Enter SPACs: Special Purpose Acquisition Companies

Enter SPACs: Special Purpose Acquisition Companies

This week’s Cannabis Corner article has been developed from recent published sources by PorterPartners, and is deemed to be of prime current interest to FON members who have cannabis-related investments in their portfolios, or are considering such investments.

To those following the mergers and acquisitions of cannabis companies, 2020 was the year of the SPAC. Capital markets were starved by January 2020.

Enter SPACs: Special Purpose Acquisition Companies, which act as blank checks for investors interested in pooling their money for a designated goal. In our industry, SPACs function as a way for investors to align their money and identify a target company for acquisition. The net effect is actually a reverse merger, whereby the resulting company takes on the SPAC “shell” and operates as a publicly traded enterprise. Though most traditional companies go public in an initial public offering (IPO), the federal prohibition targeting cannabis has pushed operators into less traditional capital-raising methods – including SPACs. In a SPAC, the people responsible for finding a deal – the sponsors – must deploy the raised capital to receive shares in a new company before a deadline, otherwise they’re required to return the money raised to shareholders. This sets up the incentive for sponsors to get a deal done, even an expensive transaction, which is why investors should pay close attention to the underlying details.

Cannabis-related SPACs held more than $2 billion in assets in 2020. They are created to target high-value investments that have a healthy future as a publicly traded firm.

At the tail end of 2020, Schulze Special Purpose Acquisition Corp. landed a deal with Clever Leaves, a sprawling cultivation and distribution company with bases It’s a $205-million deal, which puts it in the upper echelon of recent cannabis transactions.

Two cannabis special purpose acquisition companies (SPACs), Silver Spike Acquisition Corp. and Subversive Capital Acquisition Corp., recently announced deals worth more than $2 billion, while two other SPACs have an additional $280 million that must be deployed in the next year. Once the Silver Spike and Subversive deals close in the first half of 2021, the U.S. cannabis industry overall will get an injection of liquidity, since the companies said they plan to use some of their combined $662 million cash on hand and publicly traded currencies to consolidate smaller operators in California and marijuana-related technology companies.

Of the 10 cannabis-interested SPACs listed in March, only two still need to deploy their capital however there may be a shortage of opportunities.

• Greenrose, with $150 million and an Aug. 13, 2021, deadline.
• Merida Merger I, with $130 million and a Nov. 7, 2021, deadline.

Collective Growth Corp., with former Canopy Growth CEO Bruce Linton at the helm, went public in May this year. Starting off with a $150-million raise in the early days of the pandemic, this was big news. But the SPAC took a different path and executed a reverse merger with a sensor company. The cause of the shift was there weren’t enough companies in the hemp space with the revenue, valuation and accounting requirements of the SPAC, according to Geoff Whaling, president of the Austin, Texas-based company.

If any FON member would like more information on this article, or to discuss this or any other aspect of the cannabis industry, please contact Dean Porter at (843) 849-3191, or by e-mail at dean@porterpartnersgroup.com. PorterPartners is a free resource and member benefit available to all FON members providing insight and information relating to the cannabis industry.