US medical marijuana cultivator, manufacturer and dispensary operator, Columbia Care LLC, recently completed a stock exchange listing on Canada's NEO Exchange (NEO Exchange) to form Columbia Care Inc. (CCHW.NE) (Columbia Care). Columbia Care commenced listing with a market capitalization of over CAD$2 billion. The merger transaction was completed by way of a business combination with Canaccord Genuity Growth Corp., a Special Purpose Acquisition Company (SPAC), a Delaware subsidiary of the SPAC and Columbia Care LLC. The transaction represents the NEO Exchange's largest listing of a corporate issuer to date. Columbia Care's listing is also notable as rather than completing its "go public" transaction through an initial public offering or reverse takeover, it merged with a SPAC created by investment firm Canaccord Genuity with the intent of attracting a US cannabis business, and listed on the NEO Exchange with more than CAD$160 million in capital raised at the time of the public listing with Columbia Care.
Gowling WLG focus
Issuers with marijuana-related activities in the United States have faced obstacles in accessing North American public markets, prevented from listing on some US and Canadian exchanges given the legal grey area in which marijuana exists in the US. While a number of issuers have turned to the Canadian Securities Exchange in response, Columbia Care may be the first of a series of large US corporations with marijuana-related activities to list on the NEO Exchange by completing a business combination with a SPAC. SPACs present a unique vehicle for corporations to list on the NEO Exchange, providing access to a larger base of capital than a Capital Pool Company, the opportunity to list on a senior exchange, and a time and resource-efficient process of completing a "go public" transaction. Given the significant amounts of capital raised in the previous listing of two other SPACs on the NEO Exchange, and the filing of a preliminary prospectus to launch a third, business combinations involving SPACs on the NEO Exchange represent a new pathway for large cannabis issuers to access the Canadian capital markets. Gowling WLG's multi-disciplinary cannabis practice is tracking this activity with interest and has the industry focus and expertise to add value in assisting issuers of all sizes looking to raise capital in North America and comply with Canadian cannabis regulations.
Key attributes of and requirements for listing and going public with a SPAC
SPACs are reporting issuers that have no operating business or assets other than cash and which are created to engage in a merger or acquisition of, by or with a business within a specific period of time. The NEO Exchange and the Toronto Stock Exchange (TSX), the Canadian exchanges on which SPACs may be listed, impose a number of requirements on SPACs in respect of their listing and the process by which they may complete a subsequent transaction with another issuer. To list on either stock exchange, a SPAC must initially raise a minimum of $30 million via an initial public offering (IPO) of securities. Upon completion of the IPO, the SPAC will have a period of 36 months (or a shorter period, if specified in the IPO prospectus) to complete a qualifying transaction, which may include the acquisition of assets or one or more businesses. Ninety percent of the funds raised in the SPAC's IPO, including 50% of the underwriters' commissions, must be held in escrow. Such escrowed funds must be used toward the completion of the SPAC's qualifying transaction, the fair market value of which must be at least 80% of the value of the escrowed funds.
SPACs create the potential for efficiency in the "go public" process. A SPAC which places 100% of the gross proceeds of its IPO into escrow will not require shareholder approval for its qualifying transaction, resulting in cost savings to the issuer and a shorter listing process. If a qualifying transaction is subject to shareholder approval additional disclosure will be required; the SPAC must prepare an information circular containing prospectus-level disclosure of the resulting issuer, assuming completion of the qualifying transaction. Such information circular is in addition to the requirement to file a prospectus containing disclosure regarding the proposed qualifying transaction with the Canadian securities regulators in all jurisdictions in which the SPAC and resulting issuer will be a reporting issuer following completion of the qualifying transaction.
SPACs may issue either common shares or units in connection with the IPO. In either case, the securities must contain both a redemption right and a liquidation distribution feature. The redemption right permits shareholders to redeem their securities for a pro rata portion of the escrowed funds in the event a qualifying transaction is completed, which right may be exercised regardless of whether shareholder approval of the qualifying transaction is required. The liquidation distribution feature requires that a SPAC distribute its escrowed funds to shareholders in the event a qualifying transaction is not completed within 36 months of the closing of the IPO.
SPAC to the future: The history of SPACs and why they may gain traction among cannabis issuers
SPACs were initially introduced to the TSX in 2008, but until recently only a relative few had been listed and completed qualifying transactions. Prior to certain amendments to the SPAC rules in October 2018, there had only been six SPACs launched on the TSX over the ten-year period since they became available in 2008. Unlike the Capital Pool Company framework available on the TSX Venture Exchange (TSXV), the SPAC regime requires a significant public offering of $30 million in order to meet listing requirements on the TSX or NEO Exchange. Traditionally, the volume of large-scale Canadian transactions has limited the relevance of SPACs. However, the SPAC framework may prove relevant to large issuers with marijuana-related activities in the United States seeking to access public markets.
