Special Purpose Acquisition Companies, commonly referred to as “SPACs”, have garnered significant public attention and investment capital in the past year and have made investments into a number of different industries, including cannabis. It is estimated that SPACs raised over $82 billion in 2020, which was a six-fold increase from 2019. Several SPACs have made large investments into California cannabis companies, and it is likely that this trend will continue. This article will discuss how SPACs raise & invest capital, and also highlight a few of the recent major cannabis SPAC deals.
What is a SPAC?
A SPAC is a publicly-traded holding company, that, at its time of listing, has no operable business; rather, it is a “blank check” company, formed solely for the purpose of acquiring another company. “Publicly traded” means that anyone can invest in a SPAC; investors are not required to have a minimum income or wealth level, as they are for many private investments. Investors in SPACs are oftentimes betting on the manager of the SPAC, who may be a well-known public figure, and who the investors think will find a company to purchase at a favorable valuation and use their expertise to improve the prospects of the company following the purchase. Funds raised by a SPAC are put into an escrow account, and must be returned to the investors if no transaction is completed within a set timeframe – usually two years. Because a SPAC does not have an operating business at the time of listing, the disclosure requirements imposed by the SEC are much less onerous than for operating companies.
SPACs generally purchase private companies that are considering doing their own public offerings. For a company looking to raise money from public markets, merging with a SPAC can be a more favorable route than conducting its own initial public offering, which would require extensive financial reporting and legal disclosures. Merging with a SPAC provides access to public capital without having to go through the lengthy and expensive IPO process that requires the filing of an S-1 registration statement, which can often extend to hundreds of pages of technical financial and legal information. Because a SPAC is already publicly listed, it can provide a shortcut for the company they are merging with to access public markets.
Recently, several SPACs have conducted transactions in the cannabis space. Currently, the largest cannabis SPAC is Subversive Capital, which was launched in July 2019 and raised $575 million from investors. On January 15, 2021, Subversive Capital completed its acquisition of both Caliva and Left Coast Ventures, to form The Parent Company. Caliva is a California cannabis company that is licensed to engage in cultivation, manufacturing, distribution and retail, and provides product to over 150 dispensaries. Left Coast Ventures is a cannabis and CBD company with extraction, manufacturing, distribution and product/brand development operations, as well as a significant investment in greenhouse Cannabis cultivation.
And on December 14, 2020, the company Clever Leaves closed its merger with Schultze SPAC. Clever Leaves is a large-scale cannabis cultivation company with operations and investments in the United States, Canada, Colombia, Germany and Portugal. Clever Leaves plans to operate low-cost cannabis cultivation facilities in geographic regions that it believes are naturally conducive to cannabis growth.
A complicating factor facing cannabis SPACs is that they are often unable to list on U.S. stock exchanges given that cannabis remains federally illegal in the United States. Instead, they are often listed on Canadian exchanges, as cannabis is federally legal in Canada. The Parent Company is listed on NEO Exchange, which is a Canadian stock exchange. However, some U.S. exchanges have agreed to list companies with foreign operations so long as they are compliant with applicable laws in the relevant jurisdictions and do not conduct illegal operations in the United States. Clever Leaves, for example, is listed on the Nasdaq stock exchange.
Given the continuing popularity of SPACs, it is likely that SPAC-led consolidation of the cannabis industry will accelerate in the coming years. This is particularly true in California, where the industry remains highly fragmented, with approximately 6,061 cultivators, 1,159 distributors, 892 manufacturers, 705 retailers and 313 delivery licenses operating in the state. There are over a thousand retail cannabis brands in California, but less than 20 have a market share of greater than 1% in the state; and no single brand has more than single-digit market share.
For smaller operators looking to be purchased, this is a good time to ensure that any outstanding corporate governance matters, external contracts and licensing issues have all been properly addressed, as issues that come up at the due diligence stage can derail otherwise mutually advantageous deals, so it is better to address such issues before entering into deal negotiations.
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Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.