Benefits and drawbacks to making a cannabis company publicly traded and owned

Now that the Canadian cannabis industry has hit the mainstream, private cannabis-related companies have the option of becoming a publicly traded and owned entity. By taking this path, it opens them up to a variety of funding opportunities. However, Alexander Holburn Beaudin + Lang LLP associate counsel Stewart Muglich says this decision should not be taken lightly.

“I always advise the company to make sure that they are fully prepared to go public as it is a significant undertaking. The company needs to make sure they have carefully assessed all of their options and understand the time commitment, financial commitment and the responsibilities associated with being a publicly traded company,” says Muglich.

Cannabis companies, like all other companies seeking to go public, need to meet the basic listing criteria in order to be listed on the Canadian Securities Exchange, the TSX Venture Exchange or the Toronto Stock Exchange.

“But more practically speaking, a company should only consider going public once there is a need for capital that can’t be met by other avenues. In essence, they have exhausted their ability to fund their company through their friends, family and business associates and can’t access other sources of capital such as venture capital,” says Muglich.

Cannabis companies also face unique hurdles as a result of being in a regulated industry. They must have licensing in place and their facilities must be in compliance with all legislation. Since the cannabis industry has only recently become legalized, private companies face some key growing pains.

“Everyone, including various levels of the government, is still developing the legislation that is in place to regulate the industry. Legislation concerning production, distribution, packaging and labelling are also subject to change. It can get expensive to cope with these changes,” says Muglich.

This is when making a company publicly tradable and owned can be attractive for those who have exhausted private sources of funding.

How to raise capital publicly and privately

An advantage to a private company going public is the liquidity it provides – most publicly traded stocks are made easily available to a large investor pool and are traded through public market exchanges on a daily basis. This also gives companies wider access to funds than if they stayed private.

“When you’re a private company, an investor’s ability to sell his securities is very limited. And in most instances, you would only attract a limited number of investors,” says Muglich.

Public funds also tend to be slightly less expensive than private funds because the premiums needed to attract people with private funds aren’t necessary, according to Muglich.

A further advantage to going public is that it can increase the attractiveness of the company and therefore reduce the cost of capital-raising endeavours.

Going public requires a prospectus or some other disclosure document. Muglich says that a private company’s initial public offering and the increased burden of being a public entity can be expensive. Companies have reporting obligations under the various securities laws, must prepare and post audited financial statements and must deal with continuous disclosure obligations under securities legislation.

To navigate these demands, Muglich says public companies will be required to have a chief financial officer, management team and board of directors – all of whom will need familiarity with the cannabis industry as well as knowledge running a public entity. A company should not consider making a company publicly traded until it has a solid management structure that it can put in place.

“Because there’s a spectrum of players involved in the cannabis industry, you have to make sure that you have the level of sophistication in your management team that is able to take your company public.”

Regardless of which path you take, you need to ensure you are receiving advice from experienced professionals with knowledge of the pros and cons for both options. Alexander Holburn’s cannabis group understands the laws, regulations and business landscape of Canada’s cannabis industry and can provide you with valuable legal solutions for financing, accessing public markets and licensing and regulations issues.

For more information, contact Stewart Muglich, Associate Counsel, Alexander Holburn Beaudin + Lang LLP, at smuglich@ahbl.ca