ValueWalk’s Q&A with Danny Hurwitz, ELLO Capital’s Managing Director of Capital Markets Syndication. In this interview, Danny discusses his and hiss company’s background, navigating the federal and state laws regarding marijuana products, Californian vs Canadian cannabis companies, their opinion on Aphria, and the future for the weed industry in America.
Can you tell us about your background?
I have over 25 years of professional experience in investment banking and finance. For the past five years, I have honed my focus to the cannabis industry, delivering financial advisory services focused on integrity, credibility and transparency as the managing director of capital markets syndication at ELLO Capital. Before joining ELLO Capital, I was the Founder and Principal of Sensibility Capital, where I provided financial advisory and consulting services for cannabis companies evaluating their capital needs. Prior to that, I launched FLIC Group, an Integrated Energy Solutions firm that helps cannabis companies lower their utility costs in a sustainable manner with renewable alternatives providing a clean carbon footprint.
What does your firm do?
ELLO Capital is a boutique investment bank providing M&A, capital raising and strategic advisory services to the cannabis industry, and other industries impacted by the rise of cannabis. Our services are grounded in integrity, transparency and credibility. Essential values for an emerging industry like cannabis.
Cannabis operates in one of the most complex regulatory environments imaginable. Every state where recreational and/or adult-use cannabis is legal has their own set of laws and regulations. These regulations can be extremely complicated, but the basic premise is relatively straightforward, even for multi-state operators (MSOs): In states where medical and/or adult-use cannabis is legal, all business must be conducted within the confines of that state. This is why so many cannabis businesses, even MSOs, are vertically integrated. The federal part is a bit trickier, since cannabis is prohibited by the federal government there are limitations on financing and banking. At the moment, if a cannabis company operates within the laws of their state, they have been insulated from prosecution by federal authorities, but it is a tenuous balance, at best.
Why is California weed so much more hot than Canadian weed?
I’m not sure we’d agree with that assertion, as Canadian cannabis companies are currently among the largest in the world. But California does have a lot of influence, largely due to the fact that as of 2018, California has the fifth biggest economy in the world, while Canada is the 12th. Canada has been a pioneer of reasonable cannabis laws, as demonstrated by their federal legalization of cannabis. As a result, Canadian cannabis companies have an edge over their U.S. neighbors and have been able to grow into large, legally compliant organizations with access to banking and the public markets. Within the U.S., California is not only one of the biggest economies, but it has one of the largest and most deeply entrenched cannabis industry, including medical, which was legalized in 1996, and adult-use, which was legalized in 2018. California is unusual, compared to other states and Canada, in that much of its cannabis is cultivated outdoors. California has a much better growing climate than Canada. The impact of the black market also does affect California tremendously.
Is this due to California’s size (almost double Canada’s population) or are there other factors?
Size does matter, but it has more to do with California’s economic prowess, cannabis friendly culture and laws, growing climate, and well-entrenched cannabis agricultural infrastructure.
Can you tell us about the legal landscape for medical marijuana – are there states in which its still banned? Is it legal on federal level?
It is not legal on a federal level, though the FDA did approve Epidiolex, a CBD-based epilepsy treatment from GW Pharmaceuticals, last year. Bills have been introduced to lift prohibition, or to at least protect states where it’s legal (the STATES Act) or to allow banks to conduct business with state-legal cannabis companies (the SAFE Banking Act). Currently, medical cannabis is legal in 33 states and adult-use is legal in 11 states. Medical and adult-use cannabis are also legal in Washington, DC.
In terms of investing, will banks give money to businesses dealing solely in medical marijuana?
It doesn’t really matter, from the banks’ perspective, or from the feds’, whether the cannabis is medical or adult-use. The federal government prohibits cannabis outright, with no distinction between adult-use and medical. As a result, there are a lot of risks and complexities that prevent most banking institutions from working with cannabis businesses.
How can companies who deal with recreational marijuana in states where it’s legal or Canada get funding?
Cannabis is legal in Canada, so there’s no problem with banking there and they are largely free to access public markets in Canada and in the U.S. But for U.S.-based companies there are a lot more obstacles to accessing funding. U.S. companies simply cannot go public on major U.S. exchanges right now, but the Venture Capital and Private Equity markets for cannabis are heating up.
Is there any guidance from the investment side from regulators like the CFTC, SEC or FINRA?
The only federal guidance was the Cole Memo, released in 2013 by former Deputy Attorney General James Cole, which offered guidance to federal prosecutors not to go after state-compliant cannabis businesses. Ex-Attorney General Jeff Sessions ripped up the Cole Memo when he became AG in 2018, but he didn’t do anything beyond that, and there has been no further guidance from the Trump administration.
There are a few marijuana public companies – however it’s a young industry is most of the action in the venture capital space?
