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Colorado cannabis wants to go public, but not everyone is on board

Lack of investor capital could be state industry’s undoing

Colorado used to be on top of the cannabis world. As legalization spreads both in the U.S. and abroad, a lack of investor capital here could be the industry’s undoing.

“Now we are chasing the wagon,” said Dean Heizer, the executive director and chief legal strategist of LivWell. “And we need to get back on the wagon, and we need to get enough capital so that we can actually start driving the wagon again. We are falling behind.”

Colorado law doesn’t allow public investment in marijuana. States like California and Florida do, so cannabis companies there can issue stock to fund massive expansions. In Canada, the business press breathlessly covers marijuana as they would any other industry on the stock exchange.

There’s an effort afoot in Colorado to level the playing field. A bill under consideration by state lawmakers, HB 19-1090, would repeal the prohibition against publicly traded companies to hold a marijuana license. The bill’s first hearing in front of lawmakers is Monday.

For now, Heizer said companies like his – LivWell is probably the state’s largest marijuana retailer – have to rely mostly on in-state private money.

“There are not a lot of private investors floating around Colorado,” Heizer said. Certainly none big enough to fund a major expansion or buy a company the size of LivWell.

The restrictions are a holdover from the early days of marijuana when the state wanted to keep ownership small to make it easier to keep a tabs on the nascent, still federally illegal, industry.

But things have changed since 2014. In fact, the industry pulled down $10.4 billion nationwide in 2018, and competition from within the state has become more cutthroat.

That competition has driven down the price of marijuana, which means many smaller mom and pop dispensaries in Colorado struggle. The industry is ripe for consolidation, but without large-scale public investor money, Heizer pointed out there’s “less capital to acquire the people who want to go out of business, and instead they’ll just go out of business.” In some cases, that means a loss of life savings for the owners as well as lost jobs and tax revenue for the state.

As Heizer sees it, the opening of Colorado cannabis to the public market would allow nearly unlimited capital.

Shadow activity?

There are other benefits. Today, not much is known about the state’s marijuana businesses because they’re all private. If they become public, they’d have to disclose details like financial data, risk factors and executive compensation.

“There’s a lot of, shall we say, potential for shadow activity in the private arena that is not available in the public arena,” Heizer said.

It makes sense in theory, but the story is more complex in practice – there has been shadow activity in the public trading of marijuana companies in other states.

Last fall, Texas-based Greenview Investment Partners L.P., was charged with fraud by the Securities and Exchange Commission. Executives allegedly lied about their credentials as longtime cannabis investors, and bilked investors out of $3.3 million.

Alongside the charges, the SEC warned about marijuana-related investments, noting eight different marijuana-related enforcement actions. “Investors must remain vigilant and not let the fear of missing out dupe them into making bad investment decisions,” said Shamoil T. Shipchandler, director of the SEC’s Fort Worth Regional Office.

It’s stories like these that give Chris Woods, the owner of Boulder-based dispensary chain Terrapin Care Station, the chills. He opposes the idea of public trading and considers the state’s cautious approach to ownership a good thing. Public trading is standard in every other business, but Woods is quick to point out that marijuana isn’t just any business.

“Yeah, the difference is these businesses aren’t legal on the federal level,” Woods said of the state’s grow houses, dispensaries and edibles manufacturers. “Because, what we are fearful of is that this will be a backdoor to allowing for black market activity.”

Colorado’s U.S. Attorney Jason Dunn shares that concern. He told CPR News that public trading in marijuana “raises real questions” about whether bad actors can invest in the industry. Dunn said it’s hard to answer those questions though because the bill is in a state of flux.

While it’s a measured statement, it’s that kind of federal scrutiny that worries Woods more than falling behind other states, like California.

“I don’t think we will be left behind, I think we’ll again be seen as leaders for doing things in a responsible manner,” he said.

The bill’s odds are good

Woods may be fighting a lonely battle.

Most people contacted by CPR in and outside the industry think public trading is a good idea. Gov. Jared Polis supports it. A similar bill last session passed easily through a bipartisan Legislature, before former Gov. John Hickenlooper vetoed it over fears of tracking ownership.

Securities attorney Tom Tenenbaum said marijuana scams highlighted by the SEC don’t involve its federally illegal status. Rather, it’s the media attention and the lure of the green rush.

“Whatever’s the hot new thing, people intent on committing securities fraud are going to latch onto it,” said Tenenbaum, who noted the same problems crept up around the bitcoin craze.

Denver cannabis attorney Sean McAllister said SEC regulation would actually mean more accountability.

“The SEC is not going to allow Pablo Escobar to own a public company,” he quipped.

McAllister has worked with marijuana companies since the first days of legalization. For him, these capital-intensive operations desperately need an infusion of cash.

“The general public thinks that every cannabis operator is filthy rich,” he said. Instead, “a lot of these folks are mom and pop operations” who face the same struggles as any other business. McAllister said public trading and freeing up capital could maybe save some of them from closing down.