Economics
Reverse Takeovers: How U.S. Cannabis Companies Get Listed on the Canadian Stock Exchange
With U.S. stock exchanges still almost entirely closed to cannabis businesses, the stateside industry is increasingly seeking access to the Canadian exchanges in order to secure investment. Merging with publicly traded Canadian firms through reverse takeovers has emerged as the critical tactic in this endeavor.
On the morning of May 29, the Los Angeles-based cannabis company MedMen got its listing on the Canadian Securities Exchange. With a chain of 12 posh cannabis storefronts in California and New York, as well as a sprawling greenhouse facility in Nevada, MedMen is going public through a “reverse merger” with Vancouver-based Ladera Ventures Corp.
What Is a “Reverse Merger” or “Reverse Takeover”?
A “reverse merger,” otherwise known as a “reverse takeover (RTO),” allows a private company to go public by taking over a publicly traded “shell company.” And MedMen isn’t the first American company to use the reverse takeover strategy to get a public listing — they’re only the latest company in a growing trend.
MedMen seems to represent the cannabis industry’s fast-growing mainstream acceptance. The company bills itself as strictly high-end. It has outlets on Los Angeles’ Santa Monica Boulevard and just off New York’s Fifth Ave, which are two prestige locations in the United States. However, because MedMen sells products containing cannabinoids that are technically illegal at the federal level, American stock exchanges are closed even to such stylish enterprises as this one. Listing on the Canadian exchanges is the next best alternative for selling shares and raising capital for expansion.
A Bloomberg profile says that Ladera Ventures “does not have significant operations,” but “is seeking new business opportunities to either acquire or participate.” Previously, Ladera Ventures was involved in oil and natural gas operations in Alberta.
Canadian Vs. American Stock Markets
In its public statements, MedMen is portraying the reverse takeover strategy as an interim measure before access to U.S. stock markets is won. “You’re going to see more and more cannabis companies listing on the major stock exchanges in the U.S.,” MedMen spokesperson Daniel Yi told Forbes upon news of the reverse takeover.
Yi predicted that the New York Stock Exchange and NASDAQ will soon open their doors to companies like MedMen. Then, he said, “you’re going to see some migration” from Canada to the U.S. “That’s the beauty of having free markets and open borders.”
With more states liberalizing their cannabis laws, Yi rhetorically asked at what point federal prohibition will “become a moot point.” He added optimistically: “From a capital standpoint, there’s a tipping point, and I think we’re very close to that tipping point.”
And indeed, there are some signs of hope. While it might seem paradoxical, a few Canadian companies have been granted listings on U.S. stock markets. Also this week, Ontario-based Canopy Growth became the first “plant-touching” cannabis company to list on the New York Stock Exchange. Back in February, Cronos Group of Toronto became the first Canadian cannabis company to list on NASDAQ. But no U.S.-based cannabis enterprise yet lists on either the NYSE or NASDAQ.
It is Toronto that has emerged as the financial center of the cannabis industry. Home of the Toronto Stock Exchange (which hosts Canopy Growth and Aphria Inc, two of Canada’s cannabis giants) and Canadian Securities Exchange, the city has traditionally served as the financial hub of the mining industry. And this proximity has apparently resulted in an unlikely synergy of the cannabis and mining industries.
As New Cannabis Ventures website notes, Toronto-based cannabis company Supreme Pharmaceuticals now holds gold claims in British Columbia. And Aurora Cannabis of Vancouver went public in 2014 after it executed a reverse takeover with Prescient Mining Corporation, a Vancouver-based firm with uranium operations in Saskatchewan.
Canada certainly far surpasses the U.S. in legal cannabis production, and despite the recent cracks in Wall Street’s prohibitionist edifice, Uncle Sam is also being left behind by his northern neighbor in the industry’s financial sphere. It remains to be seen if state-by-state liberalization will provide a sufficient critical mass to pry open the stock exchanges of New York City —even in the face of ongoing federal prohibition.
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