You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
While the historic passage of the Marijuana Opportunity Reinvestment and Expungement Act (MORE Act) was likely only symbolic, it was a very important step towards ending the hypocrisy in our current federal cannabis policy, especially as it relates to the enforcement of laws and its impact on people of color. Activists and many in the industry are well aware of these issues, but having them debated on the floor of Congress will expand the understanding of the unfairness of the current state-legal but federally illegal system and ultimately lead to change.
Enactment of the MORE Act into law could offer major benefits to the industry, one of which we have discussed several times this year: the ability of state-licensed American cannabis companies to trade on major exchanges. The ultimate benefit, of course, would be better liquidity and lower cost of capital. Quite simply, relegation to the Canadian Securities Exchange and the OTC Markets has resulted in substantially fewer retail and institutional investors than if they were trading on the NYSE or the NASDAQ, like their Canadian counter-parts.
The good news is that even without this change, we are seeing trading volumes pick up, more institutions figuring out how to invest in the sector and debt capital becoming more available and at better terms. The House passing the MORE Act, the UN removing cannabis from its list of dangerous drugs, the proliferation of state-legal program adoption in the recent elections and the success of existing companies in satisfying the needs of patients and consumers, creating jobs and generating tax revenue are all contributing to the momentum that will eventually result in a more rational federal policy. Before then, investors are already figuring out where things are headed.
On Thanksgiving Day, we reported that a new cannabis ETF had crossed an important milestone of exceeding $100 million in assets. We had been waiting for it to reach critical mass, and we shared with subscribers at 420 Investor that day our expectations that the AdvisorShares Pure US Cannabis ETF (NYSE ARCA: MSOS) would triple in size by year-end and have profound implications for the sector. In fact, we think that the ramp to $1 billion could be relatively quick.
In the 6 trading sessions since then, the ETF has increased assets by 36% to $163 million. Most of this growth has been the number of shares, which have increased 23%, rather than price gains, which have added 11%. Over the last four weeks, the number of shares has increased by 192%, and we remain confident in our forecast of the exponential growth continuing:
We are reminded of how quickly ETFMG Alternative Harvest ETF (NYSE ARCA: MJ) increased its assets in early 2018 and what a profound impact it had on its constituents, which were primarily Canadian LPs that hadn’t yet begun to trade on the higher exchanges. We think that the set-up for MSOS is even better. Never before have U.S. investors been able to access direct cannabis companies through a security that trades on a major exchange. This is vastly expanding the audience of investors, ranging from retail traders on platforms like Robinhood that include this ETF but not the underlying American companies (because they are traded on the OTC) to financial advisors who can now allocate to their retail customers.
To be clear, we aren’t recommending investment in the ETF MSOS, but we do appreciate that for many investors it could be the only way for them to invest in the direct American cannabis sector. The large flows into the ETF we are expecting would likely benefit the constituents, not all of which would experience the same impact due to their own liquidity relative to their weighting in the fund.
While increasing investment into the American companies through the ETF falls short of them moving to higher trading exchanges, it would nonetheless be very beneficial. The demand for shares from the ETF would allow companies to raise capital more effectively, as they won’t have to worry about impacting the share price as much as if their trading volumes were lower. We are already seeing warrants of some of the constituents get exercised as the trading volumes and prices of the underlying companies have improved. Additionally, investors and insiders with large stakes looking to reduce exposure can do so with less market impact as the volumes lift.
This new ETF, the first one that has been able to capture the unique investment opportunity in American cannabis companies, has reached critical mass and is poised to expand its assets dramatically over the next few weeks and beyond, in our view. Growth in the Pure US Cannabis ETF has the potential to make a major impact on the sector that we believe will prove very important in addressing the current challenges American companies face raising capital.
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Alan & Joel