Epic Fails in International Cannabis Fundraising – Stories from The Trenches

Cannabis fundraising is getting easier, but there are still many dubious practices afoot and claims aplenty that investors should be aware of.
Epic Fails in International Cannabis Fundraising – Stories from The Trenches

The cannabis industry is nothing if not creative about regulatory loopholes along the way to financing. The entire vertical, in fact, has been built just about everywhere in the grey edges of the law. Companies who have raised cash through cannabis fundraising so far have literally paved the way for the industry itself—but the route if not the means has been just as tenuous. If not frequently outright ludicrous. This has been less than remunerative for many early investors in the market. First mover “advantage” in this industry is certainly not all it’s cracked up to be…and is often unbelievably expensive.

While it may sound easy at this point to chuckle from the privacy of your mobile device as you read on, also remember that at the time, certainly in the flush of passion and asset transferring, some of these have not been so easy to spot. 

Here is what you really need to know about cannabis fundraising before investing in any part of the industry, anywhere. Understanding the regulatory environment, not to mention reviewing proposals with a clear head, is the best way to avoid disasters. 

That said, beyond cautionary tales of course, some of these are absolutely amusing.

Money for Nothing and Your Chicks for Free

There are big dreams aplenty in the world of international cannabis. Many of them still have a tinge, beyond the excel particulars, of fast cars, faster women, and mother plants. Oedipal psychology and bro culture aside, most proposals which claim to have a roadmap of becoming the next “Google” or “Walmart” of weed should be avoided. Like the Plague. Or a Covid-19 carrier for that matter.

When it has come to the financing of the international industry however, the wizardry of the industry and the ability to sell the same is, from a certain perspective, based on a tenuous grasp of the intersection of securities and narcotics law just about everywhere.

This starts with the practice of the by now (certainly in some circles) infamous process of going public by backing yourself via what is known as a “reverse IPO”—in other words into the operations of an already existing if not exactly operational other company. While nothing technically is illegal about the use of “shell” companies to go public, the practice has reached an art form in some places (see every public Canadian cannabis company of a certain vintage). 

Here is generally how to look at such plans these days. Read the small print and understand what is going on between the lines. 

For example, to counter a claim seen in many of the same, there is no such thing as an easy to enter “European market.” Even for CBD, now that it is not considered a narcotic. Here is another. Next year, the recreational markets in Switzerland and Luxembourg are not going to resemble what has happened in the United States, Canada, Holland, or Spain so far, for that matter. Any such claims are akin to selling real estate dividends in the South Sea. Or tulips of a certain Dutch variety. 

Second, the companies who relied on the Toronto Stock Exchange (TSX) for a quick market entry and raised a great deal of cash over the last 7 years, are facing smaller competitors, just about everywhere, for the cultivation of the actual plant. EU GMP, for starters, did not feature in many of these companies’ plans. Neither did the much slower pace of European reform. Much less negotiated pricing for cannabis that is about a quarter of what the original cannabis sold to Europe was (and revealed in corporate quarterly reports). Or the specifics of educating doctors in countries where there is a much different approach to healthcare. 

There are several of these companies who have gone bankrupt along the way underestimating all such details. Of the “survivors” of the German bid process, for example, there is only one company still standing and unmerged, and they have also been on a record “cost cutting” binge of late.

Beyond this, certainly in Europe, the attitude towards buying equities generally is very different. While in London, cannabis companies have begun to go public via the LSE, on the continent the Deutsche Börse has not yet taken the industry off its watch list. Reverse mergers are unlikely to be a “thing” anywhere in the EU or its closest neighbors (even in Switzerland).

“Exclusive” German Cannabis Distributorships

Because equity is harder to raise in Europe and there are a lot of expenses that must be met and so far, have not been adequately sold to investors, early-stage companies must scramble to find ways to fund such operations, often with far flung cultivation partners. 

The German market has been rife with such schemes—in particular in the funding of distributor licenses (estimated costs of establishing the same run about 1 million euros per license). This has been so “successful” that the government has now issued over 80 of the same (or about one cannabis speciality distribution license for every 1 million Germans). Many of these distributors also survived initially by reselling (to each other) product they bought over the border from Holland. That practice has been winnowed significantly but has led to other disasters (notably overcharging for generic drugs).

Several have also raised money via bragging about “exclusive” import rights (particularly from opening markets). This is a ludicrous claim. The best way to get product into the market (and this is not an inclusive list by any means) is having GMP compliant and audited product (plus a good law firm). All of the above must be written into the prospectus—and most of the time this is not. Indeed, one of the largest complaints on the European side of the industry to date is that investors, even of a European family office kind, are not used to seeing line items for compliance.

That is slowly changing. But any business plan that claims to have a team of experts with “hundreds of years” of experience—or even much over 10—and in specific markets if not practices, is not worth reading. Nor is one that claims to have an “exclusive German market access” for any country’s cultivated and about to be imported produce.

I Have A Cannabis Farm In (Fill in The Blank Location)

For the romantically inclined, or those who have a bucket wish list that includes cultivating cannabis somewhere in the world and selling it somewhere else, the mere act of cultivation does not a cannabis company make. Indeed, many who have gone this route after being swept off their feet by the romance of the same, have found this out, to their chagrin, as they begin to think about selling it. Anywhere. 

The largest failure, from the German side of the discussion at least, is understanding at the time of sale that the plant that has been grown—in a situation which cost someone time and money—just cannot meet German if not pharmaceutical spec without more investment, from someone, somewhere.

That is a major downer.

Looking to The Next Stage of Cannabis Fundraising and Investments in Europe

As European countries, if not the bloc, begin to tackle the regulation of cannabis as medicine, serious investment opportunities will begin to proliferate. It is not rocket science. The cannabis industry, globally, is growing up. Cannabis is a commodity as much as it is a plant that can be used for medicine. Or an alternative to another kind of recreational, adult use, social lubricant.

Growing, processing, and manufacturing it is just becoming normalized, along with the ability to finance such operations in a way that generates returns on investment the usual old “boring” way.

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