U.S. Markets closed

The Cannabis Debate: Weed investment boom sparks calls for City pot exchange

Michael Bow

Canada was once the centre of a gold rush, but now a "green rush" for cannabis is setting stock markets alight. As the world's most progressive country on cannabis legislation, Canada has become the centre of a weed investment boom that has caught the eye of entrepreneurs across the globe.

The Canadian Securities Exchange (CSE), newly dubbed the Canadian Pot Exchange, lists more than 175 cannabis companies, accounting for a whopping 80 per cent of its 25 billion Canadian dollars (£15 billion) value.

In addition, the blue-chip Toronto stock exchange (TSX), the ninth largest in the world, has more than 50 Canadian cannabis stocks worth C$60 billion (£37 billion), including weed farmers, health and beauty companies and nutrition groups.

In a clever move, the CSE has permitted US weed firms to list but the flagship TSX has not, because cannabis remains illegal in the US at the federal level. Other American firms are permitted on the TSX, including those in the legal industrial hemp industry, with the index listing 44 US companies not involved in cannabis.

Legalising cannabis has helped Canada gain "first mover" status in the burgeoning industry and now some are asking whether London should follow suit and steal a lead over European rivals such as Amsterdam, Luxembourg, Lisbon and Berlin.

CSE chief executive Richard Carleton, who has steered the exchange to become the poster child for the pot boom, said Canada's first mover advantage has hugely benefited Canadian pot growers and investors alike.

"It's been very important for the growth of both the investment and cannabis industry over the past four or five years," he said.

"Canada has firmly established itself in a leadership position from a corporate finance perspective for the cannabis industry. We are dealing not just with having capitalised the Canadian industry, but now we are [doing the same with] companies from South America, Colombia, the Caribbean basin, Israel and from Asia."

People from all walks of life are getting into the industry … Five years ago it was taboo. Now it's accepted

Patrick Moreton, medical cannabis investor

Canadian cannabis companies have the lowest cost of capital in the world, he added, because they have a monopoly on the billions chasing the industry. "A Canadian company can be fully part of the capital-raising infrastructure while a US company can't, a UK company can't. In the US, they couldn't even get debt financing from hedge funds let alone banking services," he said.

Patrick Morton, a former banker who focuses on medical cannabis investment in London, added that Canada's weed laws were also proving a boon for ancillary jobs such as marketing and accounting. "People from all walks of life are getting into the industry," he said. "It's not as wild as it was considered to be five years ago when it was a taboo and a maligned industry. Now it's accepted."

Investors have done well out of cannabis companies. If you had invested C$1,000 (£610) five years ago in a basket of top Canadian weed producers on the TSX, you would today have stocks worth C$35,000 (£21,350), an impressive 3,500 per cent gain, according to Canaccord Genuity.

The largest Canadian weed firm is Canopy Growth, based in Ontario and listed on the TSX. It has a 30 per cent share of the Canadian recreational market and predicts a $250 billion consumer sales market worldwide. Canopy recently bought British beauty brand This Works for £43 million to launch CBD-infused sleep products and skincare.

Britain's ability to provide a launchpad for success stories such as Canopy has been hamstrung by confusing laws around what sort of cannabis is legal in a market broadly divided into recreational, medical and wellness sectors.

Recreational use remains illegal in the UK but an inconsistent patchwork of rules for medical and wellness cannabis has confused investors and stymied growth. Medical cannabis was made legal last November, giving investors greater comfort to invest in medical weed firms such as GW Pharmaceuticals.

UK stock markets list five UK medical cannabis firms — Sativa Group, Ananda Developments, Highland Natural Resources, Spinnaker Opportunities and FastForward Innovations — although they tend to flock to the UK's version of the CSE, known as the Nex market.

The UK's cannabis wellness sector has also boomed due to a health craze around CBD, which is legal due to a loophole over which parts of cannabis are regulated. The Centre for Medicinal Cannabis estimates that 1.3 million consumers spent over £300 million on CBD products in the UK last year.

But the shadow of recreational puts off deep-pocketed investors. "The fact that recreational cannabis is not legal means many investors are reticent to invest," said Nick Davis, CEO of international law firm Memery Crystal. The big fear for potential investors in the UK is that they could break the Proceeds of Crime Act if they deal with firms involved in recreational cannabis.

Robert Jappie, head of cannabis law at Mackrell Turner Garrett, said companies might have to contact the National Crime Agency to head off any possible legal issues if they suspect funds on deals come from the recreational sphere. "The NCA normally decline to either approve or block such deals, leaving the lawyers to ensure the necessary due diligence has been carried out," he added.

IN response, investors are considering setting up funds in the Cayman Islands or British Virgin Islands to provide a buffer zone between their funds and the investment company. But Jappie says these legal quirks mean Britain risks being left behind. "This industry is here to stay and the potential is massive," he said. "The UK risks missing out on a lot of US and Canadian companies setting up their European bases here."

Entrepreneur Alexandra Chong, who is aiming to float her cannabis venture, Jacana, in London next year, said the UK should make recreational weed legal. "It's a no-brainer… It comes down to whether we want to be an early mover in what is the largest-growing industry in the world right now."

Alexandra Chong, inset right, aims to float the venture in London next year

BDS Analytics, a cannabis research firm, said worldwide legal cannabis spending will expand 36 per cent to $15 billion in 2019 and pass $40 billion by 2024 — and that is before taking into account other countries that could still legalise. Even established players such as Barclays see the potential, arguing that the US market alone would be worth $28billion today and $41billion in a decade if America legalised recreational use at a federal level.

Major conglomerates are also on the march, with Big Alcohol in the US moving fast to strike deals. Companies such as Molson Coors — which joined forces with Canadian weed grower Hexo to sell weedinfused beverages — and AB InBev are developing joint ventures. In the UK, tobacco giant Imperial Brands recently signed a £75 million partnership with Canadian company Auxly Cannabis to develop new products. This has piqued the interest of blue-chip investors in London, who see the entry of wellrespected names as a signal that cannabis is no longer beyond the pale.

Canaccord Genuity analyst Alex Brooks, who writes about the sector for City investors, said there is growing demand for information in London. "More and more people are accepting it's a medicinal product with a recreational angle as well," he said.

There may still be UK investors hesitating about the green rush — but as Canada's boom testifies, moving first pays off.