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Capital Imbalances Offer Opportunities in Cannabis

Legal Status Of Cannabis World

Though long considered an illicit substance, cannabis is on the cusp of social and legal acceptance—both domestically and internationally. According to a report by Grandview Research, that dramatic shift is set to create a global legal market with an estimated total sales of $66.3 billion USD by 2025 (up from $11.9 billion USD in 2018). But while there has been an explosion of capital raised from cannabis companies, there remains a mismatch between cannabis companies seeking capital and their potential investors. This capital imbalance creates opportunities for savvy investors.

Volatility and inevitable market corrections are partly to blame, but ultimately, the mismatch between capital demand and supply is due to a limited universe of investors, lack of credit availability from traditional banks, and an undeveloped payments systems. However, with the impending shift in the regulatory climate, one thing is certain: this soon-to-be-corrected capital inefficiency points towards a strong potential market opportunity in the cannabis space.

This is evidenced by the expanding universe of investors starting to look at this space.

History of Cannabis

Cannabis first emerged on the US federal legislation radar with the Marihuana Tax Act of 1937. It was further prohibited by the Controlled Substances Act of 1970, the legislative precursor to the “War on Drugs” and widely regarded as racially-motivated legislation promoted by the Nixon Administration to further alienate disenfranchised demographics. But progressive notions of medical utility have since reshaped the legal landscape, and now 33 states have made the use of medical cannabis legal for adults as a form of health treatment.

Eleven states have made both medical- and recreational marijuana use legal, with Illinois the most recent jurisdiction to fully legalize cannabis use.

Regarding CBD, on the state level, some jurisdictions have eliminated certain prohibitions on cannabis and cannabis-derived compounds. On the federal level, the Farm Bill (Agriculture Improvement Act) of 2018 removed cannabis and cannabis derivatives that are low in THC (less than .3) from the definition of marijuana in the Controlled Substances Act. This Farm Bill, however, preserved the FDA’s responsibility for CBD products.

While the FDA has been skeptical of the rapidly growing cannabis industry, it is under increasing pressure from Congress to ease the path to market CBD-derived products as there is much popular support for these products due to increasing evidence of the benefits of CBD in treating inflammation, pain, anxiety and sleep issues.

In June 2018, the FDA approved Epidiolex, a cannabidiol oral solution for the treatment of seizures associated with two epilepsy syndromes – Lennox-Gastaut syndrome and Dravet syndrome. It is the first-ever FDA approved medication to treat seizures in Dravet syndrome, a debilitating form of epilepsy that usually begins in childhood and persists into adulthood.

While there are many promising applications for cannabis, the financial, banking and payments side remains inconsistent and in development. This has made banking tough for cannabis-based businesses, with financial institutions apprehensive about handling money that could be perceived as ill-gotten gains in the eyes of Uncle Sam. These inefficiencies, however, are creating opportunities for savvy and forward-thinking entrepreneurs who are creating value in business that help companies bridge this gap.

The inconsistent and uncertain regulation of cannabis across all 50 states results in the perception that cannabis as an investment remains tricky —hence the reluctance that pervades the sector and shapes capital opportunities.

See the Potential

A number of private equity, venture capital, family offices, and individuals see the tremendous growth opportunity in this nascent industry and have made significant investments. According to a report by Viridian Capital Advisors, the total capital raised in the US and Canadian markets combined for 2019 YTD as of August 2nd, 2019 is $8.7 billion USD, which is nearly double the amount raised at this time last year.

There have also been some notable transactions in the space from large strategic investors looking to capitalize on an addressable market and establish synergies with their core businesses.

The Altria Group, in need of a growth engine after their investment in Juul became controversial, invested $1.8 billion USD in the Cronos Group. With oils, tinctures, and beverages, cannabis represents an opportunity for the Altria Group to get involved in both the medical and recreational side of products.

Constellation Brands, which owns Modelo and Corona beer, invested $4 billion USD in Canopy Growth with the aim at leveraging their own strong distribution and logistics network for future cannabis-infused beverages.

Meanwhile, Molson Coors Brewing entered into a partnership with Quebec-based Hexo Corp. with a similar game plan in mind. They intend to market non-alcoholic, cannabis-infused beverages in Canada later this year.

Market Snapshot

According to a Grand View Research report, the US legal cannabis market’s total sales were estimated to be $11.9 billion in 2018, with medical marijuana claiming the largest share of that market.

As per, there are currently over 140 companies publicly traded on the US and Canadian stock exchanges that have a hand in the cannabis industry in some capacity, whether it be via the growing of cannabis, pharmaceutical research or in an ancillary aspect.

market data on the cannabis top ten performers
Though uneven regulation has created cash imbalances, opportunities in cannabis continue to flourish

An International Snapshot

On the international stage, a number of countries have legalized—or are considering legalizing—cannabis in various capacities.

In Europe, Luxembourg will soon legalize cannabis for recreational use. The UK has allowed limited use for certain medical conditions.

In Asia, Thailand has legalized medical marijuana, while South Korea has legalized CBD, the pain-relieving component of cannabis.

Israel has decriminalized cannabis. So, too, has Australia and South Africa.

If the shifting attitudes of acceptance continue on the international stage, it’s safe to assume that at some point in the future legalized cannabis will truly be a globally traded sector—with even more capital opportunities.

Opportunities in the Face of the Inevitable

While the exact timing of federal approval is impossible to pin down, it all but seems inevitable that the Food and Drug Administration will rule on the use of cannabis and cannabis-derived compounds soon. As per a recent release from the regulatory agency:

The U.S. Food and Drug Administration (FDA) recognizes the significant public interest in cannabis and cannabis-derived compounds, particularly CBD. However, there are many unanswered questions about the science, safety, and quality of products containing CBD. The Agency is working on answering these questions through ongoing efforts including feedback from a recent FDA hearing and information and data gathering through a public docket.

It’s only a matter of time. Until then, there are cannabis-based enterprises seeking capital… and those with capital who see this significant nascent and growth investment opportunity.