With a surge in sales during the pandemic, new markets coming online throughout the US, and greater public acceptance of adult-use and medical cannabis, the cannabis industry feels poised to enter the mainstream. Another wave of expansion and consolidation is on its way. Expansion as operators enter new markets and bring new verticals online. And consolidation as well-capitalized operators acquire licenses and operations. One common way to accelerate a cannabis company’s growth is by going public. Is now the right time to consider taking your company public?
Reasons for taking your cannabis business public
If you’re considering going public, you’re likely the founder/CEO or financial leader of a sophisticated cannabis business with ambitious plans. Ideally, your products and services are best-in-class, you’ve carved out a profitable niche in the industry, and you’re barely keeping up with customer demand. With a major capital infusion, you can bring your plans to life.
Ultimately, there are as many reasons to go public as there are companies who undertake this transformative transaction. Common reasons include:
- Enter new markets or states
- Vertically integrate
- Launch new products
- Acquire licenses or operations
- Invest in research and development
- Pay down existing debts to boost financial health
Options for taking your cannabis company public
If you’re a plant-touching cannabis company with operations in the US, your options are quite limited. Within the US, you may consider an over-the-counter (OTC) or off-exchange transaction, but these are unregulated, quite risky, and limited in scope. Until Federal laws change, you’re barred from listing on any of the SEC-managed exchanges, NASDAQ, NYSE, etc.
Instead, you’ll likely look north to Canada. The federal legality of cannabis in Canada, plus a welcoming regulatory, financial, and investment environment has made the nation home to a number of large cannabis enterprises. This has led to growth that has been fueled by the ability to access capital via public listings. The two most active exchanges, the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX-V), are home to a number of large Canadian cannabis companies. But, similar to their peers in the US, they impose restrictions on listing companies that have plant-touching US operations.
That elevates the Canadian Securities Exchange (CSE) as the best option for most cannabis companies. The CSE is an alternative exchange focused on micro-cap and emerging companies. The CSE calls itself a “modern and efficient alternative for companies looking to access the Canadian public capital markets.” As a result, the CSE offers simplified reporting requirements that lower the barriers to listing. Perhaps most importantly, the CSE has taken a progressive approach to the cannabis industry and does not block companies with plant touching US cannabis operations.
Advantages and disadvantages of going public
Before undertaking this complicated and cost-intensive transaction, you should weigh the advantages and disadvantages of operating as a public company.
Advantages of Going Public
Access to capital: Once public, you can use the public markets to raise additional capital at a later date, normally at a higher valuation than a private company.
Boost to market awareness: Going public can be a highly-publicized event raising awareness and earning headlines that introduce products and services to new markets.
Leverage for talent acquisition: The hiring market in cannabis is very competitive and going public can make the company more appealing to future hires by offering equity ownership options that act as motivational and retention tools.
Securities used in M&A: If planning to acquire companies or licenses, publicly traded shares can be more attractive to a seller, providing an advantage in negotiations.
Disadvantages of Going Public
Initial and on-going operational costs: Going public requires a significant capital investment and the demands of operating as a public company creates continuous cost burdens.
Dilution of equity: By selling ownership stakes to the public, existing owners and investors may be diluted depending on future valuations and growth.
Heightened public scrutiny: Going public shines a light on your company and public disclosure rules require exposing many operational and financial details.
Navigating regulatory oversight: As a public company you’ll be required to meet quarterly and annual reporting and regulatory requirements that demand time and resources.
Reduced management control: As a public company, corporate decisions require approval from the board of directors and/or shareholders.
These are just a few of the considerations a cannabis company must seriously weigh and balance before going public. The benefits can be truly incredible, but the risks are not without consideration. If you’re planning a cannabis go-public transaction, the experts at GreenGrowth CPAs can be your trusted guide. We’re the only cannabis-focused accounting firm to take a company public in Canada, and we know the ins and outs of the marketplace.
If you’d like to talk your options through, just schedule a consultation with us or call 1-800-674-9050.