Cannabis companies continue to face restrictions on most national exchanges. Special-purpose acquisition companies (SPACs) help fill the funding void.
These types of deals are occurring more often as a less costly and more efficient go-public strategy.
Recall in November how Caliva and entrepreneur Shawn Carter (aka Jay-Z) inked the largest ever SPAC deal with Subversive Capital Acquisition Corp. SBVCF. The SPAC would acquire Caliva and Left Coast Ventures for a respective $282.9 million and $142.2 million.
But SPACs must clear several hurdles in 2021 to remain a popular and effective investment alternative.
Related link: 3 Cannabis SPACs To Consider For 2021
SPAC Deals May Close In 'Just A Few Months'
The traditional initial public offering (IPO) process is expensive and time consuming. SPACS allow companies to go public without spending as much money or time on the process.
Also, capital scarcity is driving a reliance on the public market.
Cresco Labs Inc. CRLBF co-founder Joe Caltabiano says SPACs may provide the fastest path to a public transaction.
An uptick in sophisticated investors and the desire for companies to go public is also fueling the trend.
"That creates opportunities for sophisticated financial vehicles, such as SPACs to amalgamate various assets and ultimately create a new [public company]," he says.
MGO partner and head of cannabis Scott Hammon told Benzinga that stock market volatility helped spur interest because SPACs allow companies to gain quicker access to liquidity.
“A traditional IPO can take up to a year to execute,” Hammon says. “By contrast, a SPAC transaction can be negotiated and closed in just a few months.”
Legislation in the early 2000s helped make SPACs another viable IPO alternative, shifting away from occasional "pump and dump" schemes to upmarket movement, particularly larger transactions, Hammon adds.
Eric Berlin, a cannabis law expert and partner at Dentons, cautions that some market confusion remains over SPACs and current U.S. federal laws.
While SPACs play an important role in cannabis today, investors must remember that U.S. regulations continue to present hurdles that limit U.S. cannabis companies from becoming viable targets to American SPACs, he explains.
"The smaller MSOs and even the individual companies that are operating in violation of U.S. federal law are not able to take advantage of the U.S. SPACs," Berlin says.
The SPAC strategy may be a viable option for companies looking to go public in the coming years, but it also faces significant tests.
Marc Adesso, counsel for Saul Ewing Arnstein & Lehr LLP, cites three key factors:
Continued market volatility combined with a continued upward trajectory is critical, along with what the Biden Administration does concerning cannabis laws.
"If cannabis becomes federally legal, you can expect to see many more traditional IPOS as valuations soar in the cannabis space," Adesso says.
It's also important for national exchanges to continue allowing companies to list. Hypothetically speaking, an uptick in SPAC activity would likely occur if the NASDAQ or New York Stock Exchange were to change course and allow plant-touching companies to list, he explains.
Related link: Online Therapy Provider Talkspace Seeks SPAC Deal
The cannabis industry is ripe for consolidation. SPACs will likely help small- and mid-tier operators combine to compete against larger operators, Caltabiano says.
"You've got a lot more [legalized] states, which means you've got a lot more operators and you've got a lot more stronger, smaller operating companies than you did," in years past, he adds.
MGO’s Hammon also brought up how, in their acquisition deals, SPACs are subject to spending specified percentages raised during specified time periods — typically three years.
"As a result, the clock is ticking for some early SPACs," he says, citing data from Viridian Capital — at least 10 cannabis SPAC deals represent $2.5 billion in capital needing to be deployed over the next year.
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