Investors Prep $3B Lifeline For Distressed Cannabis Assets

By Diana Novak Jones
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Law360 (April 10, 2020, 7:55 PM EDT) -- At a time when cannabis companies are increasingly strapped for cash, a group of blank-check companies are working to line up nearly $3 billion to buy assets on the cheap — but it's unclear whether it will be a benefit to the companies or just a boon to investors.

At least 13 special-purpose acquisition companies, or SPACs, have popped up over the last year, listing publicly on exchanges like the Nasdaq and the NEO in Canada, according to public filings. While they aren't the first SPACs in the cannabis space, it's a marked uptick.

Experts say the spate of SPACs is a reaction to the difficulties cannabis companies are having raising investor money in more traditional ways, combined with a flood of cheap cannabis assets — and both are increasing as the coronavirus pandemic continues.

The SPACs pool money from shareholders with the express purpose of funding acquisitions, although they must make the buys within a specific time frame and with shareholder approval. Along with their stock purchase, the shareholders usually receive warrants valued at more than the share price, allowing them to buy more stock at a discount.

The sponsors, who operate the SPAC and look for investment opportunities, typically receive 20% of the total shares at a steep discount.

They're a favored tool for investors hoping to get involved in a risky or struggling industry, making them a great fit for the cannabis industry right now, according to Lee Buckler and Blair Jordan of Restructur Advisors, a cannabis industry-focused restructuring firm.

Buckler and Jordan, who built a list of SPACs they shared with Law360, said they started noticing the investor groups forming as cannabis companies started having trouble finding capital last year.

Silver Spike Acquisition Corp., which launched in July, was aiming to raise $250 million, according to company filings. A company representative declined to comment.

Subversive Capital Acquisition Corp., which also launched that month, has hit its $575 million target, according to Michael Auerbach, the chairman of its board of directors.

Several more launched this year.

A second SPAC Auerbach is overseeing, Subversive Real Estate Acquisition REIT LP, announced it had raised more than $200 million in January.

Collective Growth Corp. announced plans to raise $150 million with the U.S. Securities and Exchange Commission in March.

Investors in these SPACs are looking at cannabis at a time when many others aren't, Buckler and Jordan said. Cannabis stocks have been in free fall since late last year, as the industry struggles with growing pains.

That nosedive "pulled a huge amount of capital out of the market," Jordan told Law360. "It's also deprived those companies of what was a lifeline for them."

The stock exchange rules governing SPACs say they have to spend 80% of their money on their first transaction — and with some SPACs raising hundreds of millions, that's a lot to spend on a single deal.

They could buy real estate, brands, patents, "anything worth money," Buckler said. "You can get them for cents on the dollar. [But] just because something is on sale doesn't mean it's a good value. You still have to do your due diligence."

Licenses are hard to get through applications, so could these investors pick them up through acquisition? Perhaps, Buckler said. But there are a lot of regulatory hurdles associated with selling licenses, in both the U.S. and Canada, he said.

These assets, though cheap already, likely took another hit when the virus came along, Jordan said. He and Buckler said they have been in contact with investor groups sponsoring still more new SPACs, hoping to take advantage of a bigger pool of distressed assets.

"I was skeptical until this distress unfolded that anyone was going to find a $600 million growth opportunity," Jordan said. "So I actually think the distress in the market makes the landscape for SPACs much more compelling."

A few weeks into the crisis, that's already true, according to Auerbach. A cannabis investor and board member at Canadian cannabis company Tilray, Auerbach said the last two weeks have changed things.

"Even companies that were not interested in the SPAC space are now very interested in contracting with a SPAC," Auerbach told Law360.

Of the SPACs Law360 looked at, Subversive Capital Acquisition is the largest, with $575 million in investor money — and it has until January 2021 to spend it. Auerbach said he's had a lot of interest from cannabis businesses, but he won't make any moves until the pandemic has passed and he has a better understanding of its impact.

Auerbach says his SPACs formed with the theory that there will be no federal legality of marijuana in the U.S. until a year after the November 2020 election. But they know that until then, cannabis companies have been "starved for capital," Auerbach said.

"We have a lot of money, more money than any other SPAC out there," he said.

Meanwhile, revenue and valuations are still dropping in the cannabis sector, "increasing our availability of deals for the SPAC," Auerbach told Law360.

The SPAC could ultimately buy one company, or multiple, he said.

Auerbach said he's confident that his REIT will find deals, enough so that they're operating on a shortened timeline of just 12 months. What they are most interested in is urban retail real estate and sale-leaseback agreements, he said, but they won't pay a premium just because the real estate is linked to cannabis.

As this new stream of capital becomes available to cannabis companies, the question becomes whether it's a true benefit to the industry or just a way for investors to cash in.

Marc Hauser, co-vice chair of the cannabis law team at Reed Smith LLP, has been monitoring the spread of SPACs. He cautions against viewing the money as a bailout.

"In the right situation, where the acquisition could be paired with a necessary cash infusion into the balance sheet, it could be a strong lifeline for a company," Hauser said. "But I think that, given the SPAC limitations, the number of potential targets is inherently limited, meaning that the SPAC's usefulness to solving the macro cash problem in the industry on a broad basis is similarly limited."

One limitation is that many of the new cannabis SPACs are listed on the Nasdaq, which like many U.S. exchanges requires its listings to be from companies in industries legal in their home country. To remain listed after they make an acquisition, those SPACs likely won't be able to invest in a so-called plant-touching business, he said.

If they do, the SPACs will need to relist on a Canadian exchange, where cannabis listings are allowed, Hauser said. That move may not be very appealing to a shareholder, who has a vote on the acquisition target.

Plus, "nothing is easy to buy in this industry because of the regulated nature of it," Hauser said. "Everything has to be approved. Even if a SPAC finds this acquisition target, they still have to get it approved."

Finding an investment target that will use up 80% of the SPAC's cash to acquire — that isn't already public — will be hard, Hauser said. Many of the biggest companies are already public, and they aren't going to be interested in a SPAC acquisition, he said.

And if a SPAC is buying a company as a whole, it would have to take on the same debts and problems the company had before, Hauser said. That might not be the deal the SPAC is looking for, anyway.

"It is a way for the sponsors to take advantage of a lot of those dynamics in the industry — of investor interest, of the distressed nature of the industry, of the need for capital — and it gives them time. If they can't find a deal, they just give back the money," Hauser said. "It's not a panacea."

--Additional reporting by Tom Zanki. Editing by Brian Baresch and Alanna Weissman.

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