ValueWalk’s interview with Avis Bulbulyan, the CEO of SIVA Enterprises. In this interview, Avis discusses federal and state laws regarding marijuana products, the legal landscape for medical marijuana, funding for recreational marijuana companies, activity in the venture capital space, U.S. companies listing on Canadian Securities Exchange, his views on companies like Aphira, the CBD space, and the future of weed industry in America.
How do you navigate the different federal and state laws regarding marijuana products?
Navigating Federal is pretty straight forward, it’s illegal and not much to navigate other than staying within each individual state regulations or going public on the Canadian exchange. As for state regulations, they’re fairly straight forward. Generally, if something is not expressly excluded or addressed in regulations, it’s open for interpretation so when you read state regulations, you’re really looking to understand what you can’t do and not so much what you can do.
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If a company wants to sell marijuana in America in a recreational state, how does that work when federal law prohibits it?
Years ago, Federal restrictions were a lot more intimidating and not to call it a crap shoot, but there wasn’t as much of a comfort level as there is today with federal enforcement. These days, because of all the states that have legalized medical and the ones legalizing adult-use, the feds have taken a general position that as long as a company is compliant within their state, they’re not going to enforce. Because of the merit based and competitive application and licensing process in place in most states, the state license holders haven’t had to worry as much about federal enforcement as operators in transitional states such as California. So if you want to participate in the adult-use market within your state, that state’s regulations are your best friend and as long as you operate within the framework of your states regulations, you should be fine.
Can you tell us about the legal landscape for medical marijuana in the states where it is legal. Why do you think there are some states where it is still banned? Is it because all marijuana is illegal on the federal level?
The legal landscape for medical marijuana in states where it’s legal is straight forward, you either have a state license or you don’t. The transitional markets like CA are a little trickier because they’re taking operators without licenses and transitioning them into a regulated marketplace with state licenses and full compliance. The states that don’t have regulations in place are either still trying to figure it out, or don’t want to deal with the conflicting laws as it relates to the federal restrictions. Usually a state starts picking up traction when there’s an industry or voter base that starts pushing towards some sort of state regulations. With all the states available, resources are deployed in states that are the proverbial “low hanging fruit.”
What is the best way companies that work with recreational marijuana can get funding?
The best way for companies to secure funding is to have a legitimate business model beyond an intent to secure a license because a license doesn’t make the business, a license simply authorizes an activity. Investors invest in ideas, concepts, business models, people, operators, and teams. Funding is the most difficult thing to secure but it’s also the easiest thing to secure, it just comes down to what you’re looking to do with the funds.
Is there any guidance from the investment side from regulators like the CFTC, SEC or FINRA?
Not really. The guidance comes from memos, notices and positions these agencies/regulators take. When any given topic starts going down the direction where it has the potential of getting out of hand, they’ll come out with a position statement or a general memo. The CSE (Canadian Securities Exchange) does provide more guidance than the US agencies, but that’s also because they’re trading cannabis stocks. Even so, their guidance would be minimal. Going into the 2nd half of 2019, and particularly 2020, I think we’re going to see much more “activity” from these agencies because almost all of them understand that this is coming and it’s coming fast and hard so they’re all starting to position themselves to be able to address cannabis at the federal level within their respective agencies.
There are a few marijuana public companies in the US - however its a young industry. Is most of the action in the venture capital space?
There’s a lot of activity in the venture capital space, the real estate space with REITs, and obviously the Canadian public markets. Private investor activity is still very hot and getting more intense every day. You have a few US companies listed on the US, but they’re either ancillary companies; companies that have listings on this US for their non-plant touching side with a sister listing on the Canadian markets for the plant touching side, or you have some pretty interesting (to say the least) corporate structuring going on. As a whole, investment activity in cannabis is very healthy.
Why are US cannabis companies listing on the Canadian Securities Exchange?
It’s one of the very few options available to side step US securities laws. If you’re looking to scale and raise a lot of money, the CSE is a really great option. What’s going to be interesting to see is how the CSE maintains post US legalization at the federal level when the US public market opens up and becomes an option.
Is part of the legal issues companies face because of liability?
Liability is a concern across the board for any cannabis company and the key word for any cannabis company is compliance. Compliance can mean regulatory compliance, operational, corporate, securities, and pretty much every department down to marketing and advertising. This is an industry with siloed state markets, illegal at the federal level, and an every day changing regulatory environment. It’s important to understand that even though cannabis is a newly emerging industry on it’s own, operationally, it dips its toes in other industries that come with their own restrictions and guidelines so it’s important to understand that just because you might be operating within the framework of cannabis regulations, you may still be violating regulations in other industries.
Do you have an opinion on any big public companies like Aphira?
I think most of the bigger public companies are missing the real opportunity and giving up the positioning they’ve acquired. They’ve scaled, raised money, planted seeds for future growth, but are now stuck spinning their wheels which is why we’re seeing a dip in public company interest by investors. Of all the public companies, I don’t think more than a very select handful ever make it. US federal changes will have a very accelerated impact on these companies that will determine A) do they make it or B) do they live up to their hype and full potential. We’re not too far out from finding out.
