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Canadian Companies Could Soon Invest in the U.S. Pot Market – Here’s How

One Exchange is helping Canadian companies invest in the U.S. pot market for the first time.

Photo by dylan nolte on Unsplash

Most Exchange’s regulations make it nearly impossible for Canadian pot producers to invest in the US market, but one big producer is finding a way around that red tape.

Canopy Rivers Inc. (TSX: RIV.TO) may be a Venture Capital (VC) firm with big backing, but it cannot invest in the U.S. pot market under current federal regulation there. Nonetheless, the Canopy Growth Corp. (TSX: WEED.TO) is at the ready for American weed-regulation changes.

Why can’t a Canadian VC invest in the states?

Every stock exchange gives it its issuers or is criteria to list. The Toronto Stock exchange, where Canopy Rivers lists its public shares, requires that all companies listing follow their operating jurisdictions local laws. And, while cannabis operations are legal in many states, they are still federally illegal in the U.S.

Canopy Rivers co-founders Sean McNulty and Peter Hatziioannou feel confident that U.S. federal regulatory reform is afoot. XIB consulting, their independent consulting firm, keeps tabs on opportunities south of the border.

In interview with the Toronto Star, McNulty said “If Canopy Rivers could invest its own capital into the States, you would see one or both of us go all in on Canopy Rivers.” In the meantime, he says XIB is “very plugged into other ideas, competitors and opportunities.”

Bringing finance experience to the marijuana market

The two bring capital markets experience to a sector that’s heavy on entrepreneurship, but could use guidance in capitalization. McNulty and Hatziioannou met as M&A advisors at Canadian Imperial Bank of Commerce in Toronto. After working together on and off for 10 years or more, they created XIB in 2016.

How Canopy Rivers came to be

In 2016, Canopy Growth became XIB’s first client. The $10.8 billion company based in Smith Falls, Ontario, was a great catch as the world’s number two cannabis company in market cap.

However, Canopy’s main interest was not investing in other businesses. As an operator, they tend to look for companies they can own and operate. As such, XIB was turning deals away.

“We decided to create a separate vehicle where we would could take minority interests, create alternative transaction structures and provide both growth capital and strategic support,” McNulty said.

The vehicle was Canopy Rivers. 25 percent Canopy Growth-owned, its chief executive officer and acting Chairperson is Bruce Linton.

Canopy Rivers raised $104 million this September via private placement, then listed on the TSX Venture exchange using a reverse takeover. While its market value decreased by half since going public, it is currently worth $685 million.

Where does Canopy Rivers invest if not in the States?

Canopy Rivers currently invests in 11 companies globally. One is a marijuana media/ lifestyle brand called Civilized Worldwide Inc.

Their nutrition company, LiveWell Foods Canada Inc., offers hemp products. Canapar Italy is a company working with Sicilian farmers cultivating hemp.

One exchange facilitating U.S. investment

Further, the Canadian licensed producer (LP) TerrAscend Corp. gives Canopy Rivers a foothold in the U.S. market.

TerrAscend may be able to expand into the U.S. market. Indeed, it could invest in U.S. pot firms because its stock is listed on the Canadian Securities Exchange. That exchange allows Canadian companies to be U.S.-pot-focused.

“It was important for us to try to make sure that we maintained our investor base and kept them happy,” according to TerrAscend CEO Michael Nashat. “We see the U.S. market as the next big boom and now we can pursue this opportunity.”

The arrangement is pending shareholder approval. If the deal gets done, it’d set a precedent for cross-border pot investing

Meanwhile, investment opportunities continue to flow in Canopy Rivers direction
“The deal flow is sometimes overwhelming,” McNulty said. “We’ve evaluated hundreds and hundreds of opportunities but we’re very picky because we’re trying to get it right for every investment.

Written by Jason Bagg

Mr Bagg has over 20 years experience in financial services ranging from Capital Markets to Private Equity. Mr Bagg has helped clients build wealth, reduce taxes and plan for retirement. Drawing on his experience, Mr Bagg has spoken on different panels regarding investing and has written numerous due diligence reports and white papers in this area.

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