After a few days in the Miami sun — well, actually, in the air-conditioned exhibition spaces of the Fontainebleau hotel — the Burns & Levinson team is happy to report that the 2022 Benzinga Cannabis Capital Conference was a great success.
Our Cannabis Business & Law Advisory Group was well represented by Frank A. Segall, Scott Moskol, Bryan Natale, and myself – Max Borg. We had the opportunity to connect with many of our fantastic clients throughout the industry and to meet many key industry participants we hope to work with soon.
Benzinga was a concentrated gathering of many – if not most – of the key players throughout the cannabis industry, from the largest investors in the space to founders and CEOs of the largest cannabis companies in the world, to activists, politicians, consultants, advisors, professionals and many others.
Before discussing my five biggest takeaways from the conference, I want to briefly reflect on the experience of the event itself. The passion and enthusiasm for this rapidly growing industry could be felt throughout the conference. It was a fantastic networking and educational experience, and people seemed to be having FUN! I wonder if it was a coincidence the conference coincided with 4/20… Benzinga was clearly filled with passionate people from across the industry. It was a great event.
Below are my key takeaways from the conference, based on conversations with people I met and presentations that I attended.
1) Legislative Action Unlikely Before Midterms, Unfortunately.
While there are differing opinions about what could — and should — happen next for cannabis on the legislative front, the unanimous opinion from conference attendees and presenters was that something NEEDS to happen. Specifically, criminal justice reform and SAFE banking need to be addressed immediately, or other legislative action taken to ease banking regulations and help cannabis companies gain broader access to capital markets.
And while not unanimous amongst the crowd in attendance, the overwhelming sentiment was that it is doubtful that we will see any significant legislative action from Congress before the midterms in November. The chatter amongst attendees was that the Senate does not have the votes, nor the appetite, to pass any meaningful cannabis reform before November. This could be wrong. Let’s hope so.
As an aside, it is great to see President Biden pardon three – and commute the sentences of 75 – nonviolent drug offenders earlier this week. There is still a LONG way to go, but it is a start.
2) Access to Capital Markets Continue to Be Constrained
One of the unfortunate realities of cannabis remaining illegal at the federal level is that the laws and regulatory conditions make it extremely complicated and challenging for cannabis companies to raise capital and operate a profitable business.
With respect to raising capital, one of the major themes discussed throughout the conference was the ongoing difficulty that both privately held and publicly traded businesses face with respect to raising capital to build and expand their businesses.
- As a result of the federal illegality of cannabis, plant-touching cannabis companies are not able to trade on the major US stock exchanges (NYSE and Nasdaq). As a result, these companies are forced to go public through holding companies in Canada and list on the Canadian Securities Exchange, and/or list their securities on the over-the-counter (OTC) markets in the US. Many investors don’t want to invest in the securities listed on these markets (less robust reporting and accounting requirements; less familiarity with these exchanges, among other reasons). Additionally, some investors simply can’t invest in these securities, as many of the major investment brokerage firms in the US refuse to permit their customers to trade or hold these public cannabis securities.
- As a result of various market factors (including the profit-chilling effect of Section 280E of the tax code, which I will discuss below), the trading prices of the major publicly traded cannabis stocks — typically Multi-State Operators — have taken a major hit over the past 12 months. While these reduced valuations are not necessarily tied to reduced performance of these companies (in fact, during this span, many of these companies continue on a path of consistent revenue growth and profitability), investor confidence seems to have taken a hit, along with the public valuations. This has also had a negative effect on valuations in the private markets. An opportunity for bullish investors, perhaps? This is not investment advice, by the way…
- The result has been lower valuations for equity raises (both public and private) and an increase in debt capital coming into the space, where lenders can obtain significant upside while maintaining downside protection by obtaining security interests in valuable assets such as real estate and cannabis licenses.
3) Potential Increase in Distressed M&A in the Coming Months
To piggyback on the point above regarding the difficulty of raising capital in these current market conditions, there was significant chatter about what many see as a resulting practical reality — that many cannabis companies unable to operate profitably will become distressed acquisition targets.
As a result of Section 280E of the tax code, the federal tax deductions to which cannabis companies are entitled are generally limited to the cost of goods sold and. Accordingly, it is very difficult for companies to operate profitably after paying their taxes. Combine that with increased cost of and limited access to capital, and there is a recipe for distressed M&A activity. The reality is that the constrained capital markets present a unique opportunity for companies with access to capital to purchase distressed assets at reduced prices.
4) Concerns About the Illicit Market
Another critical topic discussed throughout the week was the difficulty that states are having concerning the continued significant presence of the illicit market and the stressors this puts on licensed operators trying to compete.
Everyone agrees that it is essential to ensure consumers have access to safe, tested, legally compliant cannabis products. The practical reality is the illicit markets continue to thrive in many states around the country. A consistent point of discussion was that state regulators need to do a better job creating access, opportunity, and incentivizing legacy operators to move into the regulated markets. Bringing operators from the illicit markets into the regulated markets should benefit everyone.
5) Increased International Presence
Benzinga had more significant international representation than any cannabis conference I’ve attended in the past. I met enthusiastic cannabis industry participants from around the world – from Canada, Mexico, Colombia, Portugal, Denmark and Israel, to name a few. The overwhelming sentiment was that certain international markets — particularly in parts of Latin America and Europe — are paying close attention to the cannabis momentum here in the States, and they won’t be far behind. Hearing from the CEOs of some of the largest US cannabis companies, companies here in the US are well aware of the increasing international growth, and are beginning to execute on strategies to expand their operations overseas. Something to keep an eye on over the next few years.
Overall, Benzinga was a great experience, and I look forward to returning next year. With the rapid changes in this industry, who knows where things will be when Benzinga returns in 2023. I am excited to be along for the ride.