Canada has been good to MedMen, the largest cannabis retail chain in the U.S. The Los Angeles-based company has brought in more money in the last six months than it has in the last six years. The major catalyst for this was its decision to list on a junior stock exchange in this country called the Canadian Securities Exchange (CSE). The combination of public and private money it was able to raise by listing on the CSE in June is a whopping USD $250 million.
MedMen has used that windfall to buy more real estate in the U.S. and fund the biggest cannabis-related takeover in American history with their purchase of medical cannabis provider PharmaCann. MedMen’s Senior Vice President of Corporate Communications Daniel Yi says “essentially we bought PharmaCann with 25 percent of MedMen. That would not be possible if we were not a publicly-traded company. That’s why we went to the CSE in order to tap the public market. It’s the best option available to us today.” MedMen’s market cap is now around $2.5 billion.
The CSE has become the go-to option for a growing number of companies like MedMen, which are based in the U.S. or serving the American market. Two industries in particular have flocked to the CSE: cannabis and cryptocurrency/blockchain. Of the 400 companies listed on the junior exchange, 106 are cannabis companies (49 have direct exposure to the U.S. market) and 41 are blockchain-related enterprises.
The CSE was first recognized as a stock exchange in 2004. Back then, it had 25 listings. In the last two years, it has seen a flurry of listings from crypto and cannabis companies. Both the cannabis and crypto industries offer high-growth returns and outsized risk, especially from less established players.
They are also two industries that are very attractive to younger investors. Earlier this year, the CEO of TD Ameritrade, reported a 72 percent increase in the number of investment accounts opened by millennials on his trading platform, which is one of America’s largest. CEO Tim Hockey credits interest in cryptocurrency and cannabis stocks and Exchange Traded Funds, or ETFs, which are a collection of stocks bundled into one investment vehicle.
For a company like MedMen (its interior pictured below) listing on an American stock exchange isn’t possible because although they operate in states where weed is legal, cannabis is still illegal on a federal level. Cannabis companies with exposure to the U.S. market are banned from listing on U.S. stock exchanges as well as Canada’s largest stock market, the TSX and its junior exchange the TSX Venture.
Big Canadian names however, like Canopy, Tilray, and Cronos list on American exchanges and yesterday, Aurora Cannabis made its debut on the New York Stock Exchange. Because they don’t serve the U.S. market, they’re not in danger of violating any federal laws. Although weed is prohibited federally, it’s not clear how or if this should be enforced. This uncertainty was sparked on January 4 by Attorney General Jeff Sessions who rolled back Obama-era protection that directed federal prosecutors not to target weed businesses operating in accordance with state law. This matter is before the U.S. senate in the form of the “States Act.”
John Kaden is the Chief Investment Officer with a New York-based cannabis investment fund called Navy Capital. He sees a “higher than 70 percent chance” that questions regarding federal laws will be cleared up in the first half of 2019 — which could change where these companies want to list. “We’re hearing renewed momentum towards something looking like a State Act and it’s bipartisan, coming from both sides including the White House itself. Donald Trump sees this as a popular way for him to get in front of an issue that could ultimately drive voters towards him and his party... in the 2020 election.”
For now though, that legal limbo continues to drive interest in the CSE. Acreage Holdings is a New-York based cannabis investment company planning to go public on the CSE in the coming weeks. Its board of directors includes John Boehner, the former speaker of the U.S. House of Representatives and former Canadian Prime Minister Brian Mulroney.
When it comes to crypto, between the TSX Venture and the CSE, there are 65 publicly-traded blockchain companies, which means Canadian exchanges lead the world. Deepak Kaushal is the Managing Director of Equity Research at GMP Securities and he believes this country is home to the largest number of publicly-traded cryptocurrency and companies listed. “Canada is, to my knowledge, the biggest in terms of public equities but it still represents a small corner of the industry.”
Cryptocurrency companies, which are also part of a nascent industry, often don’t have the two years of audited financials needed for an IPO in the U.S. Several have chosen to list in Canada, on the TSX Venture. However, an increasing number have opted for the CSE, whose requirements aren’t the “gold standard” that the benchmark stock exchange demands. That typically means they can get listed more quickly, with less paperwork, cost, and sometimes less scrutiny involved.
“The thresholds for listing on the Toronto Stock Exchange will be higher than they are on our exchange but they’re similar in nature,” says Robert Cook who is the CSE’s Senior Vice President of Market Development. “There are a lot of speculative securities here because the companies tend to be at an earlier stage,” which he likens to the TSX Venture. The CSE, like the TSX and the TSX Venture are all kept in line by the same regulator, the Ontario Securities Commission (OSC).
It’s difficult to get a good handle on the risk involved with putting money into emerging industries like cannabis and crypto. Barry Schwartz is the Chief Investment Officer of Baskin Wealth Management. He suggests investors steer clear of the CSE. “If you invest in any companies on this exchange, you have to be prepared to lose all of your money. My advice is to stay away,” he says. “You may be able to cherry pick one name or two, but most will go to zero, in my opinion.”
Cook says the CSE is not for everyone. “We separate the world into two kinds of people: those that appreciate us and those that don’t know us yet."
Cover image courtesy of VICE