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Are Investors Reconsidering Cannabis-Based SPAC Funding?

Mar 31, 2022

Currently fully legalized in 18 states across the U.S., cannabis growing, refining, and distribution continue to emerge as new opportunities for business owners. Like any new venture, effective business growth requires the necessary capital to meet operating costs. As it’s still classified as a Schedule I narcotic at the federal level, financial institutions often will not work with businesses dealing with cannabis, such as offering typical banking services, electronic payment processing, or commercial lending.

In recent years, special purpose acquisition companies (SPACs) have become a popular option to many cannabis-related business owners to gain access to the capital they need to grow.

A SPAC is shell company with no business operations, created with the purpose of acquiring an operating company with capital raised through an initial public offering (IPO). Often referred to as “blank check companies,” these structures offer cannabis-based businesses an alternative way to tap into publicly traded markets.

More recently though, this strategy has received heightened scrutiny from regulators as it circumnavigates the traditional corporate IPO process we’ve come to expect. Typically, if a company is looking to “go public” and raise funding by completing an IPO, they are required to disclose all their finances and business practices to regulators before ever issuing a share of stock. This process is very expensive and can often take six months to a year to complete.

Part of this regulatory attention comes from previously SPAC-funded companies that are unsuccessful in their mission to acquire an operating entity. Since SPACs are an investment avenue and do not have any business operations on paper, they do not need to expose to scrutiny the same details as a company raising financing through an IPO.

An industry already facing a large amount of “unknowns” due to unpredictable changes in legislation and a combination of potential lack of transparency alongside missing expected marks for earnings can sound alarms for investors.

Despite these concerns, there is still $1 billion in cannabis-SPAC funding, made of both direct growers as well as ancillary companies raising capital in 2022-2023, according to MJResearchCo.

In the current state of the industry, SPAC funding continues to be an invaluable alternative funding source for the industry. Yet as these concerns arise, retail and commercial investors alike will surely keep a close eye on the trend.

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