Risk & Reward: A Primer on Plant-Touching Cannabis Companies

Not all cannabis-related companies are created equal. In fact, in the eyes of state and federal regulators, they differ significantly, depending on whether they “touch” the cannabis plant—and they’re treated accordingly.

The most common types of companies that do touch the plant are the “operators” that are cultivating, processing, or dispensing cannabis or cannabis products. “No-touch” companies generally provide a product or service pertaining to the industry, but avoid direct involvement with the plant itself. Examples include suppliers of cultivation-related products (e.g., fertilizer) and packaging, as well as providers of real estate, consulting, and legal services (like Burns).

The complexity of the regulations that apply to “touch” companies, as well as the rigor with which those regulations are enforced, also serves as a point of differentiation. Each state that has legalized cannabis, whether medicinal or adult-use, has enacted an enormous set of rules that govern its cultivation, processing, and sale. While there is no federal standard, cannabis operators generally need to ensure compliance with stringent guidelines regarding security, waste removal, advertising and branding, and packaging, as examples.

Generally, and unsurprisingly, “touch” companies are viewed by both observers of and players in the space as inherently riskier than their “no-touch” counterparts, stemming largely from a persistent fear that the industry will eventually be shut down altogether, due to marijuana’s federally illegal status under the Controlled Substances Act. Many cannabis-related businesses (whether plant-touching or not) still find it difficult to obtain bank accounts or to raise capital via the American public markets. Although there are a few plant-touching companies that are publicly traded (usually on the OTC market), most equity raises in the industry are still accomplished via private placements. Accordingly, many cannabis-related businesses are seeking to be listed on the Toronto Stock Exchange (most commonly via a reverse merger with a Canadian company already listed).

Plant-touching business (and many non-plant touching businesses) have also found themselves unable to take advantage of the normal debt market. While certain banks and credit unions have begun to take deposits, it is still extremely difficult, if not impossible, to obtain a mortgage or a commercial loan to support the business. While some non-regulated financing sources have begun to dip their toes in these waters, such non-bank lenders require an above-market interest rate and other fees to even consider underwriting these businesses.

Plant-touching companies are also finding that some service providers, such as law and accounting firms, continue to remain on the sidelines, unwilling to take them on as clients. Across the country, many municipalities in states that have legalized cannabis are either a.) prohibiting plant-touching businesses from opening altogether, or b.) restricting them to the less desirable portions of the town limits. Insurance remains difficult to obtain. A failing plant-touching business cannot file for federal bankruptcy protection as cannabis remains federally illegal. The list of challenges goes on and on.

This is not to say that non-plant-touching businesses are not also impacted by some of these difficulties, at times (a fact that we’ll explore in a subsequent post.)

Despite, and perhaps because of, such challenges, the industry still receives a great amount of invested capital, and, in turn, investors have become used to high rates of return on their investments. In many ways, especially with respect to the plant-touching segment, the industry has proven the adage that with great risk, comes great reward.