Since cannabis remains illegal in much of the world, raising investment can be tricky. This week, guest writer Ken Parks takes a look at how one Luxembourg-based company with operations in Latin America is looking at a new method to solve this problem.
Using blockchain in a quest for growth
A fund that invests in Latin American cannabis companies is planning to use a novel way of raising cash to expand, with a sale of a type of crypto asset known as security tokens to private investors.
Global Cannabis Capital, or GCC, is preparing to sell tokens on the Ethereum blockchain platform that represent its equity in lieu of a traditional initial public offering of shares. The company had originally planned an IPO or a reverse public offering in pot-friendly Canada next year.
But after weighing its options, GCC is pursuing a security token offering in Luxembourg, where regulations are favorable to both cannabis and the issuance of securities using blockchain, which is the technology that enables cryptocurrencies. Unlike most cryptocurrencies, however, the tokens in these types of offerings are backed by the assets or equity of the issuer.
“We cannot wait 12 or 14 months to go through an IPO process. Tokenization takes around three months,” Chief Executive Officer Andres Israel said in an interview at the company’s main office in Montevideo, Uruguay.
Token offerings could broaden the funding sources available to the pot industry, which can’t borrow money from banks due to the U.S. federal government’s prohibition on marijuana. Funding so far has mostly come from venture capital, wealthy individuals and individual shareholders, rather than institutional investors. Last year, GCC’s incubator unit, Cannabis Company Builder, raised $500,000 of seed capital from investors including a pharmaceutical company and delivery app entrepreneur Ruben Sosenke.
To carry out the offering, GCC will create 100,000 tokens representing its capital stock. The fund will probably sell as much as 6% of its equity in token form in several private placements during the next three years before deciding whether to list its tokens on a public exchange, Israel said.
Israel expects to close the first placement by early May. More than 100 investors committed to buying some of those tokens in a presale last month that valued the company at $25 million.
The process isn’t entirely divorced from the traditional world of finance, as investors are subject to anti-money laundering and know-your-client controls by GCC’s bank in Luxembourg. Even so, Israel is optimistic that security tokens will allow the fund to tap a large pool of individual investors seeking exposure to the cannabis industry.
Beyond Latin America
GCC has invested $700,000 in 28 cannabis companies in Latin America by providing services to startups in exchange for equity or buying stakes in promising firms. Only about a quarter of those companies grow pot, which reflects GCC’s bet that most of the revenue and profit growth in cannabis will come from branded products in areas such as cosmetics, food and veterinary care. His company is focusing on consumer products while avoiding the recreational marijuana market and goods that get users high.
GCC will use the proceeds from the token offering to expand its portfolio to about 40 companies this year with a focus on Switzerland, Canada and the U.S. states of Colorado and California, Israel said. The fund should generate its first profits next year, which will be reinvested in equity positions in new and current brands.
“We were more focused on Latin America in the beginning. The idea is to become more global with these investments,” he said.
Number of the week
The percentage of Louisiana voters who support legalizing marijuana, according to a poll from the University of New Orleans.
Quote of the week
“I believe the future of the industry belongs to brands; to understanding needs worldwide and creating a brand that positions itself in that particular niche. I believe that cultivation sooner rather than later will become a commodity,” GCC’s Israel said.
What you need to know
New Jersey recreational marijuana sales will begin on April 21, Governor Phil Murphy said in a tweet. The action makes the Garden State first in the New York City area to offer weed to customers 21 and older.
Tilray Brands agreed to buy $193 million of outstanding notes from Hexo.
Pennsylvania doesn’t have to prove that the cannabis in a driver’s bloodstream was nonmedical when prosecuting him for driving under the influence, a state appeals court said on April 12.
Organigram jumped this week after reporting a positive measure of earnings known as Ebitda in its latest quarter.
In Bloomberg Opinion, Chris Bryant writes about how psychedelic companies are giving investors a bad trip, in spite of their promise.
Numinus Wellness agreed to buy mental-health-care provider Novamind for C$26.2 million ($20.8 million).
Bicycle Day psychedelics event in San Francisco.
Benzinga Cannabis Capital Conference in Miami Beach, Florida.
National Cannabis Real Estate Summit in Chicago.
OrionCANN cannabis business event in Chicago.