Is Investing in Cannabis a Conservative Move or a Risky One?

Perhaps closest to a true publicly traded "U.S. cannabis company" is Greenlane Holdings, Inc. (NASDQ: GNLN). Greenlane, a Delaware corporation with principal offices in Florida, conducted its IPO in April 2019 and offers products to market in the head shop, smoke shop and dispensary channels. Though Greenlane does not touch the leaf, it represents a new level of transparency from a U.S. pubic company regarding its participation in the marijuana business.

Canadian companies listed on U.S. national exchanges and operating in the cannabis industry outside the United States present another channel to cannabis investing. Several Canadian companies, including Canopy Growth Corp. (NYSE: CGC), Tilray Inc. (NASDQ: TLRY) and Aurora Cannabis Inc. (NYSE: ACB), all maintain market caps well in excess of $1 billion.

Both U.S. public companies that do not touch the leaf and Canadian companies that do not operate in violation of U.S. federal law represent relatively conservative investments compared to companies directly involved in the production or sale of marijuana in the United States. These companies in the industry, but not directly involved in the production or sale of marijuana in the United States, can be viewed as striking a balance between risk and reward – poising for expansion if marijuana becomes legalized under U.S. federal law, but avoiding potential repercussions from violating federal law until such time.

With the emergence of cannabis stocks, several cannabis exchange traded funds are available. An ETF is an investment fund traded on a public exchange that allows investors to easily diversify throughout an industry. Cannabis ETFs now provide investors with the ability to diversify their investments within a subset of the cannabis industry, such as small cap companies or Canadian companies.

Private companies have greater flexibility than public companies to operate directly in the federally-illegal marijuana business. They remain susceptible to action by the federal government. As the cannabis industry expands, companies are increasingly looking to private investments as traditional sources of capital are often not available due to the unlawful nature of the businesses.

Investing in private placements of cannabis companies comes with risks. Without disclosure requirements, private companies may leave investors with little information relating to the operation and health of the business. Moreover, private companies' ability to produce and sell marijuana, even in states where such activities are legal, brings the increased risks of operating in violation of federal laws.

Unrelated to cannabis, private placements often have limited liquidity, require reliance on forward-looking statements, are subject to significant dilution and present tax risks unique to each investor. Private placements are also generally only available to accredited investors.

Conclusion

The legalization of hemp at the U.S. federal level and expanding legalization of marijuana at the state level are attracting investors in the cannabis space. As the industry matures, more opportunities will become available. But risks remain, most notably that marijuana remains federally illegal as a controlled substance. Equipped with an understanding of the federal and state, legal and regulatory frameworks surrounding cannabis, investors can better assess the risk of a potential investment.

Guy Lander is a partner, Alexander Malyshev is counsel and Matthew Schwatrz is an associate at Carter Ledyard & Milburn. They are members of the firm's Cannabis, Hemp and CBD Industry Group.