As legal cannabis sales in the U.S. surpassed $10 billion annually in 2018, more and more investors started to turn their gaze to this industry, willing to invest in cannabis space.
Venture capital and private equity funds have been showing interest: among them Privateer Holdings, Tuatara Capital, MedMen Capital and multiple others. According to PitchBook, VCs have invested over $1.2 billion in U.S.-based cannabis companies in the first 6 months of 2019, surpassing $836 million invested in 2018.
Europe and the UK seem to be soon following America’s lead: even the Church Of England’s $10.5 billion Fund announced in June 2019 that they are changing the fund’s rules to allow for investments in medical cannabis.
While there are multiple investment opportunities for VCs, institutional and professional investors, access to cannabis market is limited for retail investors.
Specially for Valuation420, Stobox has analyzed the legacy and cutting-edge ways to invest in cannabis for individuals investors.
Cannabis stocks & ETFs: easy access, but later stages and lower returns
If you’re an individual interested in the industry, you will most likely first explore investing in the shares of cannabis companies, publicly traded on stock exchanges. There are plenty of online resources providing market analytics and tools to invest in cannabis space.
Most benefits and downsides of this investment method are pretty much the same as for the entire IPO market. Companies that go for an IPO are on their later stage of development, so retail investors have a chance to capture only a really small value in comparison with private early-stage investment rounds that can bring much more solid returns. Currently, there is no established infrastructure for individual investors to participate in 99% of private rounds, and the existing ones are pretty limited.
Another potential drawback of investing in the stocks of cannabis companies is related to the general trend on the capital markets: right now the majority of companies doing IPOs are not profitable. And thus, unable to pay out dividends in the near future. Naturally, it is the same with early stage investments – but the difference that the latter provide much bigger returns in case of success.
Crowdinvesting: early stages, but few projects and zero liquidity
Taking all of the above into consideration, many individuals would rather become early equity investors in cannabis startups. Despite that new startups are created every month, there aren’t a lot of opportunities for investors to reach them due to the lack of information and technical solutions.
Crowdfunding websites like IndieGoGo provide backers early access to products like CBD based cosmetics and hemp shoes. A couple of industry specific crowdfunding platforms like 420fundmeup provide rewards to contributors instead of giving an ownership stake in their businesses. This might be emotionally satisfying for some industry enthusiasts, but can hardly be considered an investment.
Right now, there is only one active equity platform for crowdinvesting in cannabis: fundanna provides access to Reg CF and Reg A+ offerings of companies in the cannabis space. It is open to international investors, but lists only a limited number of deals.
While there is still almost no infrastructure for primary investment in shares of cannabis startups, the secondary market for those is non-existent at all. Traditional private venture investments are illiquid in general: investors have to wait for a project to list on a public exchange (see: do an IPO) or to be acquired by a larger company in order to make profits. As the cannabis industry is still very new, the timelines for these events are even harder to project. Due to this, there is a certain psychological barrier for crowdinvesting, as investors would feel more comfortable to have a place to trade their assets at any time, opening up liquidity for their investments.
Tokenized shares: still early days, but a more accessible, cheaper and liquid option
Tokenization as a fundraising method is aimed at providing a solution to the pain points of investors, including those mentioned above. Essentially, it is a new, superior form of crowdinvesting.
Investment in tokenized shares of cannabis companies is closer to crowdinvesting rather than public stocks. However, it combines the benefits of both investment methods: access to early stage startups that were previously available only to VCs and to the secondary market liquidity.
In practice, this means an opportunity to invest in promising startups on the same stage with venture capital firms, while having a secondary market to trade these shares with no need to wait for several years to make an exit.
Right now, the secondary market for tokenized financial instruments is significantly smaller than for public stocks. With technological solutions already in place, it takes time for the major upcoming platforms and exchanges to get licensing and to reach trading volumes big enough to talk about real liquidity. But we are already seeing regulatory clarity, institutional interest and first licensed players in the space, and these numbers are expected to grow within the next couple years.
The delay of this benefit is compensated by the cost reduction – compared to stocks, investment in tokenized securities is significantly cheaper for retail investors in transaction fees.
Stobox is currently developing a fully legal model to enable cannabis companies to tokenize their assets, as well as accept investments in cryptocurrencies.
We are on the mission of democratizing the market, enabling a wider audience of individuals to invest in cannabis space, for the benefit of both sides.
Join Valuation420 initiative to be in the front row, to witness and contribute to the way this industry will be changing during the next 1-2 years.
CEO at Stobox. Serial entrepreneur. Investor. 25+ years in IT Development and entrepreneurial experience. International background. Focus on technologies, stocks and crypto trading platforms, Web 3.0.