SPACs are now being issued at such a frantic pace that finding the right company has been substituted with finding any company that’s up for it. In its original form, the special purpose acquisition company (SPAC) was meant to be a fund that investors entrusted with a sizable amount of money. The fund’s manager, who charges a handsome 20% for their services, was expected to use their subject matter expertise to find a diamond in the rough, then negotiate the most favorable terms for investors. Today, anyone who can fog a mirror is issuing a SPAC because the people on the other end of the trade have never been so dumb.
It’s not just SPACs. At no point in time was the greater fool theory ever more appropriate in explaining what’s happening to SPACs, IPOs, tech stocks, bitcoin, and the list goes on. It’s always the risky assets too. How come nobody gets excited about Johnson & Johnson (JNJ)? Let’s hope they never do, because that’s one of the reasons we sleep so well at night. Buy safe stocks and drink to excess on a nightly basis. You’ll sleep like a baby.
The Cannabis SPAC
Today, we’re here to talk about what we all knew was inevitable – the cannabis SPAC. Anyone paying close attention to the SPAC space would have noticed several of them pivot away from cannabis into tech. Momentus (space transport) and Innoviz (LiDAR) both went public using SPACs with originators who started out talking about how their expertise in cannabis would help them find the needle in the pile of cannabis trimmings. What probably ended up happening was that the regulatory requirements presented a risk that they might not find a deal in time, so they pivoted into whatever they could find.
It’s hard to keep track of everything SPAC, but we believe the first cannabis SPAC has now been announced. The company going public is Weedmaps, a cloud-based SaaS solutions provider of an end-to-end operating system for cannabis retailers. The company plans to go public at a $1.5 billion valuation by merging with Silver Spike Acquisition Corp. (SSPK), a NASDAQ-listed SPAC launched by Silver Spike Capital, an “institutional quality provider of equity and debt capital to the burgeoning plant based and alternative health & wellness industry.” As with most SPACs, the deal still needs to close, so nothing is certain until both parties sign on the dotted line (the deal is expected to close in Q2 2021).
Update 12/21/2020: There have been other cannabis SPACs prior to Weedmaps – in the States (Akerna) and in Canada (Ayr Strategies and Columbia Care). Thanks to Alan Brochstein for pointing this out.
The finer points of the business are expressed in the glossy pitch deck that SPAC offerings always churn out in favor of the detailed S-1 filing that IPOs provide investors. Over the past five years, Weedmaps has grown revenues at a compound annual growth rate (CAGR) of 40%, growth they’re expecting to continue achieving moving forward. At the core of their offering is a two-sided app where they’re able to connect retailers with consumers while monetizing both sides.
With 10 million monthly active users, the app certainly has traction and is capable of generating meaningful revenues from a variety of sources.
Our bone to pick isn’t the fact that shares are trading at a 25% premium on the news alone, or that the company is only receiving $100 million of the $585 million total consideration.
We’re more concerned with some of the smaller details that may go unnoticed.
The Museum of Weed
For example, there’s the Museum of Weed that Weedmaps and Vice Media opened in Hollywood California last year, a city frequented by people who are treated like gods by the media for spending their entire lives pretending to be someone they’re not. Real estate isn’t cheap in that neck of the woods, nor is building a 30,000 sq. ft. experience featuring seven immersive exhibits, interactive art installations, a Plant Lab, a full cafeteria, gift shop, snack/coffee bar, and, of course, the obligatory VIP parties.
Maybe they managed to make some money on this VIP event, but how many tickets did they have to comp to get “influencers” to show up? Not to mention DJ Mustard’s time prolly don’t come cheap. Around the same time Chirag was enjoying the open bar at the VIP party, Weedmaps was laying off 25% of their workforce. Not a good look. And two months after that, The Rona reared its ugly head. Now, they’ve filed for a SPAC so some existing shareholders can get out and greater fools can pile in. That’s another way to look at it.
The DOJ Comes a Knockin’
The same month that Weedmaps laid off a quarter of their workforce, the Department of Justice came knocking. (Even prior to that, Weedmaps was having problems with the California Bureau of Cannabis Control.) We almost missed this tidbit of information because they obscured it on the last slide of their glossy deck in grey text that’s so tough to read, we were barely able to discern it.
Here’s the first paragraph of what they’re trying to say.
In October 2019, we received a grand jury subpoena from the U.S. Attorney’s Office for the Eastern District of California (the “DOJ”), requiring the production of a broad range of documents related to our business, personnel and operations, including documentation related to our dealings with companies in the California cannabis industry. We are fully cooperating with the DOJ’s inquiry.
Credit: Weedmaps Investor Deck
Long story short, they needed to require those using their platform to procure copies of licenses to demonstrate legitimate permission to sell cannabis in the State of California. They’ve now done this, and “have had productive discussions about a potential resolution, but no agreement has been reached.” That’s what the company is telegraphing here, but a look at the subpoena itself would dissuade any investor from wanting to touch this stock until the whole thing is done and dusted. Marijuana Business Daily posted a link to the subpoena along with a summary as seen below – everything from website backups to instant messaging transcripts:
Perhaps it’s a non-issue, but it’s also an important lesson. Just because you’re not touching plants doesn’t mean you’ll be able to avoid regulatory scrutiny. It also shows us just how much regulatory risk there is in an industry that transacts in something that’s illegal at the federal level. We’re not saying that’s a good thing, we’re just saying.
To Buy or Not to Buy
People sometimes wonder how our passion for everything tech spills over into cannabis. That’s because of the incredibly high interest we’ve had over the years in our cannabis content. For us, it’s an opportunity to welcome newbie investors into the fold, and tell them the truths that nobody else will. You won’t get rich trying to find the next Microsoft, and you won’t get rich trying to control your emotions while dabbling in the extremely risky world of cannabis stocks.
The potential is there to make money off the legalization of cannabis. Even institutional investors acknowledge this. The ones we’ve spoken with favor the ancillary cannabis sector. In other words, the pick-and-shovel plays of the cannabis sector, everything that’s non-plant touching.
There’s a spectrum that goes from ancillary to plant touching. On one end of it, you have businesses like hydroponics equipment suppliers who don’t even interact with the end customer. On the other end, you have people growing the stuff – literally touching the plants. The Weedmaps DOJ inquiry shows that you don’t actually need to touch plants to incur regulatory risk. If we were to invest in this space, we’d prefer opportunities that fall firmly into the “non-plant touching” end of the spectrum. Hydrofarm comes to mind as a good example of a stock that stays far away from the actual plants.
Compared to the cannabis ICO, the cannabis SPAC appears to be a great deal more appealing because you’re actually receiving some equity in a business instead of a token that’s worth eff all. In the SPAC hierarchy of stakeholders that matter, retail investors are lowest on the totem pole. If we were to invest in the ancillary cannabis sector, we’d opt for Hydrofarm (HYFM) instead. Two-thirds of their revenues are from consumables, and they’re not likely to be receiving any inquiries from the DOJ anytime soon.
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