Could SPACs rescue the cannabis industry?

With the Democrats in control of the House of Representatives, the Senate, and the White House, cannabis entrepreneurs and business owners are feeling more hopeful than they have done for a long time. As things stand, recreational cannabis use is still illegal under federal law, and just 34 states permit medical marijuana. Companies trading in hemp, legal medical cannabinoids, etc. are generally welcome on the NASDAQ, but those that directly handle cannabis, referred to as plant-touching companies, can’t list on the NYSE or NASDAQ. As a result, most publicly-listed plant-touching companies list on an exchange like the Canadian Stock Exchange (CSE), the TSX Venture Exchange (TSX-V), and the NEO Exchange. Ancillary companies have a nebulous status and some are accepted onto the exchanges.

However, the times are a-changin’. Chuck Schumer, the new Democrat majority leader in the Senate, is heavily in favor of legalizing cannabis and has made it clear that he’s pushing for a change in the law.1 Although President Biden continues to oppose legalizing recreational cannabis,2 he’s also stated firmly that he intends to decriminalize it, supports legalizing medical marijuana, and approves of states’ rights to legalize it.3 On March 30th, 2021, New York became the 15th state to legalize recreational marijuana,4 and some look forward to seeing this to impact on trading decisions made on Wall Street. Financial news site TheStreet suggested that New York’s legalization “may spark an increase of cannabis SPAC deals.”5

Although the cannabis industry saw a flurry of investment activity in 2018, funding later waned, until a series of high-value cannabis SPAC stock acquisitions in late 2020 and early 2021. 2018’s jolt of investment, which came through typical IPOs (initial pubic ofering) and RTOs (reverse take over), brought pressure on publicly-listed cannabis entities to find assets quickly. However, there were simply not enough cannabis companies around, creating supply shortages on the sales side in what was still an immature market. The fact that cannabis and marijuana were still illegal under federal law meant that the market was very restricted, making it harder for those public companies with hungry investors, to  find appropriate assets. As a result, the public companies were forced to complete a number of overpriced, over-regulated deals without enough growth potential, which in turn dragged share prices down, caused sector value to drop, and left investors nervous. In the months that followed, it was extremely difficult for cannabis entrepreneurs to find backing for their initiatives.6 

But all that changed in late 2020. Q1 2021 saw more cannabis M&A capital than any quarter since Q1 2018, with the sole exception of Q3 2019, this time generated by SPACs.

A graph showing capital for cannabis M&As on the rise

It’s worth noting that the spike in funding in Q1 2019 was triggered by just 2 IPOs from two large SPACs, one for $575 million for Subversive Capital, and one for $350 million for Bespoke,7 neither of which was part of any longer-term rise in cannabis investments. In contrast, the first 3 months of 2021 saw $600 million of SPAC funding generated by a number of different SPAC IPOs. These SPACs followed a number of big acquisitions in late 2020, and the pace seems to be holding.

Analysts agree that the marijuana market has a different feel today than it did in 2018, thanks to a new political climate, a more mature market, better leadership, and lower production costs. “The management of publicly held marijuana companies has never been stronger, energized by more predictable growth as markets mature, lower production costs, higher-quality executive teams as well as better financial controls and compliance.” says Scott Greiper, President of NY-based financial advisors Viridian Capital. “The deal follows an acquisition spree involving special-purpose acquisition companies, or SPACs, over the past year. And it follows a broader marijuana stocks rally this year that peaked in February,” Greiper added.8

It’s arguable that the rise in SPACs themselves could be playing a role in the rejuvenation of the cannabis market. Until SPAC deals became popular, it was extremely difficult for cannabis entrepreneurs to find funding. The vast majority of cannabis deals in the last 12 months have been through SPACs. In a SPAC deal investors, shareholders and entrepreneurs all communicate openly about the value of the putative company, which lowers the risk of businesses receiving over-inflated valuations that drop immediately upon listing. Additionally, SPAC sponsors have 2 years in which to find a target for investment, and aren’t restricted to the sector they choose initially, leaving room for a U-turn if necessary. Finally, individual investors who might be wary about investing in a cannabis-focused venture capital fund are more comfortable with a cannabis-focused SPAC, because they can vote on any proposed acquisition and can sell their shares whenever they like. 

Many of the recently-formed cannabis SPACs have been encouraged by changing political attitudes. SPAC owners hope that by the time they complete their acquisition, which can be up to 2 years down the road, the federal legal landscape will have altered. Their dream is to snap up high upside opportunities that are in the licensing and application stages or early stages of operation, secure a federal license, and watch the startup’s value skyrocket. If they get lucky and close a deal just at the point that federal laws change, their newly-acquired cannabis enterprise will enjoy a capital injection at exactly the right time to take advantage of business opportunities. Even if federal licensing doesn’t come through at the right moment, they’ll still be able to run ancillary businesses that are federal and state law-compliant, like medical marijuana, hemp and hemp derivative production, or international plant-touching companies. 

One analyst has even turned the argument on its head and suggested that cannabis SPACs that are floating on Canadian exchanges because they’re banned from the NYSE and NASDAQ, are actually fueling the popularity of SPACs in general in Canada.9 

The cannabis acquisitions that have taken place just in the past 6 months certainly encourage optimism for cannabis entrepreneurs. In January 2021, the Subversive Capital Acquisition Corp. SPAC closed its acquisition of Caliva, Left Coast Ventures, and Jay-Z’s cannabis company MONOGRAM in a deal valued at approximately $63 million. The final amount, including follow-on funding, is approximately 70% larger than initially expected,10 and the deal was already the largest to date in the cannabis SPAC space. Investors include celebrity artists such as DJ Khaled, Rihanna, Meek Mill, and Yo Gotti, and the new public company is now trading on the NEO as The Parent Company11.

