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Investing in anything else but cannabis during COVID-19? Don’t

28/05/2020

At a glance

CEO Nick Davis speaks to Eco Equity, a medicinal cannabis company, on the growth of the cannabis sector during COVID-19, advice for investors and the difficulties faced due to cross-border laws and trade restrictions.

Harriet: What are your thoughts on the growth of the cannabis industry and where can you see it going in the next few years?

Nick: We’re clearly in interesting times at the moment. If you look globally and certainly reading some of the consumption figures in the US on the recreational side, cannabis and lockdown are good friends. But in the more global space, Memery Crystal is much more focused on the medicinal and wellness side of the cannabis industry. I think over the next few years, we’ll continue to see jurisdictions embracing medicinal cannabis with more patients getting access to it and so I can only see it growing. As you know, some of the clinical trials that are coming out of the COVID-19 crisis are quite extraordinary, and I think there is a refocus for investors on life sciences, biotech, and I think, therefore, cannabis should get the uplift in the same way as others are. Certainly, if you look at the fundraisings that have gone on in the public markets over the last few weeks, I’ve been very much focused on life sciences and biotech. So I see it growing, I see it continue to grow on the medicinal side and on the CBD wellness side.

Harriet: In a highly regulated industry sector like legal cannabis, what should an investor look for when they’re performing due diligence in any given investment opportunity?

Nick: So that’s a question that we get asked all the time because we act for quite a number of the significant investment funds who are investing in the sector at the moment. So, my advice in cannabis is the same as any other business, particularly regulated businesses. The starting point is to look at management and get comfortable with the people you’re dealing with. As with any business, it’s all about management, and then digging down into the business itself. It’s about making sure that the licenses are in place for whatever it is they’re doing. Whether they’re manufacturing or growing, they have to have the right compliance structure in place. Therefore, if you’re making an investment in the space, you need to make sure that you’ve got good advisors around you – who are making sure that you are complying with what is a very fast-moving, compliant, regulatory landscape, that is changing all the time.

Harriet: What are the pros and cons of investing in a publicly listed company vs. a private unlisted one, we are a private listed investment opportunity, as you know. So what do you think the pros and cons are in comparison?

Nick:  I’ve spent my whole life helping companies list on the stock exchange; it’s what I do. Obviously, I am a big fan of the equity capital markets and the ability to access public capital.

At the moment, it’s quite difficult to get a listing, certainly in London, although, if you look to North America, there’s been a large number of listings. Cannabis is no different from any other business, It’s about timing – companies should stay private for as long as they can and access the funding that they need to grow their business. There’s certainly much less of the glare from the public if you doing things privately. It’s easier to make mistakes privately, which all companies do as they grow. It’s about choosing the right moment when the company has sufficient levels of corporate governance and the board to start looking at accessing public capital.

There are a number of advantages of being listed on the public market. One is the ability to access public capital, that’s the whole point of going public. A lot of life science companies need large amounts of capital to grow their businesses. The cannabis world is a capital-intensive world. And therefore, the ability to access that capital from a wide pool of people that are on the private side of the investment world is certainly beneficial. I think it’s a good time for cannabis companies to be doing their growing up in private and then when they’re at the right point in time, look at GW, go public and take advantage of all that the public markets have to offer.

Harriet: What are the pre-success criteria’s for cannabis companies that want to list?

Nick:  At the moment in the UK, it’s very difficult to list on the market. I’m hoping that will change. We’re working very closely on a number of transactions where hopefully we will get some more traction. The markets are saying that they’re open and certainly, AIM will be there for the right company. It comes back to very much the same things that we’ve talked about in the past couple of questions, which is, what’s the pre success criteria? It’s all about management compliance and corporate governance.

It’s all about the board and making sure that your entire business proposition is backed up with the appropriate licenses and regulatory consent. You know, going through that process where you’re ready to take other people’s money, which obviously is a big step, it’s really all about making sure that the company is ready to take that big step to be a public company.

Harriet: How are cannabis companies currently coping with the multitude of differing cross-border laws and trade restrictions, especially as they often have production, dispensary and management structures in different regions?

Nick: With difficulty… it’s something that requires a lot of advisors in all relevant jurisdictions. It’s very much about having the right law firm on board that can help, understand and guide through the maze of regulations.

The rules in the US are completely different to the rules in Canada, which are completely different to the rules in the UK and having experienced advisors that can help you to move through that minefield of regulatory compliance. If you’re looking at novel foods at the moment on the CBD side, supposedly European harmonized regulation, there are different interpretations in different jurisdictions so it’s very much about making sure you’ve got good compliance and management on the ground. People who understand the space that they’re working in, taking advice from the right people at the right time, and really staying up to speed with things that are evolving very quickly. It’s all about being surrounded by the right advisors and having the right condition.

Harriet: What are your thoughts regarding Eco Equities progress so far? Particularly its acquisitions in Zimbabwe and the Caribbean.

Nick: It’s been really interesting to watch the progress that you, JP and the team have made in relation to emerging markets and cannabis. It’s clear, in my opinion, that growing of the biomass is going to be done in  low cost jurisdictions with appropriate regulation and compliance with the right climate and Sub Saharan Africa, in particular, Zimbabwe, where I’ve done a lot of work in the past always was the breadbasket of Africa. So, the fact that the company has managed to secure a license in Zimbabwe, I think it’s a very positive step. There aren’t that many countries in Africa that have enabled companies to grow and export. Obviously, Lesotho is one of them, but Lesotho is a country built on top of a mountain. Whereas Zimbabwe has an enormous history of agricultural growing. I think it’s a very positive step that the company has taken.

The Caribbean has certainly been a place where traditionally, cannabis has been grown; there is a big market. It has the right weather and especially, there is a lot of expertise there about growing.

Eco Equity has picked two very interesting, emerging market jurisdictions. I do think low-cost production is going to be very important. Clearly, it’s going to be about making sure that you’ve got the right GMP certification if you want to bring a product into Europe and other places across the world. It will now have to focus on actually building out a project, which I know is the next step. So I think the company has made great steps since its inception. I’m excited to see how it grows over the next period of time.

Harriet: As the cannabis industry has taken a positive turn during a time of crisis, would you recommend this as a prime time for investors to place their capital?

Nick: The big missing piece at the moment in the cannabis space, particularly in Europe is capital. There are a lot of projects that are looking for capital. I know that the Eco Equity team have successfully managed to raise the first round of funding, which is exciting.

If you look at the North American model, a lot of companies raised a lot of money. Most of them are going to struggle to build out the projects that they thought they would, and therefore, the key now is finding the right investment story, the right proposition, doing all the things that we talked about just now: your proper due diligence. Making sure that you’ve worked out exactly what the company does, where it is in the supply chain, where and what you want to be invested in, but certainly, I am a believer in the long term of cannabis and I wouldn’t have spent the last three years building a practice based on it. Picking the perfect time is always a challenge and that’s why I’m a lawyer and not a stockbroker.

My personal view is that cannabis, in all of its guises, but particularly as you know, my focus on the medicinal and the wellness side, is here to stay and we’re just at the beginning. I think it’s a very exciting time to be investing in cannabis.

Image source: Citywealth

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