In late May, Colorado Gov. Jared Polis signed the Publicly Licensed Marijuana Companies bill (HB-1090), which removed the previous ban preventing publicly traded corporations from obtaining a cannabis license (you can read our summary of it here). Passed with the intention of expanding access to the state’s cannabis market, existing operations are now tasked with securing and maintaining investment capital from both public and private stakeholders. This is a new playing field for most operators in the space and many business owners are going to find this out the hard way. Accordingly, we are publishing some very basic guidelines to help stakeholders prepare themselves for the new playing field they are about to compete in.
Simply put, we believe that to attract the kind of investors who will now be permitted to invest in this space, there are three key general concepts that cannabis business will now have to address: transparency, financial security & viability, and organizational optimization.
Let’s start with transparency. Transparency is arguably the most crucial consideration to draw in investment capital. Clear and upfront operations not only appeal to consumers but also builds trust for investors hoping to engage the company by providing a glimpse into the business’ inner workings. One way to achieve transparency is to flesh out existing operations through the implementation of a formal board of directors. An advisory team specifically created to respond to business development and operational concerns could also be a great way to demonstrate high-level functionality to investors while providing effective oversight within the business. Such bodies are standard in the traditional business world, but because of MED ownership rules, cannabis companies couldn’t really make use of them prior to HB-1090.
Similarly, readily accessible data is an effective tool to demonstrate operational efficiency and clarity. Before attempting to raise funds through investment, cannabis companies should prepare and organize all relevant contracts, licenses, organizational documents, and, specifically financial statements. Financial records will generally need to be audited because of regulatory requirements that (usually) require at least two years of audited financial statements for businesses intending to raise money from the public. Security regulations aside, should a potential investor request formal documentation before making a transaction, organization and accessible records are crucial to ensuring investor assurance in the business.
The second aspect of securing investment capital is financial security and viability. In order to obtain capital, businesses must first raise a considerable amount of resources to address the legal, accounting, and advisory fees necessary to securing said investment. One of the most well-known obstacles facing the cannabis industry in terms of finance is banking access, yet, it’s a significant indicator of the success of building reliable investment relationships. Companies that do not have transparent banking relationships can count on being ignored in this first acquisition fever that is expected to start on January 1, 2020. Additionally, please keep in mind that new capital is not the solutions to all your problems! With new capital, shareholders will expect a certain level of extended growth, meaning that the company will need to continue operations in a way that consistently brings in higher revenue, profit, and opportunities for expansion. To give potential shareholders the confidence to invest, a financial foundation reinforced by formal banking solutions and a plan to continue growing after receiving investment capital is key. If you are a cannabis operator and your company does not have a formal and transparent bank account please call us at 720-663-0558, we can help you secure one (we have an excellent track record of securing banking relationships for our clients).
Finally, our last suggestion for cannabis companies looking to secure new capital in this new epoch of cannabis regulation in Colorado is to adapt to the internal changes that the new funds will bring while optimizing said corporate shift. For both public and private investment, existing ownership will be redistributed to account for the new shareholders. The resulting reallocation of company control is a necessary consideration in planning the business’s post-investment environment. An increase in stakeholders also brings increased regulatory inspections, stressing the importance of secure legal and financial counsel. Existing legal teams will then need to advise on stock classification and securities law to ensure compliance with familiar regulators like the MED but also a whole host of new, Federal, regulatory agencies like the US Securities and Exchange Commission (“SEC“), the U.S. Commodity Futures Trading Commission (“CFTC“) and a whole host of equivalents in other countries (most notably Canada). The implementation of these changes will also need to coincide with post-transaction shareholder demands, resulting in a continuous project of reaching investor expectations and operational growth.
While the full effects of HB 1090 remain to be seen, Colorado’s cannabis industry will need to have a comprehensive understanding of the changes it will bring to investment opportunities in order to benefit from the expansion of market access. Contact us today to discuss what options may be available to you and your business.