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If God had wanted us to fly he would have given us wings (or cannabis)

10 June 2019

April French Furnell

The lobbying; legalization and consequent institutional value of the medicinal, not recreational, cannabis industry continues to rise and is poised for more growth as a wave of legalization and public pressure for reform, drives change in North America and Europe. Aided by changing societal attitudes towards marijuana’s by products which include CBD or cannabidiol which doesn’t include a ‘high’ but will potentially have positive effects on debilitating diseases, such as Alzheimer’s. Big pharma’ has navigated into position to benefit from a new industry but also, in the last year, so has the investment industry as big investors like the Church of England give it their blessing.  

However, it can still come with a health warning given the lack of legal clarity about its uses in certain jurisdictions. Citywealth’s April French Furnell spoke to leading advisors and industry players to get their take on the prospects for the cannabis market.

You got to be in it, to win it

North America is one of the largest cannabis markets worth an estimated $85.6billion according to research by New Frontier Data who are a research consultant who create lobbying opportunities for clients. Early adopters include Canada wo legalized marijuana in late 2018 but were second to Uruguay who have a state-controlled regime which was legalized in 2013/14. While it is still illegal under overall, federal US law, some 30 states have voted to make cannabis legal although it varies as to whether it is medical, recreational or both. California for instance has legalized both but has taken more than twenty years to come to this result, first legalizing medical marijuana in 1996 then full legalization in 2018. As a result, the investment market has taken notice. Both the NYSE and Nasdaq had their first pure cannabis company listings in 2018. There was the Cronos Group whose products include ‘Peace Naturals’ promoting wellness with diet, lifestyle and cannabis as a therapy who  became the first to make its trading debut on Nasdaq in February 2018 while Canopy Growth Corp, Canada, produce different strains like ‘Tweed’ CBD and ‘Penelope’ a hybrid of CBD and THC (Tetrahydrocannabinol) which does include a ‘high’, became NYSE’s first listing in May 2018.

Nelson Peltz, an activist, American billionaire investor in New York who is best known for his stakes in Procter & Gamble and General Electric, recently signed on as a strategic adviser to Aurora, a Canadian cannabis producer picking up stock options as part of the deal. This news sent Aurora’s New York-listed shares up 14 per cent. However, for investors, despite the heads up in the US and Canada, the challenge is now to sort the winners from the losers: who will be the Google of the cannabis industry and who will disappear in a puff of smoke?  

Harvest for the world

However, ingestion is not the only option in this investment bonanza. There are also some new opportunities emerging. Joseph Casanova, an investment associate at Dolfin, previously managed a cannabis portfolio before moving to Dolfin. He believes that “the main growth segment comes from Hemp”. Hemp is a variety of the cannabis plant that doesn’t have any psychotropic effect. It can be used in clothes, paper, animal feed and building insulation and as of December 2018 its cultivation across the US was legalized by President Trump. So far, most hemp farms are focused on CBD production due to the widely claimed health benefits, yet industrial hemp which Casanova believes is “under-appreciated”, could be more widely used.

Outside of North America, the situation regarding legalisation and investing is a bit murkier.

Ganjapreneurs: Guernseys H’empire

Certain jurisdictions in Europe have embraced the opportunities the cannabis industry presents, among them is Guernsey in the Channel Islands, which has become an early adopter, giving permission to cultivate low THC and high CBD to its first licensed farm. Policy & Resources Committee president and an elected deputy in the State of Guernsey government, Gavin St Pier recently posted on his social media channel in response to a licence to grow plants at Le Douit Vinery in the Vale, “Delighted to welcome a new growth industry to Guernsey; hope it may enable more old vineries to be repurposed with this high value product”. Backing up the Guernsey innovation, Nick Davis, CEO at Memery Crystal in London, an independent law firm, who has experience advising cannabis companies said “Guernsey is the most advanced of the offshore islands at present. From the point of view of setting up a company, Guernsey is embracing the industry, having the business services offering and getting the regulations in place”.

The House of Green Limited, a Guernsey-based cannabis production company is currently going through the licensing process for cultivating and processing cannabis. CEO Paul Smith said: “Guernsey is an early adopter in this space and, with its horticultural heritage and strong regulatory reputation, it is a great location for us to be setting up in.” He added: “Europe has to learn a lot from businesses already in the space in North America and Canada. Surprisingly, there are relatively few people in the industry with specific, detailed knowledge and experience in the area of cannabinoid extraction. We’ve chosen to work with a highly respected team with patents in the US on extraction and they’ll be relocating to Guernsey. The extraction side of the business is key and it offers us the opportunity to be innovative in our methods and produce a high-quality product”.

