As a firm specializing in business advisory and corporate legal services for the cannabis industry, it is hard to ignore the regular calls from clients and prospective clients seeking clarity about publicly traded companies and cannabis. It remains to be seen as to whether or not publicly traded companies are a mainstay in the cannabis industry. And with varying regulations across the cannabis-friendly states, this question presents a particularly murky set of answers.

But one thing is certain – the chatter surrounding public offerings in the cannabis industry will not stop.

The total number of cannabis companies in the U.S. and Canada has approximately quintupled since 2014.[1] Despite cannabis being illegal federally, the number of companies servicing the industry continues to grow. This is evidenced by the almost $1.2 billion in capital public cannabis companies have raised by the end of September 2017, up from $485 million in 2016.[2] With the growth cannabis companies have seen financially in 2017, you have to wonder what their value will be when cannabis is fully legal.

Regardless of its legal status, data shows that cannabis is set to grow 23-27 percent annually over the next five to six years.[3] In fact, the value of most cannabis stocks with market valuations of $200 million or more have doubled or tripled in the following year.[4] Speaking on the industry’s growth, Scott Greiper, president of Viridian Capital Advisors, said “[i]t’s going from a cottage industry of growers to a more industrial scale.”[5] He added that “[a]s new states legalize, there is a larger population of consumers that can buy.”[6] What we’re seeing is capitalism at its finest, as the market drives the cannabis industry to increase quality and production. This growth, however, doesn’t mean that every cannabis company is doing well.

Since inception of the cannabis industry, fraud has been a concern, especially when investing in cannabis companies. This was particularly prevalent at the inception of the industry when many unscrupulous stock promoters tried to take advantage of a fledging industry dominated by inexperienced entrepreneurs.  “I track 550 companies, and about 90 percent of them are frauds,” says Alan Brochstein, founder of 420Investor and New Cannabis Ventures.[7] If it’s not fraud, they’re just not performing. As investors are coming to find, there has been a lot of talk but no action when it comes to some start-ups. Cannabis companies that have been valued highly are not providing the returns expected. One example could be made from MedReleaf. Right now, the company is projected to earn only $10-12 million for 2017, despite being valued initially at $636 million, 50 times the seeming profit potential.[8]

Many professional investors have compared the initial stages of the cannabis industry to the beginning of the tech boom in the 1990’s. While there are many companies who are growing and expanding as the industry continues to grow and expand, there are some who’s result of operations are less than expected.  As is the case in virtually any bull market, investors still need to be diligent about where to put their money.

It should be no surprise this is due, in large part, to the lack of support from the banking industry. The lack of available investment capital and payment infrastructure in the U.S. has drawn to the industry an unwanted number of greedy, reckless investment managers and stock operations.[10] As a result, investment firms have turned to foreign markets, including Canada, to make the most of the budding market. In Canada, medical cannabis is legal, which provides investors more security with their investment capital, but even with the haven Canada has provided, U.S. laws are causing concern across the border.

Just recently, the Canadian Depository for Securities revealed they were considering whether to refuse to settle trades made by Canadian cannabis firms with U.S. assets. The Toronto Stock Exchange mandates that all listed companies are expected to comply with relevant laws and regulations in the jurisdictions in which they operate.[11] The hesitation stems from worries these Canadian cannabis companies may violate U.S. laws, especially when Aphria, a Canadian cannabis company, just spent $25 million in Florida as part of its growth strategy.[12] “Ensuring compliance with TMX’s published rules and policies across our broad issuer base is an integral, ongoing function we perform and each issuer is handled on a fact-specific basis,” said Catherine Kee, spokesperson for the Toronto Stock Exchange.[13]

While this certainly should be a concern for investors in both the U.S. and Canada, recent set-backs haven’t stopped cannabis companies from succeeding, even in the United States. Right now, there are at least six cannabis companies reporting earnings in excess of $2.5 million to the SEC.[14] Typically, these companies have responded to the illegal status of cannabis in the U.S. by investing in ancillary products, which are generally not governed by state and local regulatory schemes and which are, accordingly, free from a number of constraints that the plant-touching aspects of the industry must follow.

Take ScottsMiracle-Gro for example. The lawn-care company is betting big on the future of pot with their recent $500 million investment in small manufacturers of equipment for marijuana growers.[15] Jim Hagedorn, CEO for ScottsMiracle-Gro, said this is “the biggest thing I’ve seen in lawn and garden . . . [but] we’re not getting into pot growing. We’re talking dirt, fertilizer, pesticides, growing systems, lights. You know it’s a multibillion-dollar business . . . .”

Overall, the cannabis industry is continuing to make strides even with all the lingering legal problems. The momentum in favor of cannabis legalization is becoming clear. This is telling by the incredible growth public cannabis companies have experienced in the last year. The sky is the limit when it comes to legal cannabis, because even as a federally controlled substance, the market is booming.

[1] Dan Weil & David H. Lenok, An Advisor’s Guide to the Cannabis Industry, WealthManagement.com (August 1, 2017), http://www.wealthmanagement.com/alternative-investments/advisors-guide-cannabis-industry (last visited Oct. 10, 2017).

[2] Viridian Capital Advisors, Cannabis Deal Tracker: Investment and M&A Activity in the Cannabis Industry, viridianca.com, http://mailchi.mp/viridianca/deal-tracker-2930241 (last visited Oct. 10, 2017).

[3] Sean Williams, Say Hello to the Largest North American Marijuana Stock IPO of All Time, The Motley Fool (June 12, 2017), https://www.fool.com/investing/2017/06/12/say-hello-to-the-largest-north-american-marijuana.aspx (last visited Oct. 10, 2017).

[4] Id.

[5] Weil & Lenok, supra.

[6] Id.

[7] Id.

[8] Williams, supra.

[9] Weil & Lenok, supra.

[10] Id.

[11] Jen Skerritt, U.S. Pot Laws Are a Headache for Canada’s Biggest Stock Exchange, BloombergMarkets (July 27, 2017), https://www.bloomberg.com/news/articles/2017-07-27/as-pot-craze-sweeps-canada-largest-exchange-debates-u-s-policy (last visited Oct. 12, 2017).

[12] Id.

[13] Id.

[14] Alan Brochstein, Publicly-Traded Cannabis Socks Are Beginning to Look Like Real Revenue Producing Companies, New Cannabis Ventures (August 13, 2017), https://www.newcannabisventures.com/publicly-traded-cannabis-stocks-are-beginning-to-look-like-real-revenue-producing-companies/ (last visited Oct. 10, 2017).

[15] Weil & Lenok, supra.