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Cannabis Stock Exchange? How the CSE capitalized on pot stocks




Cannabis Stock Exchange? How the CSE capitalized on pot stocks
Richard Carleton, CEO of CNSX Markets Inc., at his Toronto office in November.

Richard Carleton, CEO of CNSX Markets Inc., at his Toronto office in November.

Michelle Siu/The Globe and Mail

Richard Carleton can’t help but laugh when he’s asked: “In 2014, how much did you know about pot?”

The question isn’t about consumption, but it still catches him off guard. A lawyer by training, Mr. Carleton, 57, has spent decades building a career in the financial exchange business. Today, he runs Canadian Securities Exchange (CSE), a stock market for early stage companies.

Cannabis is a new talking point for him.

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“I didn’t know a lot” about the marijuana business, he says as his laughter subsides. “I didn’t know that it was going to be a public-markets story.”

That story started in 2014, not long after the federal government unveiled new rules for the commercial-scale growth and sale of medical marijuana. A wave of new cannabis companies applied to Health Canada for licences to produce the drug. All they needed was money.

But banks wouldn’t lend, few angel investors would put up cash, and TMX Group Ltd., which owns the two dominant stock markets in Canada, refused to list their shares unless they had a licence – a process that required growing facilities to already be built and inspected.

Enter the CSE. Three years later, the “C” in its name might as well stand for cannabis. Fifty-three of its 352 listings, or 15 per cent, are marijuana companies, as of Dec. 11. But those stocks accounted for nearly 65 per cent of all the trades it handled in November.

And now, Mr. Carleton and the CSE have been handed another chance to grow by its chief rival.

In October, TMX formally banned marijuana firms with assets in the United States, where the drug is legal in some states but illegal at the federal level. Companies deemed to be violating U.S. federal law are prohibited from listing their shares on the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV). Both markets say they are launching a review of existing issuers and will delist any found to be offside their rules.

For the 14-year-old CSE, this could be the opportunity of a lifetime.

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The CSE is long been perceived by the Street as the bottom of the minor leagues for companies looking to list shares. It’s seen as the place where the smallest startups go public, or as a last resort for issuers that don’t qualify elsewhere. (A newer market called Aequitas Neo Exchange Inc. also aspires to list equities but so far, it hasn’t attracted a single corporate stock listing, although it has landed several exchange-traded funds.)

When companies get too big for the CSE, they typically graduate to the TSXV. If companies stick it out on the Venture long enough – and grow their market caps large enough – they’ll eventually get the call to the big leagues: the TSX. Since 2007, more than 320 companies have got that call.

The TSX, whose roots as a stock exchange predate Confederation, is where shares of the country’s largest public companies are housed. In recent years, newer stock markets such as CSE have struggled to make a real dent in the TSX, and have mostly failed to attract the high-profile issuers and deep-pocketed investors.

But the U.S. cannabis ban by TMX is breathing life into the CSE as a growing number of CSE-listed issuers can’t get the call to the TSXV or the TSX. As a result, the CSE is playing host to companies with market valuations that would have been unfathomable a few years ago.

Of the 53 cannabis issuers listed on the CSE, 17 have businesses or assets south of the border. The market caps of these 17 companies represent about one-quarter of the entire $8.5-billion on total market cap of all companies listed on the exchange. The largest is a newly-public grower called CannTrust Holdings Inc. Since making its debut in late August, its shares have sky-rocketed by more than 200 per cent amid a steep rally across the sector, pushing its market cap north of $700-million.

Early last year, prior to the rapid run-up in marijuana stocks, the largest company on the CSE was valued at slightly more than $100-million.

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The cannabis sector as a whole is picking up steam as companies jockey for position ahead of Canada’s planned legalization of the drug for recreation use in July. Applications to list on the CSE are piling up, Mr. Carleton says. And marijuana stocks are changing hands at a frantic pace, pushing the CSE’s daily trading volumes to new highs on 14 separate occasions in November.

But opportunity breeds competition. Neo, the upstart market with no corporate listings today, wants to fill the void left by TMX and is targeting larger-cap marijuana stocks – including those with interests in the United States.

The CSE finds itself in a race to make the most of the marijuana boom. It’s a chance to become something more than a minor-league player on Bay Street. But will the cannabis craze offer the path to the big leagues or will new competitors, a maturing industry and changing perceptions of pot eventually leave the CSE in a familiar position – stuck near the bottom of Canada’s stock-exchange hierarchy?

Ian Bandeen is stunned by the recent surge in trading on the CSE, the company he co-founded in 2001. On Nov. 28, for example, a record 327 million shares changed hands. To put that in context: It was just this past June that the CSE hit a single-day record just shy of 78 million shares traded.

