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Why America's cannabis companies are flocking to Canada to woo public investors

The Canadian Securities Exchange is becoming a wildly popular destination for US cannabis companies rejected by the NYSE and Nasdaq

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About 60% of the companies coming onto the CSE are cannabis groups, says the exchange's CEO, Richard Carleton

The migration of US cannabis companies looking to list in Canada is still going strong, as the desire for capital drives America’s marijuana suppliers to seek their fortunes north of the border.

“We are absolutely considering listing on the Canadian Securities Exchange by the Fall of next year,” said Tim McGraw, CEO and founder of Canna-Hub, a real estate holding company for cannabis operations, in an interview with Proactive Investors.

The flirtation with Canada kicked off in earnest in the Spring when the Californian cannabis retailer MedMen (CSE:MMEN), which offers 19 dispensaries in four states, and Green Thumb Industries (CSE:GTII), the Chicago-based manufacturer of cannabis products, both moved to list on the CSE.  

The two companies’ public debuts in Canada have been extraordinarily successful, with MedMen currently boasting a market cap of $3.05 billion while Green Thumb’s hovers at $2.744 billion. (Skeptics say their market caps defy reason as Green Thumb earned just $400,000 in its last quarter on revenue of $13.6 million, while MedMen reported a working capital shortfall of $3.8 million at the close of June and ended March with $86 million in debt against assets of just $52 million, according to a Motley Fool report.)

The CSE is the listing spot of choice

Indeed, the Canadian Securities Exchange is becoming the go-to exchange for US cannabis companies that are being rejected by the New York Stock Exchange and the Nasdaq as the US federal government still bans marijuana, while Canada is set to make all forms of the plant legal on October 17.

The Toronto Stock Exchange and TSX Venture Exchange are also turning a cold shoulder to US cannabis businesses on the view that they are operating in violation of US federal law.

“If you’re going to have a US business in the cannabis industry, the CSE is where you go,” says Christopher Barry, a lawyer with Dorsey & Whitney. “Countless US companies are looking to list on the CSE.”

The push by US cannabis companies to seek funding in Canada via the CSE draws comparisons to the way mining exploration companies turned to Canada to list as a way to raise capital. “It used to be the case that mining exploration projects were mostly funded in Canada and the same thing is happening in the cannabis industry,” says Barry.

Reverse mergers with Canadian shell companies are wildly popular 

There are two ways for cannabis companies to list via the CSE. The most popular and quicker route is currently a reverse merger, where private companies acquire a majority stake in listed Canadian shell companies. The second is via a standard initial public offering.

The rush by cannabis companies to list on the CSE means the exchange is now half-jokingly called the cannabis stock exchange as more than half of the companies that are coming onto the exchange have some connection to the weed sector.

“Clearly, the cannabis sector is leading in terms of funds raised,” said Richard Carleton, CEO of the CSE. “It’s about 60% of the companies that are coming onto the exchange."

Raising investment funds in the US too demanding

Charles Alovisetti, a lawyer at the Denver-based law firm Vicente Sederberg, makes the point that US cannabis companies have had to resort to listing on the CSE after finding it too difficult to raise their own investment funds.

“Back in 2016, everyone in the cannabis sector was trying to raise a fund. But people have realized that’s very difficult. They underestimated how challenging it would be to raise money,” Alovisetti notes. “MedMen raised a fund, but instead of raising a second one, they listed on the CSE.”

Some folks in the industry see a CSE listing as a temporary fix for a problem that will be resolved when US federal restrictions are lifted. “When the restrictions change, we can always uplist to a New York exchange,” says Cann-Hub’s Tim McGraw.

Demand for securing funding via the takeover of Canadian shell companies is now so great that there is a backlog of yet-to-be-realized deals and the managers of the shell companies are pushing for better terms, which is pushing up the prices of reverse takeovers, according to Alovisetti.

“Canadian lawyers are saying there have been so many reverse takeovers, that they are running out of shell companies,” he notes.

Read: Waiting to inhale? Cannabis stocks like Tilray are only going to go higher

Canadian cannabis companies with listings on the Toronto Stock Exchange and the TSX Venture exchange are looking to downlist to the CSE in a bid to widen their businesses to include the US, reports Alovisetti.

While lawyers are receiving scores of calls from American cannabis companies interested in pushing into Canada, the migration is not entirely a two-way venture across the border.

This year, Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC), two of the biggest players in Canada’s cannabis sector, moved to uplist their shares to the Nasdaq and the New York Stock Exchange, respectively. And last July, the Canadian cannabis grower Tilray Inc (NASDAQ:TLRY) made history by becoming the country’s first weed company to orchestrate its initial public offering via a US exchange.

But Chris Barry concludes that these three companies, which only operate in international markets where cannabis is legal, are the exception to the rule, however. “There’s a fairly limited number of Canadian companies that have the scale to come to the US,” he says.

In the meantime, the number of US companies focusing their efforts on listing on the CSE to woo investors from across Europe, Asia and the US, who might be scared away by the US Federal ban on marijuana, keeps rising.

“The CSE is everyone’s focus,” concludes Alovisetti.

-- Katie Lewis in Vancouver contributed to this report --

Quick facts: Tilray Inc

Price: 6.83 USD

Market: NASDAQ
Market Cap: $909.99 m

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