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Cannabis Musings - March 15, 2023
Friends – TerrAscend, a publicly-traded MSO that holds both US and Canadian assets, announced on Tuesday that it has applied to list its stock, which is currently traded on the Canadian Securities Exchange (CSE), for trading on the Toronto Stock Exchange (TSX). Generally, the TSX won’t allow US-based cannabis operators to list because, well, cannabis is still illegal down here – a concern that the CSE doesn’t share. The press release provided no information about how they’re going to do this, other than referring to an upcoming shareholder vote to restructure the company in order to achieve this.
David George-Cosh, a reporter for BNN Bloomberg (Canada), noted that an analyst for Jefferies (a large investment bank) is speculating that TerrAscend is going to isolate out its US-based cannabis assets in order to convince the TSX to allow the listing, similar to Canopy’s announced plans for its own US-based assets (such as Acreage). Astute readers will remember we talked about this in October:
“What then would prevent an MSO from restructuring so that it becomes a holding company with Nasdaq-listed stock that’s sold to the public, and that owns only non-voting stock of the US plant-touching assets, which may be flipped into common stock upon legalization? Well, I’m no longer a practicing lawyer, and none of these Cannabis Musings were ever legal advice anyway, but I think that, in theory, it could maybe work. ,In theory.”
Now, I’m not saying that TerrAscend reads these Cannabis Musings, but I’m not not saying that they do.
But I’m not filling your inbox to gloat. I thought this might be a good reason to delve into what it means to a more prominent stock exchange, known as “uplisting”. We discussed this briefly back in December (shortly after Curaleaf also announced it was considering an uplisting).
The conventional wisdom is that uplisting makes a company’s stock more attractive to institutional investors. The CSE and the NEO Exchange (which also lists some US-based cannabis operators) are generally considered to be secondary exchanges with less vigorous listing standards and reporting requirements, as well as lower trading volumes. So, if a company’s stock were traded on a top-tier exchange (the TSX, the Nasdaq, or the New York Stock Exchange), institutional capital would be more willing to invest.
I’m not convinced that’s the case. Here’s why:
Institutional Capital – this generally means investments from funds (hedge, venture capital, private equity, mutual), pensions, sovereigns, very high net worth families, insurance companies, banks, and the like. That’s compared to “retail investors”, regular zhlubs like me. Institutional capital doesn’t like illegal companies, unfortunately. Pensions are highly regulated and have very tight investment guidelines and policies. They not only invest directly, but are also significant investors into PE, VC, and hedge funds. Sovereign wealth funds generally don’t like cannabis because of the perceived vice. Funds are hesitant to risk their Federal licensing. This is why so much of the capital that’s been invested into the cannabis industry to date has come from high net worth (and not so high net worth) investors. Uplisting wouldn’t change this at all.
Clearing – this is the process whereby brokers settle up stock trades between each other. I won’t bore you with the details, but suffice to say, it’s a vital component to modern finance. It’s what allows you to go onto e-Trade and buy shares of, say, Bigfoot Project Investments (this was a real company and it did what you think it did!) with a click of a button, instead of having to deliver cash to someone in exchange for a physical stock certificate. The problem is that the major companies providing this service generally won’t “clear” trades in US cannabis stocks, making it harder, and thus less attractive, to trade these stocks. Uplisiting wouldn’t change this either.
Custody – most institutional investors are highly-regulated so they won’t steal their investors’ money or subject that money to certain risks. One way that’s done is by requiring institutional investments to be “custodied”, meaning basically that they’re held by brokers in separate accounts with specific reporting and limitations so those assets won’t be mixed with others. I think you know where this is going – major brokerage houses generally don’t like to custody, or even execute trades in, US cannabis stocks because they’re concerned about their Federal licensing, aiding-and-abetting, etc. Whether that’s rational or not, uplisiting won’t change this either.
What, then, is the benefit of uplisting? Well, it would improve trading volumes for MSO stocks, meaning that traders would probably be able to buy and sell stocks with better liquidity and price discovery. Maybe that also attracts more investors towards these stocks, which would likely help boost stock prices, but that doesn’t translate into cash being invested into the companies – these are all secondary trades between investors.
Now, I’m not trying to say that uplisting is a bad idea (although it’s not an inexpensive endeavor, particularly if you need to restructure your company to get it done). One can imagine a scenario where certain institutional investors are willing to spend the extra time and money to navigate the process and find ways to invest into these companies. Knowing that those shares may someday be sold on a “better” exchange certainly makes that more attractive. But I’m not convinced that better liquidity on a preferred exchange is alone enough to move the needle. (Of course, for any MSOs that want to consider this – my email is email@example.com)
Be seeing you!
Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network,
and twenty-five years of dealmaking and capital markets experience.
© 2023 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. Subscribe to Cannabis Musings at hauseradvisory.com.