Cannabis Musings - July 31, 2024
Cannabis news continues to surprise and delight.
Friends, I still have a lot to learn about cannabis. I’ve been in this industry for over six years now, which makes me both a veteran and a noob. I ingest voraciously information about every aspect of the business, feeding these Cannabis Musings on a weekly basis with delicious content for your reading pleasure. I apparently practiced at the highest levels of cannabis law, according to my peers. I’ve hitched my wagon to this caravan. And yet, I did not know this:
It shall be unlawful for any person to place in any newspaper, magazine, handbill, or other publications, any written advertisement knowing that it has the purpose of seeking or offering illegally to receive, buy, or distribute a Schedule I controlled substance.
This is 21 USC §843(c)(1), part of the Controlled Substances Act. Now, to give myself a little credit, there’s a chance that I knew this at some point and promptly forgot it, which is only slightly better. But still, when I read an article in Marijuana Moment about the Congressional Research Service pointing out that cannabis rescheduling would eliminate this barrier, I was taken aback. Oy vey – how could I not know, or have forgotten, this curious fact?
I relish the arcana of the Controlled Substances Act. Like the fact that it’s unlawful to obtain a controlled substance by “misrepresentation, fraud, forgery, deception, or subterfuge” (§843(a)(3) – the very same section!). That’s a weird rule – wouldn’t it be illegal enough that you’ve unlawfully obtained the controlled substance in the first place? I suppose this lets the DOJ double down on the prosecution by charging the lie as well. (Remarkably, there’s a lot of case law on this rule.) Or that it’s unlawful for a landlord to knowingly lease a property to a cannabis operator (§856), something that surprised more cannabis landlords than it should have, and the reason why cannabis REITs (which lease properties to licensed operators) don’t have their stocks listed on US exchanges (well, other than Innovative Industrial Properties, but that’s a different story).
So, when I read this article, and then the underlying Congressional Research Service report, I engaged in a moment of self-flagellation, then excitement (rescheduling would be the gift that keeps on giving!), and then disappointment after remembering that we can’t have anything nice. The reason being that the federal legal risks for companies doing business with plant-touching operators - money laundering, aiding-and-abetting, the Federal Wire Act, the Federal Travel Act, RICO, which we’ve talked about before – would remain. Advertising is no different.
Now, it’s not nothing that Section 843(c)(1) would no longer apply. That very well may impel more advertising outlets to take business from cannabis companies, comfortable that the risk of prosecution is even lower than it is today. And besides, it’s not like there’s zero advertising for cannabis. Take, for example, the Cannabis Media Council’s very clever I’m High Right Now campaign (full disclosure: I’m an Advocate for the CMC) that ran in Hearst publications. Or, if you’re driving around the Indiana-Michigan border on I-94, you’ll notice (as I did recently) the vast proliferation of billboards touting New Buffalo, MI’s numerous cannabis dispensaries.
But, like anything else in this industry, just because something appears to have changed doesn’t mean that it’s actually all that different, or any easier.
On a similar note of talking about my state of mind, imagine my delight and bemusement when I recently read about the IPO of a new cannabis SPAC. The gift that keeps on giving. On July 22, 2024, Mercer Park Opportunities Corp., a cannabis-focused special purpose acquisition company, announced its US$200 million initial public offering. Listed on the Toronto Stock Exchange, the new company has 18 months to find a target for its tempting pile of dormant cash.
Mercer Park has a history of SPAC deals, led by Jonathan Sandelman, taking both Ayr Wellness and Glass House Brands public through these special financing vehicles. Longtime readers of these Cannabis Musings will remember that we talked a lot about cannabis SPACs during the salad days of 2021-22, when everyone and their dealer was forming a SPAC (full disclosure – I represented many SPACs, cannabis and otherwise, during that period). If you were born after 2021 and don’t know what a SPAC is, basically, it’s a public company that raises a bunch of money from the public, finds a private company to acquire and merges with it (remaining a public company), and the sponsor that arranged the whole thing gets a fee in the form of stock. Think of it as a private equity deal, but with publicly-traded stock as the consideration.
I honestly thought the cannabis SPAC was dead. On the whole, SPACs (not just cannabis) didn’t work out too well, with too many of them chasing too few private deals. We saw about a dozen cannabis SPACs form during the heyday, but many of them pivoted to non-cannabis industry targets, failing to find appropriate cannabis companies to acquire. The reasons for this were numerous, including:
Nasdaq-listed cannabis SPACs could only target ancillary businesses, because if they acquired a US plant-touching company, they’d have to relist their stock on a Canadian exchange, which wasn’t desirable, severely limiting the pool of potential targets
SPAC rules generally require the target to show three years of audited financials, something many cannabis operators don’t have
The rule of thumb is that the deal size needs to be about three times the amount of capital raised by the SPAC, a valuation requirement that many potential cannabis targets couldn’t match
Potential targets soured to the way the public markets had treated cannabis stocks in 2019
Being a public company is hard
And yet, here we are. SPACs are back, baby! I’m impressed that a new cannabis SPAC could even get done in this market. Such a blessing! We’ll be keeping an eye on this.
Be seeing you!
© 2024 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.
SPACS are dead....Long live SPACS