Cannabis SPAC deals continued apace, with February bringing an even bigger deal. Ceres Group Holdings announced that its SPAC would merge with Atlanta-based cannabis producer Parallel, to bring it public in a deal valued at $1.88 billion12. The transaction includes $120 million from the Ceres’ SPAC and $225 million from private placement in public equity (PIPE) investment. The Ceres Group was founded in 2017 to invest in the cannabis industry, but Ceres Acquisition Chairman and Chief Executive Joe Crouthers explains that they only launched a SPAC in early 2020, after encountering repeated problems with investment targets through other methods13

In March, the New York-based SPAC Greenrose Acquisition Corp. agreed on a deal valued at $210 million to merge with four marijuana businesses14: Futureworks (operating as The Health Center), Shango Holdings, Theraplant and True Harvest. Between them, these companies operate in 7 states, running cultivation, processing, and packaging facilities, marijuana dispensaries, and vertically integrated operations in Arizona, California, Colorado, Connecticut, Michigan, Nevada and Oregon. Greenrose previously raised $150 million in its initial IPO, and announced that it plans to float another $150 million private offering of securities and debt as part of the deal.15

And cannabis SPAC momentum appears to be continuing. In April, Mercer Park Brand Acquisition Corp., a Canadian SPAC, announced its acquisition of Glass House Group, a vertically integrated California-based cannabis company, for $576 million. The new company plans to build the largest fully-integrated, publicly-listed cannabis business in the state, including a six-million-square-foot greenhouse16

At the same time, new cannabis SPACs are continuing to form. Some notable IPOs that took place in 2021 include the Choice Consolidation Corp., which raised $150 million; the Tuatara Capital Acquisition Corp., which raised $175 million; and the Silver Spike Acquisition Corp II. The latter, which floated in March, is led by Scott Gordon, who also led the first Silver Spike Acquisition Corp. SPAC to its successful acquisition of the WM Holding Company, which operates Weedmaps, the leading online listings marketplace for cannabis consumers, and WM Business, a SaaS solution for cannabis retailers and brands. This time, Gordon hopes to raise $250 million on the NASDAQ and aims to “focus on businesses in the cannabis industry that are compliant with all applicable laws and regulations within the jurisdictions in which they are located or operate.”17

Against the backdrop of so much investment activity, some analysts are raising concerns that there are too many cannabis SPACs saturating the market. According to Veridian, $3.9 billion worth of cannabis SPAC IPOs have been formed to date, but they have only completed $2.7 billion of transactions. California cannabis attorney Marc Hauser backs up this view, commenting that “History has shown that it’s not easy for a SPAC to actually deploy capital and close a transaction.18” Hauser points out that cannabis SPACs face particular challenges, including finding the right-sized targets, getting shareholder approval, achieving the OK from marijuana licensing regulators, and securing follow on funding. SPACs need to use all their available investment in an acquisition, but they can struggle to find a large enough target. Though there are solutions for this – for example, the $210 million Greenrose acquisition deal is comprised of four transactions grouped together in order to reach the necessary value. 

Greiper, however, points out a new trend of smaller cannabis M&As, which he feels is a healthy indicator of more considered and strategic acquisitions19. With a favorable political outlook, there’s a lot to think about for investors considering investing in SPAC in the cannabis space. 

1 “Schumer: Senate will act on marijuana legalization with or without Biden” April 3, 2021

2 “Biden’s Opposition To Marijuana Legalization ‘Has Not Changed,’ Press Secretary Says” March 30, 2021

3 “President Biden Supports States’ Right To Legalize Cannabis” April 20, 2021

4 “New York Legalizes Recreational Marijuana” March 31, 2021

5 “Spark up the SPACs? NY Legalizes Marijuana” March 31, 2021

6 “What is a Cannabis SPAC?” March 15, 2021

7 “SPACs help push funding for marijuana M&As to highest quarterly level since 2019” April 8, 2021

8 “Marijuana Stocks: Another Weed SPAC Deal, GrowGeneration Buys Char Coir” March 15, 2021

9 “What is a Cannabis SPAC?” March 15, 2021

10 “Subversive Capital Acquisition Corp. Announces Upsize Of Previously Announced Private Placement” January 8, 2021

11 “Subversive Capital Acquisition Corp., the Largest Cannabis SPAC in History, Announces Transaction with Shawn “JAY-Z” Carter, Roc Nation, Caliva and Left Coast Ventures” November 24, 2020

12“A $1.9 Billion Canadian IPO Could Make LA the ‘Center of the Cannabis Universe'” February 25, 2021

13 “Ceres Sets $1.9 Billion Cannabis SPAC Deal” March 1, 2021

14 “Greenrose Acquisition Corp. to Acquire Four Cannabis Companies, Creating a Vertically Integrated and Cash Flow Positive Platform Positioned for Significant Growth” March 15, 2021

15 “SPAC to acquire four marijuana operations in $210 million deal” March 15, 2021

16 “SPAC Deal Aims to Create the Largest Pot Company in California” April 8, 2021

17 “Marijuana SPAC Silver Spike II prices IPO to raise $250 million” March 11, 2021

18 “A marijuana SPAC can expedite going public, but research on the partner is key” February 21, 2021

19 “SPACs help push funding for marijuana M&As to highest quarterly level since 2019” April 8, 2021