A higher good

Smith is seeing interest from investors such as family offices, as well as UHNW’s. “These investors view the industry as one of great potential for returns but believe it will also be a benefit for mankind. In all our discussions, it’s surprising how often investors raise the point that they believe in the purpose behind the plant and its uses”, said Smith.

UK goes slow mo

By comparison the situation in the UK is less clear. In November 2018, the UK government amended the Misuse of Drug Regulations 2001 to add a new definition of “cannabis-based products for medicinal use in humans” or CBPM, which is a defined category of cannabis, cannabis resin, CBD and CBD derivatives. According to Shannett Thompson, senior associate, and Nicola Finnerty, partner, both at Kingsley Napley, “This means that CBPM’s can now be prescribed by specialist doctors without a Home Office licence. At present, there is only one fully UK licensed cannabis derived medicine, and another is working its way through the process. The National Institute for Health and Care Excellence (NICE) has been tasked with producing clinical guidelines on the prescription of cannabis-based products for medical use, which it is hoped will bring more clarity to the market. The guidelines are expected in October 2019”.

This offers opportunities to UK investors looking to invest into pharmaceutical and medical cannabis. According to Davis at law firm Memery Crystal, “This is the lowest risk area for investment for UK investors, yet those leading the investment tend to be retail, family offices and HNWs with a strong understanding of the space”. He added, “We haven’t seen the green rush that north America has, particularly Canada, but there are a number of IPOs in the pipeline across the City of London”.

Lay the law down

The problem for UK investors who wish to invest in companies involved in cannabis is the recreational side.  Thompson and Finnerty warn, “Investors must be very clear that the UK is a far cry away from legalising the recreational use of cannabis, and as such, this is very unlikely to yield positive investment opportunities at any time soon. In many ways, the clear regulation of the market will provide proper controls on what is permissible and what is not, thereby protecting investors from falling foul of the law, as cannabis remains a controlled Class B drug.”

International arm of the law

The difficulty is that although the activity may be legal in the country in which it takes place, “the position is that if the investment would be an offence in this jurisdiction, which it would be as recreational cannabis and non-prescribed medical cannabis is illegal in the UK, then despite the investment taking place in a jurisdiction where it is lawful, the benefit of that investment would constitute criminal property for the purposes of UK law. This is a serious situation because money laundering carries a maximum sentence of 14 years imprisonment”, say Thompson and Finnerty.

No test cases yet

The situation is made even less clear as “This area of law and its application in the specific context of investing in cannabis companies has yet to be tested in the courts or commented on by the UK authorities”, said Neill Blundell, head of Macfarlane’s corporate crime and investigations practice. “A clear way to resolve any current ambiguity in the legislation could be for the UK Government to amend the 2006 Order or to issue some guidance to investors”, he added.

Your mission if you choose to accept it…

Therefore, the overriding message to UK investors is to “tread with care”, according to Thompson and Finnerty. Although that doesn’t mean it is not possible. Davis explains that there are ways of filing a Suspicious Activity Report, asking for confirmation that what you are investing in will not be considered money laundering. “Of course, this wouldn’t work for someone regularly selling and buying stocks but if it is a mid to longer term investment then it is an option for those with a higher risk threshold who wish to invest into a north American integrated cannabis company”, Davis added.

Spanner in the works

CBD, which is also legal in the UK, is high on people’s radar, yet carries its own risks because the European Food Safety Association which is currently reviewing whether it is correctly marketed and classifies as a ‘novel food’ says it has no history of consumption to demonstrate. A pending application from Cannabis Pharma, who have provided a long-term toxicity study on animals and tolerance studies on humans could be vital. Until this decision is announced, many investors are sitting on the side lines awaiting the decision as to how the CBD and THC products will be classified because it affects sales, marketing and success. 

Plant based funds

As for the global investment picture, “Investing into cannabis is something that HNW investors can no longer ignore [with is medicinal output now turning heads of even ethical investors. This week saw the Church of England green light a position in the sector]. Companies such as Aurora Cannabis [founded in 2013 in Canada, already conduct business all over Europe with net income at C$54mn (£32mn/$40mn) in 2019] and the long-term potential for investments is evident. Take GW Pharmaceuticals, a British company trading on the Nasdaq, known for its multi-sclerosis cannabis drug Sativex, which has grown its share price by 89 per cent since the start of the year [Revenue $33.8mn]. Cannabis investments will continue to grow worldwide, even if in the UK remains somewhat of a slow burn”, concluded Pearse Carson, Analyst at multi-asset investment platform eToro.

Many will be lighting a candle in the hope that the Euro cannabis legislation goes their way.  

 

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