The TSX and TSXV have, pursuant to exchange policies, established that they will not list issuers with US marijuana-related activities on the basis that cannabis remains illegal under US federal law as a Schedule I drug under the US Controlled Substances Act. US-based cannabis issuers and Canadian issuers with marijuana-related activities in the US have increasingly turned to the Canadian Securities Exchange (CSE) in order to access the Canadian capital markets. While the CSE has adopted a less restrictive regulatory approach to listing issuers with US marijuana-related activities than the TSX or TSXV, the CSE does not offer SPACs as investment vehicles.
The NEO Exchange may emerge as an alternative to the CSE for cannabis issuers. Launched in 2015, the NEO Exchange (named from prefix of ancient Greek word neos meaning "new") is Canada's newest stock exchange, currently representing nearly 10% of all trading volume in Canadian-listed securities. The majority of its approximately 70 listings are currently Exchange Traded Funds (two of which are cannabis ETFs) and closed-ended funds. Eight corporate issuers are currently listed on the NEO Exchange, including Columbia Care. Also among these corporate issuers are two SPACSs, Cannabis Strategies Acquisition Corp. and Canaccord Genuity Growth II Corp.
- Cannabis Strategies Acquisition Corp. was the first SPAC listed on the NEO Exchange, closing an IPO of $135 million in December 2017 (including the exercise by the underwriter, Canaccord Genuity Corp., of a $10 million over-allotment option). In March 2019, the corporation's shareholders approved the corporation's proposed qualifying transaction to concurrently acquire five US-based cannabis companies that include cultivation, production and distribution of cannabis and related products. The qualifying transaction has not yet been completed.
- Canaccord Genuity Growth II Corp. was listed on the NEO Exchange after the corporation closed a $100 million IPO in April 2019.
Most recently, on April 18, 2019 another SPAC, Mercer Park Brand Acquisition Corp. (Mercer Park), filed a preliminary prospectus in respect of a proposed IPO of $250 million, in which Canaccord Genuity Corp. is acting as underwriter. Upon closing of its IPO, Mercer Park intends to target businesses in cannabis and/or cannabis-adjacent industries with an enterprise value of $300 million to $800 million to complete its qualifying transaction. Upon closing the IPO, the corporation would become the fourth SPAC to be listed on the NEO Exchange, all of which are focused in the cannabis area. Of note, both Mercer Park and Cannabis Strategies Acquisition Corp. (the first SPAC on the NEO Exchange) are indirectly held by Mercer Park, L.P., a privately-held family office based in New York.
The completion of Columbia Care's qualifying transaction and the completion of IPOs by two other cannabis-focused SPACs potentially signifies the emergence of the use of SPACs as innovative vehicles for taking larger issuers to market. Given the obstacles issuers with US marijuana-related activities face in accessing the public markets, such SPACs may become increasingly relevant, representing an opportunity for issuers that can meet the applicable listing criteria to efficiently and cost-effectively list on a recognized exchange.
SPACs also present a number of general benefits for the parties involved. Founders are able to access a large base of initial investors. The investors, in turn, receive an opportunity to co-invest with individuals with extensive industry knowledge and experience. Furthermore, the stock exchanges' rules protect investors in the event that they disapprove of the qualifying transaction or if the transaction fails to close within the prescribed timeframe. The businesses utilizing SPACs to go public reduce the traditional costs of completing an IPO and time to list on an exchange, more efficiently accessing both the Canadian capital markets and the capital remaining from the acquisition to fund their operations or growth.
Innovation in southbound investment
Northbound transactions, such as Columbia Care's listing on the NEO Exchange, exemplify how US-based cannabis issuers may gain access to the Canadian capital markets. Conversely, Canopy Growth Corp.'s recently announced $3.4 billion acquisition of US -based Acreage Holdings Inc. represents an innovative approach to an investment in the United States by a Canadian issuer listed both in Canada (TSX:WEED) and the US (NYSE:CGC). The transaction is subject to, among other conditions, the federal legalization of cannabis in the United States, which if not satisfied or waived within prescribed time periods, will result in the termination of the agreement.
Next steps
Gowling WLG is monitoring financing trends and regulatory developments in Canada and the United States and is well-positioned to assist issuers with listing on all recognized Canadian stock exchanges, meeting their ongoing disclosure obligations and exploring potential cross-border opportunities. Gowling WLG's multi-disciplinary cannabis practice has the expertise and experience to assist issuers of all sizes in complying with Canadian cannabis regulations, as well as building, financing and growing their business.