Legal edibles could seed investment boom in cannabis sector

Since the federal government announced the legalization of the production of recreational cannabis, the cannabis industry has been one of Canada’s fastest-growing industries.

At a time when the mainstay Vancouver investment sectors, particularly mining, have seen investor funding dwindle, investors have turned with excitement to this new cannabis industry. Investors have supplied billions of dollars, hoping to find the right long-term winners.

But every good turn has an end, and in the summer of 2019, we saw the first drop in investor interest in cannabis companies since the late-2018 swoon. This could be attributed to a number of factors, including market saturation and a lack of investor confidence.

With Health Canada terminating a cultivation licence for the first time, at Agrima Botanicals, and cannabis companies such as CannTrust dealing with allegations of fraud, investors have become increasingly wary of the cannabis sector.

At the same time, headline companies have become more predictable investments that are less reliant on financing thanks to increased revenue from sales. As a result, share prices and trends are stabilizing, and there is less investment pressure, because the “easy money” has been made.

Come late 2019, though, expect a resurgence.

With regulations on legalization of edibles coming into force, a whole new avenue of entrepreneurialism will be open to the markets. With all of that new enterprise comes new investment opportunities.

While some established cannabis companies will likely take the first bite into these new business opportunities, expect many new companies to be looking to establish themselves as the leaders in the production of cannabis edibles, extracts, and other processed products.

As with cultivation licences, Health Canada will be issuing standard and microprocessor licences for those looking to make manufactured cannabis products. The microprocessor licences will likely lead to a market full of artisanal products. Just as we have seen craft and specialized grown-cannabis products, such as organic cannabis from Rubicon Organics, investors and customers can expect craft producers of edibles to similarly carve out their own niches.

Moreover, when the market grows for cannabis edibles, expect a mini-wave to hit those with cultivation licences, as demand for their products will grow. Furthermore, these cultivators will likely expect profitability to increase as edibles and extracts use what would have previously been discarded, such as the stem and “shake” of the cannabis flower.

As companies begin to navigate the sale of edibles internationally, with legal markets initially being limited, expect additional investment opportunities.

There are many legal hurdles in other jurisdictions, based on each country’s laws and restrictions regarding cannabis. Canadian companies should be among the first movers in this space, landing them an excellent opportunity to build their brands.

Given the novel opportunities that will be presented for companies that create processed cannabis products, and the new legal landscape that they will inhabit, don’t be surprised if securities regulators start to require companies to provide more information to potential investors when they seek financing.

This is particularly the case for any planned prospectus offerings, where significant disclosure obligations require companies to inform potential investors about what is legal and what is not in their niches. Selling cannabis in the U.S., for example, is not allowable for ventures listed on the Toronto Stock Exchange.

Legalizing processed cannabis products is a significant change in the cannabis landscape. Hopefully, it presents a recipe for success. •

Stephen Robertson is a partner in Borden Ladner Gervais LLP’s securities and capital markets group.