Investing in Cannabis: 101
Written by Erica Roane
From dinner tables to book clubs, the business of cannabis and its earning potential has the entire country buzzing. Even in states where cannabis is still prohibited, people are still looking to get their hands and money involved in an industry that is projected to generate $25 billion in the United States alone.
Last week in New York during CWCBExpo, seasoned investment professionals Andi Goldman of Equitas Partners Fund and Kathryn McCall of Sideman & Bancroft LLP presented “Protect Thyself: Investor vs. Company-Friendly Deal Terms.”
Let’s face it. We all want our share of the Green Pie.
Since we are all saving our coins by missing a few brunch dates and walking instead of taking a car service, we just may have a few bucks saved that are just waiting to turn in millions. But, before you invest your life savings in cannabis, here are some things to consider.
Take Your Notes
The foundation to investing in cannabis are notes. A note is a legal document that serves as an IOU from a borrower to a creditor. Notes typically obligate the issuer (company you’re investing in) to repay its creditors (you) the principal loan and any interest payments on a predetermined date.
Understanding the different types of notes is crucial to investing. For instance there is something called a convertible note. This is a form of short-term debt that converts into equity in future funding rounds. Goldman stressed, “Make sure that you're not just investing knowing that it could convert later, you want things that convert now. If you're getting a company to a merger, you want to be able to participate in it.”
There are also senior notes which are debt securities, or bonds, that take precedence over other unsecured notes in the event of bankruptcy. Senior notes must be paid first if assets are available in the event of a company liquidation. With so many cannabis companies emerging, there will be just as many closing shop. Depending on what you’re investing, senior notes may be the thing for you.
Know Your ‘Rights’
As exciting as investing in cannabis may seem, protecting yourself and your investment is key. Requesting information rights, or financial statements as part of your decision to invest in a cannabis company could be a game changer. While some companies do want to give their investors detailed finance information, there are other areas such as the ability to visit facilities, cultivation farms, and offices where investors may request transparency.
Yes, the United States is positioned to bring in billions. Consider investing in cannabis businesses and opportunities outside of the United States. For instance, cannabis consumption on the continent of Africa is huge. In Nigeria alone, 19% of the population consumes marijuana. Moreover the favorable growing conditions in Africa have the region expected to generate $7.1 billion in cannabis by the year 2023.
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