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CANNABIS CORNER: How Entrepreneurs Maximize Their Capitalization Opportunities
Traders Magazine Online News, August 30, 2019
With legalized cannabis gaining traction in more states across the U.S. and increasing interest in the sector globally, investors are pouring billions into publicly traded cannabis and hemp companies. From a standing start just a few years ago, cannabis has become one of the fastest expanding consumer products market in the world -- with projected global revenues of between $75 billion and $146.4 billion by 2025, according to market research firms. In 2018 alone, industry analysts reported legal cannabis revenues reaching $12.2 billion globally, a 30% jump from 2017.
As with any new, developing industry, there are barriers to entry and significant growth challenges to navigate. That said, we’re seeing a perfect storm in this sector – companies being built, market structure and compliance guidelines in place, and investors recognizing the sector is ripe for investment. A mix of innovative companies, both unregulated and highly regulated on a path to public transparency. The exponential growth we see in publicly traded cannabis securities underscores the willingness of these companies to provide more efficient trading and enhanced disclosure for investors.
Innovative Market Solutions
There are solutions for serious entrepreneurs to tap the capital markets for growth capital. Especially appealing to the cannabis industry is the ability to cross-trade securities on both OTC Markets Group and the Canadian Securities Exchange (CSE). Thanks to a unique alliance, issuers can take advantage of the CSE's IPO listing and trading services, coupled with the enhanced U.S. disclosure distribution and secondary trading on OTC Markets. Both OTC Markets Group and the CSE emphasize simple processes and fixed fee structures that remove much of the cost, time and complexity typically associated with going public on an exchange. This solution provides the benefits of public company status in Canada, with access to the funding and secondary market trading capabilities of the U.S. capital markets.
This is proving to be a viable path to growth for cannabis companies. As of December 2018, 47% of the 124 cannabis-related companies trading on the CSE were based in the United States or had U.S. assets or interests. Last year, the eight largest CSE funding events, which accounted for over a third of equity deals on the exchange, were by U.S.-based cannabis entities.
Public Company Growth Path
As of June 30, 2019, over 200 cannabis-related companies cross-trade in the U.S. on the OTC Markets, with 61 trading on the OTCQX Best Market and 141 on the OTCQB Venture Market, creating additional liquidity and building public brand awareness by diversifying the companies’ shareholder base.
Equally important is the OTC Markets business model which allows for investor protections and provides an infrastructure with governance standards and public market tenets --such as maintaining an independent audit committee, board member independence, holding annual general meetings and solicitation of proxies. This market structure allows for innovative companies in the cannabis space to grow within the current regulatory framework.
This focus on the “cannabis entrepreneur” reflects the core differences between OTC Markets and the Exchange model. OTC Markets benefits from a unique business model and continues to disrupt the exchange model: Unlike the listing standards of SEC-regulated exchanges, OTC Markets creates standards that are practical, cost-effective, create efficiency and are adaptive to the changes we see in trading, technology and market structure.
Providing access to the U.S. capital markets is crucial for new entrants in the cannabis industry, and other entrepreneurial and emerging categories of commerce--companies that are too premature for the larger exchanges, as they are not “blue chips” yet. OTC Markets promotes capital formation and helps smaller companies’ “season” on their trajectory--taking prudent, necessary steps as they learn to become solid, transparent public companies.
Smaller public companies, and those in innovative or emerging industries such as cannabis, need to connect with a community of investors who support their cause so that these companies can attract capital. In fact, OTC Markets created a new index for that. Cannabis companies don’t need a more onerous exchange listing if they have a compelling story to tell and a management team that is executing on their business plans, demonstrating good governance and building long-term value for investors. We believe disclosure is what drives investor protection and efficient market prices.
Focus on Building Shareholder Value
Due to the uncertainty of when federal policy may evolve on the legality of cannabis, accessing capital is challenging for companies based in the U.S. or with assets here. This public market path to growth provides cannabis-related entities with viable options to fund growth and create shareholder value and access to U.S investors. We don’t believe it should be painful to be a public company. Trading on a market that encourages management teams to be laser-focused on business fundamentals that drive growth and value, positions companies in emerging industries like cannabis to attract long-term shareholders.
It’s evident that there are market opportunities in the cannabis industry – innovative companies are being built and serious investors are making bets. We’re seeing the necessary components of a burgeoning sector come to life -- a perfect storm for growth is emerging. OTC Markets is showing companies that nascent industries such as the cannabis space can access public investment to drive that steady, long-term growth that global capital markets reward.
Jason Paltrowitz is Director of OTC Markets Group International and Executive Vice President of Corporate Services at OTC Markets Group
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