Keeping Cannabis Private: Challenges with Taking Cannabis Companies Public

One commonality for businesses across all industries, including those in the medical and adult-use recreational marijuana space (“cannabis companies”), is the importance of access to capital. Everyone knows that running a company requires a significant amount of money. However, cannabis companies specifically face distinct hurdles to raising capital, especially when it comes to deciding whether to go public.

The process of a private company offering and selling stock to the public typically begins with an initial public offering, which can trigger large payouts for management and ownership; a certain elevated level of credibility; and, most importantly, increased access to capital, which can better situate a company for both short- and long-term growth. For many entrepreneurs, taking a company public may be the ultimate accomplishment. However, despite the pros, there can also be plenty of cons for companies undergoing an IPO, especially those in the cannabis industry.

In general, taking a company public not only results in increased costs and more comprehensive (and burdensome) disclosure requirements, but also a much more aggressive and scrutinized focus on short-term growth for shareholders, which can limit the flexibility and freedom to which management may be accustomed. For cannabis companies, perhaps the biggest challenge exists at the major stock-exchange level (e.g., NYSE and NASDAQ), where rules prohibit listing the stock of any company that is not in compliance with the law.

Because marijuana remains a Schedule I drug under the Controlled Substances Act, and is therefore illegal at the federal level, stock exchanges will not permit the stock of cannabis companies to be listed for sale. As a result, some such businesses have opted for listings on over-the-counter markets, which are decentralized markets that allows participants to trade directly with one another. OTC markets are often less transparent and are subjected to fewer regulations, allowing for cannabis companies to publicly list themselves as long as they file the appropriate paperwork. Although this presents a viable alternative for cannabis companies wishing to go public, the reduced disclosure requirements associated with OTC markets present increased risks to investors, which, in turn, can reduce the amount of capital that actually becomes available. While this additional capital may still be attractive for certain companies, the benefits of going public should be carefully weighed against the potential disadvantages and added requirements.

Although certain states have begun legalizing marijuana for both medical and recreational purposes, these obstacles for cannabis companies looking to go public will likely continue to exist so long as marijuana remains illegal at the federal level.