Many publicly traded U.S. cannabis companies are OTC stocks and a handful have gone public in Canada on the Canadian Securities Exchange. There are several cannabis companies trading on Wall Street exchanges – including Canopy Growth (NYSE: OCG), Cronos Group (NASDAQ: CRON) and Tilray Inc. (NASDAQ: TLRY) – but they’re based in Canada, where cannabis is legal. However, it is generally more uncommon for Wall Street exchanges to allow U.S. based cannabis companies to list since cannabis is still federally illegal in the U.S. Meanwhile, the VC market is on fire. Venture capital investing in cannabis surged to $1.3 billion through mid-May 2019, compared to about $1 billion for all of 2018, according to a PitchBook-powered report from the MGO | ELLO Alliance. The market selloff has curtailed investment in cannabis activity. Buzz in the second half of 2019 has slowed dramatically.
Do you have an opinion on any big public cannabis companies like Aphria?
I cannot offer any stock pick advice, but would emphasize that Aphria is Canadian, so it’s allowed to trade on the NYSE, under the ticker APHA. As a result, Aphria has to follow strict SEC reporting and regulatory rules. As a result, investors can get a lot of information about the company’s performance from publicly available information. This is notable because OTC stocks generally do not have this kind of information available, which tends to make these types of investments much riskier.
Are the big alcohol, pharma or tobacco companies making gains in this new industry?
The alcohol industry is very much involved, with the Corona brewer Constellation Brands taking a $4 billion stake in Canopy Growth last year. Pharma has dipped its toe in the water of cannabis companies with the FDA approval of Epidiolex from GW Pharmaceuticals. Big Tobacco has been watching the cannabis industry and made its first major investment this year when Marlboro manufacturer Altria paid $1.8 billion for nearly half of Canadian producer Cronos Group.
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 cannabis companies?
As with all investments, investors must perform exacting due diligence before making any moves. In general, it is not recommended to get involved with OTC cannabis companies because there simply is not as much information available about them. This is in no way suggests that all (or any) OTC companies are “bad actors” it is just that decisions should be made based on verifiable business information.
With money piling into the sector are some VC firms going to get into situations with cannabis companies where they lose a lot of money to fraud?
It’s possible, just like in any industry. But a lot of other companies are going to succeed. In any emerging industry, just as we saw in tech over the last few decades, there will be winners and losers. Investors in the cannabis industry must rely on exacting due diligence before making any investment.
What exactly is CBD and what is the investment picture in that industry?
CBD is cannabidiol, a compound found in hemp and cannabis plants. It does not have an intoxicating effect, but there is growing evidence that it provides a range of health benefits. GW Pharmaceutical received FDA approval for its CBD drug Epidiolex last year, which represents a major step forward. A countless number of CBD companies have sprung up in recent years, but there are a lot of questions surrounding CBD’s effects and laws governing how it can be marketed and sold are being rewritten right now. The CBD industry has a lot of potential, but there are many red flags, we would preach caution to any investor exploring the space.
When did it become legal in America and the same question with Marijuana?
CBD oil can be derived from industrial hemp (cannabis with trace to no levels of THC), and industrial hemp was legalized by the 2018 Farm Bill. CBD on the other hand, was not “legalized” and there are a lot of questions about how it will be regulated and what exactly its properties are. CBD exists in a sort of gray area until the FDA finalizes its regulatory framework.
How is CBD different than THC, Marijuana, and Hemp? Which are legal on state and federal levels?
Hemp has been legalized federally, CBD is in a gray area, and cannabis remains illegal at the federal level, but certain states allow it.
How is the global growth picture for Marijuana and how does that differ from the US?
In recent years there has been slow, but steady, progress on legalizing cannabis across the globe. Canada and Uruguay led the way, but de-criminalization and legalization efforts have succeeded on nearly every continent. The U.S. is unusual in that states are steadily legalizing cannabis, one state at a time, while the federal government maintains its prohibition status quo. Other countries, when they embrace legalization, tend to be legalize on a federal level.
Are there any countries which have recently legalized weed or plan to? What about banning it?
Canada legalized cannabis in 2018, following Uruguay, which was the first country to legalize. Currently, dome 21 countries or territories have legalized cannabis in some form, including Germany, Israel and Colombia. Legalization is gathering steam in other countries including Jamaica and Mexico. Most countries have already banned it, and Chinese officials have blamed the U.S. for cannabis use there.
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?
Illinois recently became the 11th state to legalize adult-use cannabis. Currently, legalization efforts are bogged down in New Jersey and New York, though lawmakers are expected to take it up again next year. Ohio could be the next state to legalize with a ballot initiative this year, followed by Arizona and Florida next year. Time will tell.
I would pursue an agenda to get rid of federal prohibition altogether and to de-schedule cannabis. I think the majority of the American voting population would support federal level legalization.
