Part 4: Fourth Annual State of the Cannabis Industry Conference – Smoking Hot Topics: M&A, Investing, and Capital Raising

Burns & Levinson LLP

Burns & Levinson LLP

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As in past years, the Fourth Annual State of the Cannabis Industry Conference brought some of the industry’s top leaders and regulators to discuss and reminisce on the industry’s growth, the current state of the industry, and the future of the industry. With topics ranging from restructuring and workouts to hemp and CBD, the Conference concluded with its final panel, discussing the current status of the industry’s capital markets and M&A transactions with a panel of the industry’s top investors and funds. The panel’s discussions centered on the current state of capital in the industry, the recent valuation reset of the industry, methodologies, and determinations of deploying capital, and new trends and key developments in the past 2-3 years.

As many in the industry are well aware, raising capital in the cannabis space has never been easy. This year alone, capital raising has declined by 67% since last year, with $2.6 billion raised in the first half of 2020 compared to the $5.5 billion raised in the first half of 2019. However, the panelists noted that, while capital raises are down, the opportunity and leverage for investors has never been stronger. With a valuation reset of nearly 70-80% in the public markets and continuously scarce capital, investors are currently in a much better position to negotiate for more favorable and protective terms – something that was not prevalent 2-3 years ago when euphoria to closing deals accelerated timing and overlooked significant and key issues in cannabis companies. Experts are now seeing more complex terms and friendlier valuations for investors over the past few years and expect the complexity to only increase as the industry continues to mature.

In that regard, diligence and corporate governance have been thrust into the forefront of an investor’s key issues and priorities when evaluating cannabis companies. Corporate governance in ensuring a properly constructed board with appropriate independence and oversight and information rights to cure the lack of transparency that investors saw early on are now highly sought after terms. Furthermore, the diligence process has grown more thorough over the years as the leverage has shifted. While the issues surrounding target cannabis companies remain similar or the same, investors are now focusing more so on such issues and are more leveraged to dig in deeper and extend the timing to complete diligence prior to closing.

Though capital remains scarce in the cannabis industry, all panelists remained optimistic about the continued development and future of the industry. Panelists also were unanimous in that this year’s presidential election may open the flood gates to new investor capital into the industry, though several cautioned that even after the election, the industry wouldn’t truly open up until full legalization occurs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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