What are the top five catalysts for the cannabis industry going forward?
1. Positive results from the November 2016 elections in which eight states will be voting for cannabis reform, either medical or recreational.
2. Acquisition activity continuing to increase, establishing valuation benchmarks and enhancing the visibility of exits for investors.
3. More professional and institutional capital flowing into the sector.
4. The development of an East Coast market in legal cannabis from Florida to Vermont.
5. An administration post-November 2016 elections that supports continued cannabis legalization and reform, or, in the very least, will not reverse the industry's progress to date.
What would be the best and worst case scenarios for the cannabis industry and publicly-traded companies?
The best case scenario for the U.S. domestic cannabis industry would be the continued roll-out of legalized cannabis programs in additional states. This has proven to be the most direct predictor of growth in the size of the U.S. legal cannabis industry.
In November of this year, the citizens of 8 states will vote on cannabis reform, including Arizona, Arkansas, California, Florida, Maine, Massachusetts, Nevada, and North Dakota, five of which will be voting for recreational legalization. This is significant considering that only four states have legalized recreational usage to date. We believe the November elections will serve as a breakout point in the industry, beyond which the industry’s growth will accelerate as additional states approve medical or adult-use cannabis programs and political discussions move towards reform at the national and international levels.
The worst case scenario would be a rollback of the Cole Memoranda and the Supreme Court decisions to grant states the ability to regulate their own legalized cannabis programs. This would realize a threat to licensed operators in legal states and create additional risk for public company investors.
What are some reasons institutional investors have not yet invested in the cannabis space?
Cannabis’ status as a Schedule I controlled substance is the primary impediment to investment – from both a legal and, arguably more importantly, reputational risk perspective – for fund managers, board members, and limited partners in the institutional investment community. The nascent stage of most cannabis businesses is also creating specific risks and challenges for institutional investors, including:
Some Companies Struggling to Survive: Weak balance sheets and toxic financing structures are putting downward pressure on stock prices and hampering companies’ ability to raise capital. Other companies will likely face scrutiny from the SEC and FINRA due to lack of compliance with reporting and accounting requirements.
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