Going Public

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Should You Take Your Cannabis Company Public? There are number of reasons that a company, whether in the cannabis industry or any other industry, might decide to go public.  Often, they relate to a need for liquidity for expansion and acquisitions.  Going public presents challenges for companies in the U.S. cannabis industry as opposed to other industries given that cannabis is, well, illegal in the United States (at least at the federal level).  Nevertheless, in recent years, cannabis companies like Tilray, Canopy Growth, Aurora Cannabis and MedMen have gone public on major stock exchanges such as the New York Stock Exchange, NASDAQ, the Toronto Stock Exchange and the Canadian Securities Exchange.  Accompanying liquidity has allowed these companies to accelerate expansion during these critical formative years of the legalized global cannabis market. 

If you are considering taking your cannabis company public, this article is for you.  A decision to take your own cannabis company public turns on a number of factors.  In this article we will look at some of the most important factors, which stock exchange might be best for you, and some of the alternatives to going public that might accomplish your goals.

First, the rules for going public vary considerable from stock exchange to stock exchange, so you may be limited as to which stock exchanges are available to your cannabis company.  In the U.S., cannabis remains a Schedule 1 substance under the federal Controlled Substances Act.  Under U.S. securities laws, companies that are in violation of the laws of their home country are prohibited from listing on U.S. stock exchanges such as the NYSE and NASDAQ.  However, while a US-based cannabis company that touches the cannabis plant in the U.S. is precluded from listing on these exchanges, somewhat ironically, a plant-touching cannabis company based in a country where cannabis is legal, such as Canada, is not.

Canadian stock exchanges, with the notable exception of the Toronto Stock Exchange, have welcomed cannabis companies, including those that touch the plant, to be listed on their exchanges.  The Toronto Stock Exchange has taken an approach similar to that of the NYSE and NASDAQ in that it doesn’t allow a company that is in violation of the federal laws of their home country to list.  So, a US-based cannabis company that touches the plant in the U.S. cannot list on the Toronto Stock Exchange, because cannabis is still illegal at the federal level in the U.S.

On the other hand, a cannabis company that doesn’t touch the plant in the U.S. (or any other country in which cannabis remains a prohibited substance) can list on the NYSE, NASDAQ, or the Toronto Stock Exchange.  Companies that do touch the plant in the U.S. can choose from other exchanges, such as the Canadian Securities Exchange.  Furthermore, corporate restructuring might allow a separation of various assets that do not touch the plant in the U.S. from assets that do touch the plant in the U.S.  In efforts to speed time to listing, some cannabis companies have looked to shell companies, corporate re-domiciling, and reverse take-overs.   Each vehicle presents its own rewards and risks, and its own efficiencies and complications.   

So where does all of this leave a plant-touching cannabis company seeking access to the capital of public markets?  While access to capital for cannabis companies is currently more complicated than it is for companies in other industries, with careful planning and preparation, it can be done and done well.  With cannabis companies currently enjoying extremely high price-to-earnings ratios on stock exchanges, the appetite of investors for cannabis stocks appears strong.  On the other hand, we’re likely experiencing a bubble, much like the first internet bubble.  The question of whether or not to go public, and where, depends in part on where your cannabis company is situated, and where it touches the plant.  Other factors include the amount of your company’s EBITDA (earnings before interest, taxes, depreciation, and amortization), projected growth, the state of its books, its short-term and long-term need for capital, the liquidity and prestige that comes with being a publicly-traded company, attracting talent as a function of such liquidity and prestige, and the costs and requirements associated with being a publicly traded company.    

All of these factors are colored by the increasing support in the U.S. for ending prohibition relating to cannabis.  This would in turn open up the NYSE and NASDAQ to cannabis companies.  So another question to ask amid all of this is: Do I wait? 

Tom Zuber is the Managing Partner of Zuber Lawler & Del Duca LLP, a firm of 40 attorneys which handles corporate, finance, M&A, IPO, intellectual property, and litigation matters from offices in California, Illinois and New York.  He holds a law degree from Columbia Law School, a master’s degree in public policy from Harvard University and a biomedical engineering degree from Rutgers University, where he graduated with highest honors. He can be reached at tzuber@zuberlaw.com.   




*This tip is not legal advice, and no attorney-client relationship exists between Zuber Lawler and the reader in absence of a written retainer agreement.