Cannabis Knowledge & Insights

SPACs IPO Explained (Special Purpose Acquisition Company)

Special Purpose Acquisition Companies (“SPAC” or Blank Check Companies) are emerging as major players in the cannabis industry. Watch our video or read the article below to learn more.


SPACs, or  special purpose acquisition companies now you may have heard of this term you may have not but these blank check companies are making massive waves in the finance sector of the cannabis industry so in this video we’re going to help you to better understand what spacks are their limitations and how they’re actually impacting the cannabis industry now if you have any questions about finance audits due diligence or anything cannabis business related then please reach out to us via our website at greengrowthcpas.com or give us a call at 800-674-9050 let’s hop right into the presentation so again today our topic is cannabis spax which are special purpose acquisition companies and this presentation is brought to you by green growth cpas now before we get started i need to let you know that the information contained in this presentation is meant for guidance purposes only and not as professional legal or tax advice and further it does not give any personalized legal tax investment or any business advice in general so with that out of the way let’s review what we’re going to cover in today’s video so first we’re going to talk about and understand what is a spac and then we’ll talk about how spax raise money then we’ll talk about some contexts and considerations and thoughts around cannabis specs then we’ll jump into some limitations about specs and lastly some final thoughts around specs for your cannabis business so first what is a spec you may have heard this term you may have not heard this term but spac or spac it stands for special purpose acquisition company now spax are sometimes called blank check companies and the company has no established business plan and it’s solely used to merge with or acquire another business entity and spax are publicly listed on stock exchanges or markets and they raise funds through an ipo and later they use those funds to acquire that new company and spax or blank check companies are considered penny stocks or micro cap stocks by the sec so that being the case these companies must abide by specific sec rules and regulations so there is some type of official oversight on these special purpose acquisition companies and just for context spax make up about twenty percent of the us ipo market as of 2019 so now that you understand what special purpose acquisition companies are let’s talk about how they actually raise money now at the start before these companies form the entrepreneurs and investors are going to agree on a general plan of what they want to buy but it’s important to know that these blank check companies don’t list what they’re going to buy but you can infer what type of company it will likely acquire based on the skill sets and the expertise of the founding partners from there after they have that general plan the spac is going to raise money through an ipo and so what they do is they pull money from investors and this is known as a blind pool and they put that into the public company now the money is typically placed in an interest-bearing trust until the capital is actually deployed now once public the spat can go out and make acquisitions or investments based on a strategy defined by the company’s managers this back will find a company it wishes to acquire and it brings the deal to the people who invested into the spac now these shareholders can approve the deal if they want to invest in it and if they don’t like the investment option shareholders can use what’s called the redemption right and ask for their money back and it’s important to know that spax usually have two years to make an investment and deploy that capital now you may be saying great this is all good information but i’ve never seen this before well there are plenty of examples of spac acquisitions outside of the cannabis industry that many people have heard of ipos by draftkings virgin galactic nikola motor these were all achieved through the use of the special purpose acquisition company vehicle so now that you know what spax are and how they raise capital let’s talk about cannabis and specs and the industry and how these are actually affecting the industry and how they’re working within our industry now spax have become more and more common as a way to invest in cannabis companies they’re an appealing alternative to venture capital or private equity investors who tend to typically shy away from investing in the cannabis industry because cannabis remains illegal at the federal level so an example of these being more commonplace you saw credit suisse in citigroup they’ve each led u.s ipos for companies that are looking to invest in fda-approved cannabis therapies or technology that supports cannabis companies you also saw jp morgan and goldman sachs they’ve helped existing clients with cannabis related deals though their clients don’t sell or cultivate cannabis thc plants themselves and lastly being why melon is providing services to a u.s listed cannabis etf and there are a few big names dominating the cannabis spak market you’ve got two major groups collective growth and green rose acquisition they’ve raised 150 million dollars each and just for context that’s more than all of the cannabis and hemp ipo activity in 2018 and 2019 combined and there are other big players you’ve got stable road acquisition they did an ipo for like 170 million you’ve got meridia merger group they did an ipo for 120 you’ve got silver spike acquisition 250 million dollars so for a privately held cannabis company a spac is a solid way to raise a lot of capital into a stable company and gain the liquidity that you’re looking for but you will surely need to actually build a company worth being invested in and these are large amounts of capital being deployed into cannabis from sophisticated institutional investors so the bar is going to be higher the due