Despite its early-stage challenges, the legal cannabis industry has been booming since regional legalization began spreading across the US and Canada. Global revenues are expected to reach $32 billion in 2022, up 28% from last year. And analysts don’t expect much of a slowdown in the coming years, as consensus estimates see revenue growth climbing to $82.3 billion in five years’ time. Yet many cannabis businesses still find themselves in the red, often hemorrhaging capital.
There are a number of reasons for this. Despite its legalization in several US states, cannabis remains illegal under federal law. Not only does this prevent cannabis businesses from storing funds in federally-insured bank accounts, but it also prevents them from accepting purchases via credit cards. Adding to these difficulties, cannabis businesses are also subject to high taxation. And most of their products aren’t permitted to cross state lines, severely limiting the prospects for business expansion.
But the tide of favorability is getting higher, despite its slow rise. And until federal restrictions are lifted, raising capital on a local and private level may be the most effective solution for many of these budding businesses. Hence, the benefits of Regulation A+, or what’s known as a mini-IPO.
Why Issue Reg A+ Shares Rather Than Going Public?
Many startups looking to raise capital beyond private means seek to go public; to launch an initial public offering, aka IPO. In this way, businesses can list their shares on a securities exchange, making them available to just about anyone looking for an investment opportunity.
But most startups don’t have the stigma of producing goods that may be considered a “contraband” in most states. This is likely the biggest barrier facing most cannabis businesses. A significant limitation it is, but it also has its unique set of advantages.
The Advantage of Thinking Locally
Cannabis stocks have plunged over 86% since the industry reached its highest point in September 2018. Not only is that a lot of pain for publicly-traded cannabis companies to absorb, it’s also a lot of regulatory work to maintain, all for a whopping negative return.
There are more than a handful of cannabis stocks to invest in, but most investors may not have much familiarity with many of these downtrodden names; certainly not on a face-to-face basis.
Your business may be different. As a local private business, your customers are those people you see walking into your store, or other small cannabis businesses purchasing your products and services. In other words, your strength is in your locality.
Your range of business expansion may be limited to within the state. But with a Reg A+ offering, you can still promote your Reg A+ shares to the general public, regardless of the geographic limitations placed on the actual product. So, why go through all of the hassle, cost, and risk of an IPO when you can raise capital through equity crowdfunding? Through Reg A+, you can focus on converting your customers into investors, maintain control over your company (as it retains its private status), and promote your shares to prospective investors beyond your state’s boundaries.
What Can I Expect From a Reg A+ Capital Raise?
Cannabis-related startups need to think creatively about capital raise ideas. After all, access to traditional finance is largely restricted, and the cost of going public may pose a greater risk and hassle than it’s worth. Equity crowdfunding just might be the most favorable solution for your venture.
Reg A+ (Regulation A) of Title IV of the JOBS Act is a securities law exemption that allows private businesses to raise up to $75 million in funds from retail and accredited investors. This means you can promote your company shares to just almost anybody who’s in a position to make an investment. It’s like a mini-IPO, but in this case, your business remains private and you remain at the helm of your ship’s controls, so to speak.
So, what does this look like in practice? Let’s take a few examples from the Dalmore Group, a leading broker-dealer in the equity crowdfunding space, and one of the top go-to firms for cannabis and psychedelics companies looking to raise up to $75 million in capital.
- Juva Life Inc, a California based life sciences company focused on the commercialization of Cannabis products and formulations, raised over $18m through a Dalmore-assisted Reg A+ financing and is now listed on the Canadian Stocks Exchange (CSE).
- Flora Growth Corp, a vertically-integrated cannabis company striving to be a globally recognized cannabis brand has raised $30m issuing Reg A+ shares.
- Gage Cannabis Co., a leading craft cannabis brand and operator in Michigan raised $50m in just 3 months) and is now listed on the CSE.
This is just a few of the larger capital raise campaigns. Other Dalmore clients that raised capital through equity crowdfunding include Infuzed Brands, Zenlabs, Shackelford Pharma, Goldenseed, and Emotional Intelligence Ventures.
The Bottom Line
The cannabis industry is experiencing rapid growth despite federal limitations. It may be just a matter of time before federal restrictions are lifted and cannabis products become more widely adopted and culturally accepted on a domestic and global scale. When it does, early adopters getting in on the ground level—whether businesses or investors—are likely to benefit the most from the outsized return potential that emerging industries typically offer. Remember: you can’t take advantage of the opportunity if you don’t get into the game. And the fastest and most reliable way into this complex world of Reg A+ is to seek guidance from an experienced broker dealer specializing in equity crowdfunding. If you have any questions, contact us. Dalmore is the broker dealer solution for cannabis and psychedelics companies that are looking to raise up to $75 Million a year. With the help of Dalmore and its team of professionals, you get to market both your brand and your offering. You can accomplish a capital raise without the hassle of dealing with investment bankers, venture capitalists or Private Equity groups. Instead, you get to leverage your customer base and promote your brand and offering using your own dedicated platform. Ultimately, you receive the entire benefit of the capital raise and, in the end, maintain ownership and control over the direction of your company.
