Colorado, has an ownership interest in an edible manufacturing facility in Arizona. Both companies trade on the OTC market.

Imagine a public offering of one of the big chains in Colorado, such as LivWell or The Green Solution, which each sell tens of millions of dollars of cannabis each year. Such companies could be worth hundreds of millions of dollars, perhaps more, if traded publicly. Wouldn’t Wall Street jump at the chance to take these companies public? Would Attorney General Jeff Sessions and the U.S. Securities and Exchange Commission let this happen? There is so much money at stake here, perhaps the prospect of publicly traded companies will be the impetus for Congress to deschedule cannabis. Appeals to justice don’t always lead to change in Washington, but profits and the potential for more often do.