Investor relations key in budding cannabis sector
When US-based medical cannabis provider Columbia Care went public in April 2019, listing on Canada’s NEO Exchange, it did so in a unique fashion. Rather than use a reverse takeover or an IPO, Columbia Care merged with a special-purpose acquisition corporation (Spac) set up by its investment bank Canaccord Genuity to facilitate a go-public transaction, making Columbia Care the first cannabis company to use a Spac.
The deal valued Columbia at $1.35 bn, which is not bad for a 2012 start-up that has quickly grown into the largest fully integrated operator in the global medical cannabis industry, with 96 facilities in 16 jurisdictions in the US and EU.
Columbia went public at a tumultuous time for the nascent industry. After a banner 2018 saw cannabis companies raise almost C$12 bn ($9 bn) in Canada, 2019 was a roller coaster. Some companies found themselves subject to intense regulatory and media scrutiny. Investors became more interested in profitability than expansion. High-profile CEOs were sacked and, by year’s end, medical concerns over vaping emerged.
The volatility the cannabis sector faces highlights the important role an investor relations program plays, notes Jos Schmitt, who heads NEO, one of the two senior stock exchanges in Canada and the only one to list US cannabis companies and Spacs. ‘This is a young industry and many companies are learning what it means to be publicly listed,’ he explains. ‘As cannabis companies look to raise capital, it’s important to have a good understanding of your investor base and communicate well.’
Here, Nicholas Vita, Columbia Care’s CEO and co-founder, and Gary Santo, vice president of investor relations, talk about taking a cannabis company public and navigating choppy waters.
Nicholas Vita, CEO and co-founder, Columbia Care
When should a cannabis firm tap public markets? Vita: A cannabis company is really no different from any other company. There are a number of factors that determine when a public listing should be considered. The most important has to do with the level of confidence in the business model and the opportunity to reduce the cost of capital and increase the access to capital.
What were you looking for in a listing exchange? Vita: Because we are a cannabis company, the first criterion was determining which exchanges we could actually list on. The next factor was how we approached the capital markets. We went public through a Spac, which allowed us to use a completely different approach compared with our peers. A very close, but important, second tier of decision points revolved around the integrity of the listing platform. Was it a senior exchange? Did it have high-grade listing requirements? How much support would we be able to receive? How much transparency could we get into the marketplace? All those things were critical in the decision-making process, and NEO was the clear choice. Looking back, it’s been helpful to have the NEO team as a resource because it has been incredibly responsive.
What are the advantages and disadvantage of a senior exchange? Vita: We had to go through a regulatory review process of our documentation and business model. That was very important to us because we believe it gives investors a higher degree of transparency and confidence in the material you share with them. Often investors will make decisions based on who you associate with. For us, having the confidence and being able to describe to the market that we chose the road less travelled – but the one that had the most oversight and most controls in place – we thought would ultimately pay off from the standpoint of giving investors confidence in what it is we do.
Why did you choose a Spac? Vita: The Spac was structured by one of our counterparties, Canaccord Genuity. It was its first cannabis Spac and incredibly efficient. We elected to go that route because it was the fastest way to actually capitalize the business and it checked all the boxes, giving us access to a senior exchange and enhancing our relationship with one of the most important counterparties in the cannabis market from a financial services perspective.
Gary Santo, vice president of IR, Columbia Care
What advice do you have for other IR professionals when it comes to using a Spac? Santo: In a typical IPO, you are putting systems in place, refining your story and actively marketing months before your stock goes live. With a Spac, there is limited market momentum because of the lack of marketing, so you are left to build out your program in real time with an active stock. You need to move a lot faster, with a strong understanding of your business model and long-term strategy so you can quickly identify investors and engage them in meaningful dialogue, making up for lost time.
How is the investor base of a US cannabis company different from other companies? Santo: The emerging US cannabis sector requires a more growth-oriented investor base that is patient and willing to endure not only the regulatory complexities, but also the need for companies to expend capital in order to achieve scale and profitability. Institutions typically fit this description, but regulatory overhang is preventing a lot of shops from jumping in, and retail investors have taken their place. Retail investors require a different type of support and messaging. They tend to look to digital and social media outlets for their information, so the channel you communicate through is almost as important as the message, and maintaining corporate visibility is key.
What is the biggest IR mistake a cannabis company could make? Santo: Not taking the time to cultivate an investor base better aligned with the strategy and growth trajectory of the business. The current lack of liquidity in the market is indicative of an inherent mismatch in shareholder bases. Unfortunately, a number of companies assumed retail investors would act like their institutional counterparts and, in the face of headwinds, demonstrate a flight to quality, when instead they took a broad-brush approach to the industry. A large contributor to the pullback we have seen can be traced to the tendency of companies in this space to over-promise and under-deliver. It’s the most basic of rules first taught in investor relations, but one that is often forgotten in cannabis. You need to develop a cadence to accompany your message and make sure it showcases the strength of your management team, its clear vision and ability to deliver.
What are you doing on the institutional investor front to lay the groundwork for the future? Santo: Lots of early-stage meetings. In some cases, we are meeting with institutions that are not only working through the usual corporate analysis, but also wrestling with the regulatory aspects and trying to determine whether they are able to even invest in a US cannabis company. We are being strategic in our targeting and tactical in deploying senior management to ensure we are as efficient with everyone’s time as we can be and providing reliable metrics that these institutions have come to expect. The more we can explain Columbia Care in the vernacular, the better the chance of gaining traction. It’s about remaining front of mind so that when they are ready, Columbia Care is the stock they will want to add to their portfolio.
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