When he digs deeper into the CSE’s order book, Mr. Bandeen, who is now a consultant and is no longer with the CSE, finds that the list of brokers reads like a who’s who of Bay Street. Indeed, the market, which became an exchange in 2004, has come a long way. For years, it’s flown under the radar; now, cannabis is putting it on the map.

The CSE was started with the goal of making the process of going and being public simpler, cheaper and faster for early stage companies. It was created at a time when investors were starting to use the internet to research stocks and execute trading orders.

“We made the rules and policies clear, effective and easy to understand,” Mr. Bandeen recalls. “This is in marked contrast to some incumbent equivalents, which are laden with historic compromises and unwritten policies and that are sometimes described as a twisted mess that only a securities lawyer could love.”

By the time the CSE came on the scene, the Canadian market had already undergone some major changes. In 1999, the stock exchanges of Vancouver and Alberta merged to form the Canadian Venture Exchange (CDNX) for junior equities. The TSX became the sole market for senior stocks, while the Montreal Exchange become the centre for derivatives trading.

The CDNX merger of the Vancouver exchange, which was infamous for being a haven for financial scams, and Alberta was a way for these smaller venues to gain scale and cut costs overnight. Then in 2001, the TSX acquired CDNX and, in 2002, it renamed it the TSXV and tried to clean it up. That year, the TSX went public, becoming the first exchange in North America to do so.

The CSE was like David winding up to take a shot at Goliath, but in its first decade at least, it struggled to finds its footing.

“At every turn, we’ve had to assume that there will be people who are against us and quite willing to throw up barriers – real or imagined – to hold us back,” says Mr. Bandeen, who still owns a stake in the CSE’s parent company. “That’s just the way it has been right from the get go.”

It took four years for the CSE to establish a roster of at least 100 listings. William Woods, who was brought in as managing director to grow the CSE’s listings business between 2007 and 2012, thought the CSE could amass 1,000-plus stocks during his tenure. Five years after he left, it’s still nowhere near that mark.

“We had a considerable amount of success, but not as much as I would have liked,” Mr. Woods says. “I think we felt that 500 was a real critical-mass number. And they’re heading toward that very quickly.”

The expansion of the CSE has come as the universe of publicly traded small-caps is shrinking. Since 2008, the financial crisis, mining crash and oil glut have made it hard for small-caps to raise cash. The number of TSXV issuers has been declining since 2012, falling from 2,258 issuers then to 1,648 in December, 2016.

The CSE remains minuscule by comparison. Today, it has a staff of 42 people and, for its own operations as a private company, has raised just $42-million in capital since inception.

Veteran Bay Street broker Thomas Caldwell is chair of its board. He owns 49 per cent of the CSE through his company Urbana Corp. He and deputy chair Ned Goodman, the founder of Dundee Corp., approach the role the CSE plays in the Canadian market “with an almost evangelical fervour,” Mr. Caldwell says. The two men want to create a market that helps early stage Canadian companies raise the money they need to grow.

“I always say Canada is a good country to start a business. But it’s not a good country to build a business,” he adds. “So companies end up selling out.” He says that the CSE, as with the issuers listed on it, has been in the same boat. It has declined several takeover offers from U.S. market operators.

Ask Mr. Carleton whether he ever thought marijuana would be the industry that fuels the CSE’s growth, and he borrows a line from Mr. Caldwell.

“In any startup business, you just don’t know what the thing that helps you really get over the hump will be. You don’t know,” Mr. Carleton says. “His counsel to me and the team here is just survive, keep going, keep your head down. You may not plan for [that thing] or see it coming, or have appreciated it at that moment, but it’ll happen if you hang in there.”

Beyond the lift in trading and listings, cannabis is also bolstering the CSE’s profile, and reshaping how people perceive the market and what it can do.

“Once you have wrapped your head around investing in marijuana in general, then investing in the U.S., if you’re willing to do that, you’re willing to trade on the CSE,” says Vahan Ajamian, an analyst at Beacon Securities Ltd. “It’s not so much exchange-driven any more. If I am willing to invest in U.S. cannabis stocks, [the CSE] is where I go.”

And the CSE’s position was emboldened in October when securities regulators in this country said cannabis companies with assets in the United States can raise money in Canada’s public markets, as long as they disclose how they comply with the laws of the state in which they operate and also what legal risks they face at the federal level.

But the CSE won’t have the U.S. marijuana market to itself forever. Neo, that other, much newer stock exchange, wants a piece of the green rush.

For its part, Neo says it is willing to list the shares of companies that do business in the U.S. cannabis market, as long as they are a certain size and meet other listing requirements, as well as abide by the disclosure rules set by regulators. While the exchange, which launched in 2015, is home today to a few dozen exchange-traded funds, it is still looking for that elusive corporate listing. Last month, an investment fund that seeks to buy other cannabis companies, including those in the United States, applied to list on Neo and raise $125-million.