diligence is going to be more granular they’re going to really want to peel open your company and see all the drivers of revenue and all the drivers of expenses and how tight your financial plan and operation actually are on the screen now you can see a list of us and canadian exchange listed specs that are specifically for cannabis you can see their tickers the exchange they’re on the date of their ipo so this is groups from 2017 18 and 19 and some 20s in there and then you can see how much money they raised so this sounds like a great way to raise capital but what are the limitations and risks of special purpose acquisition companies now the spac has constraints that don’t exist with other investment vehicles for example the spac has to spend at least eighty percent of the funds on one transaction so when you see a hundred and fifty million dollars being raised that means they need to deploy about 120 million dollars in one company so we’re looking at big big investments here and another constraint is that for the cannabis companies they’re going to need two years of audited financials and corporate governance with independent board members and that’s a very high bar to jump for many cannabis businesses most don’t even pay their taxes properly so if you have no way to look at the financials audit them have a third party do the proper due diligence there’s no way that you’re going to raise money with a special purpose acquisition company now it’s important to understand that spax are not permitted to buy federally illegal businesses in the u.s when they are listed on the new york stock exchange or the nasdaq even if the business is legal at the state level but this doesn’t deter canadian spax from investing in these us-based cannabis companies and since these us-based space cannot buy federally illegal businesses that means in practice this method of going public privileges the non-licensed ancillary cannabis businesses and u.s hemp businesses that are legal on the national level akerna is an example of a non-plant touching ancillary business that went public through a special purpose acquisition company and they are a parent company resulting from the merger between mj freeway and m-tech acquisition corporation and they were the first u.s listed spac focused specifically on acquiring cannabis technology companies so really what we’re showing here and explaining is that the way your cannabis business is structured how your ip is created and then licensed to the company as well as how you generate your revenue is incredibly important if you want to be considered for investments from special purpose acquisition companies so final thoughts all things considered should you sell your cannabis company to a special purpose acquisition company well if you meet the strict criteria and you want to get out of your business then yes it’s something you should consider looking into and many cannabis backs they’re raising huge sums of money but the pool of companies eligible for acquisition again due to the constraints is limited for those variety of reasons now you may be able to sell your private company for more than fair market price if you fit the right profile because there’s not a lot of deals but there’s a lot of money so every deal is getting combed over very detailed and people are going to deploy the capital because they’re on a time constraint as well but it’s also important to understand that money isn’t everything and as with any acquisition or merger the option of selling can often mean that the founder the managing partners they get ousted from the company and employees may get laid off your company or even just the intellectual property of your company may get absorbed into a larger parent group and then that’s it your company’s gone they just wanted you for your ip or for your sops or for whatever other reason but spax are a good way to raise funding and stay in control of your cannabis operation provided that you find the right group of investors that don’t just buy and kill your business but every situation is unique and you’re going to need proper due diligence to determine your eligibility and your prospects of raising capital through specs for your cannabis company so hopefully this presentation has brought you some value and helped you to understand a little bit better what special purpose acquisition companies are and how they tie into the cannabis industry now if you need help with due diligence or audit support for your cannabis business whether you’re going to be purchased by a special purpose acquisition company or you’re doing other m a deals or you’re an investor and you want to go deploy some capital but you don’t know if this company is the right fit for your investment thesis then please reach out to us we can help you with audits due diligence in any respect whether it’s operationally financially and all the above so again reach out to us via our website at greengrowthcpas.com or give us a call at 800-674-9050 you can leverage our experience we work with hundreds of active clients that are you know the 100 000 operators per year all the way up to the public companies doing 25 to 50 million dollars per year in revenue we’ve seen all types of companies in every vertical and we can give you a lot of color and context and we can help you with that due diligence that audit support to help you get a grip on your numbers help you understand if you’re a founder is your company profitable where can you find some efficiencies and cut down on any financial friction in the business as well as if you’re an investor how’s your money being used how’s the company performing don’t just rely on emails from the founders have a third party go out there peel back the company learn what’s going on and then give you some color and context in an audit document to know how the business is performing so again if you need help with this please reach out to us via our website at greengrowthcpas.com or give us a call at 800-674-9050 have a great day and we’ll talk to you soon

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn