Four completely different companies combined into a Frankenstein’s monster of a corporation that admits it is breaking federal law every day just by doing business.
On almost all regulated stock exchanges, that beast would not even be considered an option for a stock offering. In the Wild West of pot stocks, though, Tilt Holdings Inc. managed to raise $120 million last week, even after being forced to retract its financial forecast.
That is why the Canadian Securities Exchange has become a destination for cannabis companies, especially a wave of U.S.-based pot companies that grow and sell marijuana despite federal prohibition in their home country. Major U.S. exchanges like the Nasdaq and New York Stock Exchange, as well as the Toronto Stock Exchange — Canada’s most prominent home for share issuances — and sister exchange TSX Venture, will not list companies that break U.S. federal law, but the CSE is more than willing to help them raise money.
“It’s about companies wanting to raise capital for growth, to finance acquisitions,” CSE Chief Executive Richard Carleton said. “Many were private companies who have bootstrapped themselves and had some very hard slogging on the private investment side. An important aspect is that listing provides some liquidity for investors.”
As Canadian cannabis companies like Aurora Cannabis Inc.
Cronos Group Inc.
and Tilray Inc.
have managed to list on large U.S. and Canadian exchanges, Carleton said that U.S. companies have taken note and are saying to themselves, “We’re a way better company,” and are seeking their own listing. The CSE is the place for that, and listing there allows U.S. pot companies access to over-the-counter exchanges in the U.S. and potential entry into foreign exchanges in Europe and elsewhere.
Many are reverse mergers, an approach that has long been popular on the CSE, largely a home for Canada’s speculative oil-and-gas companies before the recent rush of cannabis listings. That approach leads to lower fees than an IPO, Greenbridge Corporate Counsel attorney Khurshid Khoja pointed out, and can be approved more quickly, though Carleton stressed that disclosure requirements on the CSE are identical to other exchanges.
U.S. pot companies’ path to the CSE has become popular: Cannabis-related deals have roughly tripled on the exchange this year, to C$2.5 billion ($1.88 billion) so far in 2018 from C$690.7 million last year, and account for nearly 70% of the total amount raised on the exchange. U.S. cannabis companies are even outpacing their Canadian counterparts in raising money on the CSE, a total bolstered by a $400 million private placement for Curaleaf Holdings Inc.
One of the most recent issuances was for Tilt, a four-way reverse merger that combines a delivery-software company, a customer relationship management app, a Massachusetts cannabis producer and marijuana-farming operations in British Columbia. To some investors, Baker Technologies, the piece of Tilt that makes software, is the most exciting. It serves 1,000 dispensaries and acquired its largest competitor in 2017. Also, the Massachusetts producer recently purchased a vaporization technology maker.
“The simplest thing to do is consider it a vertically integrated infrastructure and technology company,” Tilt Chief Executive Alex Coleman explained in a telephone interview. “It’s really probably more about touching the consumer, and being the most consumer-centric cannabis company … Our approach is more much holistic.”
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According to Emerge Law Group attorney Marco Materazzi, transactions that join a number of seemingly unrelated marijuana companies are becoming increasingly common in the U.S.
“It’s a common theme, bringing disparate businesses together,” Materazzi said, adding that part of the pitch to investors and other shareholders is that they would now own a smaller piece of something much larger. “And you’re going to get some liquidity for your ownership in the short run.”
The actual mechanics of these types of transactions are complex: Tilt’s description of the new business, the merger and the reverse takeover shared with investors prior to the merger checked in at more than 1,000 pages. The combined company — which has not received necessary federal approval to grow or sell pot in Canada — reported a total net loss of $10.8 million on sales of $1.6 million in the June quarter, the most recent results are available for.
When Tilt announced the merger in May, it promised much more, issuing revenue guidance of $200 million for fiscal 2019. But, the following day the company said the Investment Industry Regulatory Organization of Canada asked Tilt to rescind the guidance because it didn’t include expenses with reaching that goal, nor the assumptions the company made.
“Look, on the guidance side, I can’t tell you how many lawyers and bankers and other professional parties are involved in this company and everybody is scrambling to try and understand what is a very Byzantine set of laws and regulations around what we’re doing,” Coleman said.
Tilt began trading last week on the CSE under the ticker TILT, after selling roughly 22.9 million shares at C$5.25 apiece. Its shares opened down about 60% the first day trading, and closed at C$1.97 Thursday, a week after their debut.
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Trading shares such as Tilt is not the same as on other exchanges, and it typically attracts smaller investors — more retail investors and fewer mutual funds. For mutual funds, liquidity on the CSE can be a problem because of the large amounts of stock they typically require to amass a position; that type of buying activity could drive share prices to unreasonable levels very quickly. Selling large quantities of stock can also be a problem because it’s not always possible to make a market for big trades.
One U.S.-based investor, who described his experience to MarketWatch on the condition of anonymity, shows how the process can work. The investor bought Tilt shares in the private placement by calling underwriter Canaccord Genuity directly, then facilitated the share purchase through a law firm. Because of CSE rules, he said, he could not receive the investing materials directly from the bank and a third party had to facilitate. Selling Tilt shares is contingent on a U.S. listing — which in most cases means on an over-the-counter market. Generally listing on an over-the-counter exchange takes anywhere from a week to a month, and once that’s complete the stock can be bought or sold through a regular brokerage account in the U.S.
While its far from a perfect system, CSE and over-the-counter stocks are the only ones available for U.S. cannabis companies and investors who want to access the emerging market. And listing on the CSE offers early investors a chance to sell shares, Weedbox CEO Jeremy Potvin says.
Weedbox is eyeing a CSE listing “when the time is right” for all of the reasons companies typically go public — access to capital among them. But because the Canadian company’s business will involve the U.S., Weedbox has little choice beyond the CSE.
“I have to look at the CSE, because our plan is to have U.S.-based cannabis assets,” Potvin said. “Primarily, that’s what I have to do.”