Are the big alcohol, pharma or tobacco companies making gains in this new industry?
The big guys are creating tremendous traction more than they are making gains. For them, they can’t really do what they’re good at until federal restrictions are lifted. As such, they’re doing the next best thing and that’s positioning and getting everything lined up for that big day. Some are more aggressive than others and those companies are starting to take very active positions in the companies they tethered themselves to like the more recent Canopy Growth one where Constellation brands took over the board of Canopy and got rid of the CEO.
Every time there is a new gold rush a lot of unscrupulous people get involved - this appears to be the case with marijuana- how do investors avoid getting involved with questionable companies?
Easy, don’t overcomplicate things just because it’s cannabis because it’s no different than any other business. If you were investing in a “traditional” company, you would go through your due diligence check list, you would vet the deal, the operators, and everything about the transaction. What’s interesting is that you’ll see some of the most successful people in the world of business and finance that end up looking like a deer in headlights because they think the cannabis industry is something different. The same principals apply to cannabis businesses that apply to traditional businesses. You just happen to be dealing with a schedule 1 drug and individual state markets. Taking cannabis out of the conversation, if you wouldn’t do the deal if this was a traditional business opportunity, you probably shouldn’t do the deal. Investors should learn to dissect claims made by companies and learn to read the words between the numbers when reading press releases. This industry is really great at wordsmithing and if doesn’t pass your smell test, it probably stinks and you should avoid it. There are more opportunities in this space than most would know what to do with them. Don’t do a deal just because you feel like you’re about to miss out. A general rule of thumb that we use is that we go into a project looking for a reason to say no. If we can’t find one, then it’s probably a deal we’re interested in doing.
With money piling into the sector, are some VC firms going to get into situations where they lose a lot of money to fraud?
I would say more than some. A lot of folks are going to lose a lot of money to fraud, to unrealistic expectations, operators’ fatigue. Right now, everyone is caught up in the hype and investors are placing their bets. The ones that will come out with a profit on the other side are the ones that took a slow and systematic approach. It’s easy to get caught up in the action and potential, but slow and steady is going to be less painful and a whole lot more profitable. Will there be jackpots in the space? As a whole, don’t bet on it.
What exactly is CBD and what is the investment picture in that industry?
The CBD space is an interesting one. In general, CBD is just one of the cannabinoids in cannabis. You get CBD from “regular” marijuana plants that produce THC as well but that would put it into the supply chain that requires a state license. The CBD that gets attention is the one that’s derived from hemp and is part of the federal Farm Bill. That sector gets a lot of attention and it’s the one where you see products on Amazon and one that has a marketplace for it that’s, call it more “traditional”. However, the hemp derived CBD market is pretty saturated with products and the products themselves don’t get much attention. It’s a bit of a safer bet for the investor that wants to get into cannabis but doesn’t want to deal with the THC side of the industry. The returns are generally not as aggressive as an investment into the thc space. Long term, hemp and hemp derived cbd products are going to be a massive opportunity that goes beyond just consumer goods and into the world of textiles and a lot of other industries.
How is the global growth picture for Marijuana and how does that differ from the US?
In 2018, the cannabis industry made tremendous head way on a global scale. Several countries decriminalized it, a bunch started creating a supply chain and regulations to govern it. Most of the global market is in the “homework” stages and they’re drawing from experience in other places to develop theirs. It differs from the US in that it’s moving forward at a much faster pace than we are in the states, but a lot of those markets are also much more limiting than it is in the US. By far, the US is the bigger market and it’s going to end up being the market that drives the other markets. Come federal rescheduling of cannabis, you’re going to see major changes when it comes to all things cannabis related.
What do you foresee in the future for the Weed industry in America? Which states will legalize next and can we expect any changes on the federal level?
The future of cannabis in the US is very bright. Several states are going through their state licensing process and a handful are coming up in the 2nd half of 2019. I think we’re going to see changes at the federal level within the next 2 years. With all the states that have some sort of cannabis industry at the state level, I don’t think the federal government is going to be able to wipe the slate clean and start something at the federal level. We’re probably going to see this be more of a state issue where every state handles their own industry. I think federal involvement is going to come in the form of a Federal tax stamp and the feds will be more involved in the logistics side of the industry more so than the production side. Keep in mind that the biggest implication from federal rescheduling, besides banking and research, is going to be interstate commerce (logistics).
If you were President what would you do about Marijuana and related substances
Legalize and tax it. If I’m the President and I’m looking to create jobs, generate tax revenue, this is by far the best opportunity. Cannabis has bi-partisan support across the board. States are creating robust supply chains that comes with well paying jobs, benefits, and generating tax revenues that most industries can’t even come close. As President, you don’t even have to work on developing it, just allow it because it’s already developing itself. Create a federal tax stamp and allow for interstate commerce, allow for the money to be banked, allow for research to be conducted, and take some of the tax revenues generated and reinvest it into communities that were impacted by the war on drugs, reinvest it into federal programs, grants, etc. What we’re talking about here is the inevitable. If it’s the inevitable, why are we wasting time fighting the old when we can work on building the new?