How has the deal-making environment changed over the past five years?
Five years ago, the cannabis market was so much different than it is today. Only about 24 states had passed medical marijuana legislation, and only a small handful of states, e.g., Alaska, Colorado, Oregon and Washington, had legalized recreational marijuana. The Cole priorities were just a few years old, as was FinCen’s guidance about banking cannabis. Hemp was still federally unlawful; CBD products were not mass-marketed; Canada had not legalized recreational cannabis; cannabis branding was limited, so cannabis consumer product brands had not yet proliferated; and a national U.S. market spurred by multistate operators had not yet emerged. Deals then were more likely to be focused on investments in entities vying for state-specific licenses.
Today, the deal-making environment is as robust as the market itself. Of course, there are still deals for operator ownership, but now you may have a range of state permittees, there are megafunds with capital to spread into portfolios of cannabis companies, valuable cannabis brand intellectual property is being targeted, there is more investment by traditional industry companies and cross-border between the U.S. and Canada, as well as other countries, not to mention more and more public trading.
How much capital is available? Who are the key players in the space?
Can’t give you a number for the cannabis industry, specifically, but there is a lot of dry powder out there being operationalized on an ever-increasing basis, and just waiting for the lifting of federal banking and/or prohibition restrictions to be utilized. There is still a ton of interest on the part of individual investors and family offices, but there are now a lot of cannabis funds that are investing at all levels of the space, from operators to ancillaries. And traditional industry companies are investing in the space―think Constellation.
What are the challenges of operationalizing in a restrictive banking environment?
There is no question banking cannabis remains a problem. From the commercial standpoint, concerns about whether bank accounts will be closed has limited entry into the space, deals break down when parties realize can’t find a bank willing to transfer funds, cross-border transactions are complicated by laws intended to prevent international trafficking and money-laundering. The banking restrictions have to change. Billions and billions of dollars are being transferred in the state-legal cannabis industry without the same transparency as in other industries, which is not just restraining trade―it is a threat to public safety.
How has the deal landscape been impacted by the lack of federal movement toward prohibition?
The quest for U.S. legalization continues, but whether and how the federal government is enforcing against the legal cannabis market seems more predictable today than it was five years ago―although it is still uncertain, which has changed the risk/reward ratio for transactions in the space. In my view, the biggest impact of prohibition has been to slow a true national market for cannabis and the involvement of major traditional industry companies in the cannabis space. Cannabis represents product line expansion to consumer goods, industrial agriculture, pharmaceutical and tobacco companies, to name just a few, as well to scores of ancillary companies that provide services to those industries. But the federal restrictions continue to limit the expansion of very interested traditional industry companies, with national distribution, into the cannabis space. But, it is happening. More and more traditional industry companies are finding ways to get a foothold in the space, with the hopes of playing in an eventual unrestricted market.
Does the fact that deals involving cannabis impact their structure in comparison to deals in other industries?
This is obviously deal-specific, but generally cannabis deals employ terms that are similar to terms used in other industries, which is why a firm like Duane Morris, where we have experienced corporate and taxation lawyers doing deals day in and day out, has been able to provide efficiencies to our cannabis clients. Certainly, the closer the deal is to the flower, the more attention has to be paid to terms that control for the applicable regulatory structure. Due diligence, with an emphasis on regulatory compliance, for investments in flower-touching entities is key. Understanding flow of funds for payments involving cannabis proceeds is necessary. Of course, some cannabis transactions require unique structuring if the goal is to limit cannabis-related risks. For example, more and more companies are thinking about terms that would allow for low-risk entry into the market today in order to have a first-mover advantage once prohibition ends.
What’s ahead: What is your outlook for the infused products sector and the beverage industry, in particular? Will the same funding and expansion challenges be faced by this sector?
To me, the growth of cannabis beverages is particularly exciting because it really is a new segment of the cannabis industry, just as much as it is a new segment of the beverage industry, as best demonstrated by cannabis beverage products from Molson Coors, Canopy, Pabst, to name of few. In addition, although prohibited by the FDA, CBD beverages are being mass-marketed in convenience stores by larger and smaller brands throughout the United States. Beverages may attract new consumers to cannabis because for of a few reasons. Some consumers may view them as safer or more convenient than smoking or combusting, some may find a drink more familiar – who doesn’t love socializing over a beverage? I have had clients tell me that they have seen a decrease in their sales of certain types of infused products, like edibles and tinctures, and in an increase in their infused beverage sales. Due to the involvement of major beverage companies in the space, most of which have capital to expand product lines and develop brands and are not hampered by the banking restrictions that impair cannabis companies, and given the interest of investors in cannabis products and brands, I would think there will be a sufficient amount of capital for the cannabis beverage market to expand and flourish.
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