As the masks went on and the lights went out in businesses across the country during the COVID-19 pandemic, 2020 was shaping up to be a watershed year for legal cannabis. Marijuana was deemed an essential service, and consumption boomed in legal markets across the country, while surveys showed that Americans had become more in favor of legalization than ever before.
But while the value of the US cannabis market is projected to reach as much as $45 billion by 2025, cannabis professionals and would-be entrepreneurs still face a very uphill battle regarding funding.
Perhaps the two most often-cited reasons for the difficulties in securing private funding in cannabis are the lack of federal legalization and the complex and ever-shifting regulatory constraints on the industry.
A Regulatory Archipelago To Navigate
In the absence of federal legalization, the regulatory demands placed on the industry differ from state to state and even from one local jurisdiction to another.
These include restrictions on advertising, limits on the number of licenses one individual can hold, and outright bans on out-of-state license holders. Some states require cannabis companies to be vertically integrated, and some ban vertical integration outright.
Potential investors can be wary of running afoul of these regulations or could be dissuaded by the restrictions these guidelines place on how the business can operate.
The Foggy Legal Status Of Cannabis
Though it's a commonly-held belief that federal prohibition makes it impossible for cannabis businesses to receive loans from traditional banks, according to the U.S. Treasury, in September 2021, 755 depository institutions were banking marijuana-related businesses in the United States. But as long as cannabis remains a schedule 1 controlled substance under federal law, cannabis companies will face a heightened level of scrutiny when trying to access capital and interest rates well into the double digits. These companies also have a more challenging time obtaining credit-corporate accounts and services.
Insurance companies can also be wary of working with cannabis companies because of their hazy legal status, making these companies riskier for investors.
The Inherent Risks Of Cannabis Businesses
There is also the extent to which cannabis businesses can be risky investments - regardless of the legal status of cannabis.
“Honestly, if cannabis was [federally] legal, these would still be risky investments. Early stage investing is a risky business,” Charlie Alovisetti of the cannabis law firm Vicente Sederberg LLP said.
“These smaller private players [in cannabis] you don’t know if they’ll be around in five years. You need to be compensated for that risk.”
On the other hand, Alovisetti said that because of the risk and the scarcity of funding options, “lenders can lend at really high rates in the cannabis industry, so there’s money to be made. If you can find appropriate targets, but there aren't a lot of good candidates for debt. You gotta have real revenue and collateral, and you can't lend them money if they’re too risky.”
Alovisetti, who will be featured in a Rootwurks webinar on funding in cannabis in September, added that many of the “angel investors” in cannabis “got burned early on” and that “for the most part, the people who are comfortable are kind of tapped out, so the equity capital is kind of limited.”
Matt Hawkins, the founder and managing partner of the cannabis investment firm Entourage Effect Capital, said that the issue isn’t that the business model of cannabis companies is laden with risk, rather, the issue was more “convincing people that it [cannabis] was a safe investment from a standpoint of them not getting in trouble. It was risky from the nascency of the industry and startups, but that’s just venture capital.”
Hawkins also described cannabis as an industry that can’t be painted with a single brush stroke.
“There are later stage companies that are stable and safe, and there are ones that need capital to get to the next level, and there are startups. The industry has matured enough to where there are several stages of risk in the industry.”
Put Your Best Foot Forward For Cannabis Investment
In July, Senate Majority Leader Chuck Schumer introduced the Cannabis Administration and Opportunity Act (CAOA) which would remove cannabis from the schedule of controlled substances. Also, in July, the U.S. The House of Representatives passed the Secure and Fair Environment (SAFE) Banking Act for the seventh time. If approved by the Senate, the bill would allow banking institutions to work with legal, state-regulated cannabis companies without facing federal repercussions.
But until the Senate approves laws like these, there are some steps that cannabis companies can take to increase their chances of finding investors.
Companies must develop sound, captivating business plans to present to potential investors. They should invest in hiring qualified professionals for management positions and create professional, polished reports to present to investors.
And in a market as saturated as legal cannabis, companies must tell a good story that sets them apart - at least in the eyes of potential investors.
Image sourced from Shutterstock
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© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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