MW Cannabis stock valuations and investments hobbled by regulatory uncertainties, experts say

By Steve Gelsi

Financiers at New York event note the realities around federal rescheduling and local permitting

A reality check around regulatory challenges facing the cannabis sector has taken hold among some of the leading financiers in the industry, as optimism around the promise of a legal market has faded.

A panel discussion on funding the next phase of growth at Tuesday's Business of Cannabis Conference in New York City featured war stories about the New York state cannabis industry and caution about wading into the sector, a departure from the go-go outlook typically voiced by private-equity pros, venture capitalists and legal minds at such events.

Panelists said New York appears to be gaining traction now that legal sales approach $1 billion for 2024 amid efforts to crack down on illegal cannabis shops.

But the unknowns range from the pace of awarding state permits for new cannabis businesses in New York to a lack of financing for startups in the space.

Uncertainties on the federal level include whether cannabis will be reclassified to the less restrictive level of a Schedule III drug and when the federal 280E tax rules that require legal pot businesses to pay about 7% of their revenue to the government might go away.

"It's nearly impossible to predict regulatory changes," said David Feldman of Feldman Legal Advisors, a longtime securities lawyer in the space.

Valuations of cannabis companies in both the public and private markets continue to be muted because of these issues, he said.

Sergey Sherman, managing director of Tuatara Capital - an investor in Verano Holdings Corp. (VRNOF) and other cannabis businesses with about $400 million currently under management - said his firm has avoided making equity investments in New York.

"We all recognize the potential, but it has to make sense," Sherman said.

However, Tuatara Capital is providing some debt capital through its participation in the Cannabis NYC Loan Fund, which launched earlier this year. The pool of capital is providing loans to startups at about 9.5% interest - lower than commercial rates in the sector - with participation from New York City's Economic Development Corp.

Dai Truong, managing director of Arlington Capital Partners, noted that he worked as vice president of corporate development at MedMen Enterprises $(MMNFQ)$, which in 2018 opened a medical dispensary on Fifth Avenue modeled after the Apple Store, only to fall on hard times.

"New York has been exciting. It's of those major cities that you have to have a presence in," Truong said. He said he's been tracking larger cannabis companies in Florida that may be considering an entry into the New York market.

On the regulatory front, however, Truong said his company doesn't even attempt to factor the elimination of 280E into its investment profiles for companies.

"It's hard to sign off on these things, because we've seen 'sure things' not materialize," he said.

Brett Finkelstein, co-founder of Phyto Partners, said he's looking forward to a potential rebirth in the industry, but he didn't flag any specific investments in New York.

His firm has been focusing on backing service and technology companies in the cannabis sector, with an eye on states that had robust medical-cannabis programs before switching over to adult-use sales, he said.

"A lot of investors have been burned," said Matthew Karnes, founder of GreenWave Advisors.

Opportunities in the industry continue to be a "moving target," he said, with drinks infused with hemp-derived THC one business attracting interest currently.

"The industry has headwinds," he said. "We may be pretty close to [federal] rescheduling, but we don't know when the 280E requirement will go away."

Joanne Wilson, chief executive of Gotham and an angel investor who spoke at an earlier panel at Tuesday's event, summed up the challenges posed by the regulatory landscape in this way: "The people making the most money in this business are the lawyers," she said.

Also read: Green Thumb Industries looks past 'tricky time' for cannabis stocks as the company notches another profit

-Steve Gelsi

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November 12, 2024 13:58 ET (18:58 GMT)

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