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This has been a difficult year for public companies and the economy overall. The result of such a financially challenging year could be bad news for the cannabis industry. But a new player is becoming popular in the marijuana industry.
Cannabis special purpose acquisition corporations (SPACs) have been around a while but have recently become a major funding source for marijuana startups. In 2019, SPACs raised more than $2.6 billion in the cannabis industry, fueling merger and acquisition (M&A) activity. In the first half of 2020, they raised more than $700 million.
There are advantages and disadvantages to SPACs. Cannabis entrepreneurs should know more about this option by talking with a marijuana business lawyer at McElfresh Law. You can schedule an appointment at (858) 756-7107 or online.
SPACs are created by investor groups to raise money and acquire a privately held business. A business uses this type of company to become a publicly traded entity instead of through a traditional initial public offering (IPO).
SPACs are known as blank check companies because when investors contribute money to the company, they don’t know what they will invest in yet. The money raised is held in a trust until a good M&A opportunity is identified. Once investors form a SPAC, they have a certain timeframe to find a private business to merge with, or the investors must dissolve it.
The most obvious advantage to a SPAC is that it has a significant amount of capital raised to infuse into a cannabis business. That’s often what a company needs to grow. It also might be the only feasible way for a marijuana-related business to go public—though not everyone agrees on this.
According to Jamie Mendola, head of strategies and M&A for marijuana-focused SPAC, Mercer Brand Acquisition Partners, no U.S. multistate operator has raised significant capital through an IPO or reverse takeover (RTO) in the past 18 months. However, others in the industry believe an IPO or RTO is still a viable option.
Another significant advantage to a SPAC is that the founders of the cannabis business do not have to lose control of their company like they would if they sold to a larger public company. By rolling into a SPAC, founders receive a large capital investment but remain at the head of their company.
SPACs work in a particular way, which might make them inaccessible to young cannabis companies. According to Ruth Epstein of Tuscan Holdings, marijuana businesses need two years of audited financials and corporate governance with independent board members. There’s also a time limit of three months to complete the transaction, and the SPAC can spend 80% of its funds on a single transaction.
Also, not all SPACs can get directly involved with marijuana. A SPAC that lists on the NYSE or Nasdaq can’t buy illegal businesses under federal law. Instead, these SPACs target ancillary cannabis businesses and hemp businesses, which are federally legal. If a SPAC becomes involved with a plant-touching company, they must delist from a U.S. exchange and relist on a Canadian exchange.
If you are a cannabis or ancillary business that wants to go public, you might be looking for a SPAC. But you shouldn’t take on the search without guidance from an experienced marijuana business lawyer and a financial adviser.
Having the right team is essential to ensuring an accurate valuation of your business. Your lawyer also can help you prepare your documentation, including two-to-three years of audited financials.
You need to do your due diligence when considering a merger with a SPAC. Look at the SPAC sponsors’ track record in their previous companies and the cannabis space, specifically. Look at the board of the SPAC—do the board members bring value to your business? Merging with a SPAC isn’t just about money. It’s also about gaining business opportunities.
You’ll need to have frank discussions with the SPAC about their intentions. Do they prefer a hands-on or hands-off approach? What do they envision for your business? How many board seats with they control? It’s important to be clear about how much freedom and control you’ll retain over your business.
Also, is the SPAC looking to be a long-term cannabis investor or recover their investment quickly? A risk of merging with a SPAC is finding a short-term investor who wants to immediately sell their shares. You need a long-term investor to truly benefit your company.
If you’ve found a SPAC opportunity, or you’re interested in this method for your cannabis business, it is time to partner with a knowledgeable cannabis attorney.
Jessica McElfresh has years of experience in the cannabis industry. She helps cannabis entrepreneurs with corporation formation and financing, employment matters, environmental, land use, and zoning regulations, and litigation and risk assessment. Jessica knows the ins and outs of the marijuana industry and can help your venture succeed.
Contact McElfresh Law online or call (858) 756-7107 to schedule a consultation.
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