“We’re open for that business,” says Jos Schmitt, the chief executive of Neo. “We wouldn’t have the slightest issue to list them on our exchange. What would be a reason not to?”

One reason might be that there is a chance that, one day, the Trump administration may decide to enforce federal law, disrupting the status quo that now protects firms operating legally in U.S. states that permit and regulate cannabis use within their borders. (Currently there is a legal framework in place that defers policing to affected states.)

Neo is backed by a group of blue-chip financial institutions that have largely stayed away from the cannabis sector, such as RBC Dominion Securities Inc. RBC says it doesn’t do business in the marijuana space and declined to comment on the possibility of Neo doing so. But Mr. Schmitt insists that his investors’ aversion to the sector won’t stop Neo from pursuing these companies.

“We’re not here to execute what one or several board members want for their organization,” he says. “The board members are there to support and take decisions that are in the best interests of the company.”

Neo is trying to position itself as an alternative to the TSX for larger listings; one of the key metrics it uses to assess listings applications is whether the company has a market cap of $50-million or more. But here is where the usual pecking order of Canadian stock markets is being dismantled: While the CSE is identified with small stocks, it is showing with its cannabis listings that it can handle much larger securities – and that investors are going to the market to trade them in high numbers. Eleven of the 17 issuers with U.S. cannabis exposure on the CSE have a market cap of at least $60-million, as of Dec. 11.

There has been a flurry of activity in those stocks. From July to October, about 394 million shares in those dozen companies changed hands, according to data compiled by the CSE. In November alone, 566 million of these shares were traded. CannTrust is the largest. “Our investors are buying what we’re delivering,” says Eric Paul, CannTrust’s CEO. “They don’t really care which exchange we’re on. They just want shares.”

Other companies aren’t so sure. Marc Lustig, CEO of CannaRoyalty Corp., which is making a push into the cannabis market in California and has its stock listed on the CSE, says its shares would be worth double or more and be traded five times as much if they were listed on either the TSX or TSXV.

“That has been a source of frustration that I can’t deny,” he admits. “They are working through the perception issue that exists. I don’t think you can change that overnight.”

Sean Dollinger, the CEO of another CSE-listed company called Namaste Technologies Inc., is getting “a lot of pushback” from larger asset managers and has his sights set on graduating his shares to the TSXV. He says some equity analysts have told him that their firms won’t cover stocks that are listed on the CSE “because their investors don’t want to touch them.”

“I love the CSE. The guys are fantastic over there,” he adds. “But no one really wants to hold CSE stock, for whatever reason. They say the regulations aren’t as strict.”

Mr. Carleton rejects the idea that the CSE is less risk-adverse than the other markets in Canada. “We’re faster, which I’m not going to apologize for, but this notion that we’re more permissive or more lax? No,” he says.

TMX, for its part, says many of the companies listed on the CSE don’t actually meet the initial listings rules of its two stock markets. They tend to fall in short in areas such as the legality of their operations, the suitability of officers and directors, and how much working capital they have on hand, TMX spokesman Shane Quinn says. “Interestingly, we are seeing many companies graduate to TSXV from CSE once they have risen to meet our minimum listing requirements, including 15 over the last two years,” he adds.

Other companies say they wouldn’t be where they are today without the CSE. Supreme Pharmaceuticals Inc. is one of the applicants that listed on the CSE in 2014, giving it access to capital it couldn’t source on its own, CEO John Fowler says. He began his business with a handful of people, an application for a licence and a plan. Just three years later, he heads up a $400-million company with 130 employees, a grow-op on the shores of Lake Huron in Kincardine, Ont., and now has a stock listing on the TSXV.

“We had a good run on the CSE. I’ll be eternally thankful,” Mr. Fowler adds. “For us, it was the right time to graduate.”

The CSE has given issuers the chance to raise money. Now it has to give them a reason to stay longer. “Companies feel like when they hit a certain level, they have to go to the TSXV,” Mr. Carleton adds. “We have got to make them think otherwise.”

With its position on U.S. cannabis investment, TMX is doing the CSE a big favour in that regard. And Mr. Carleton is first in line to say thanks. At a Bay Street gala last month, he ran into Ungad Chadda, head of the listings business for TMX. Mr. Chadda has spoken on behalf of the TSX and TSXV about the ban on U.S. marijuana stocks.

“I hugged Ungad the other day,” Mr. Carleton says. “I did. I said, ‘Dude, I love you, man!'”

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Marijuana and CBD companies can’t advertise on Facebook and Google, so they’re getting creative – CNBC




David Bozin used to get cuts and scratches on his arms when it came time to bathe his golden retriever, Jax, who rebelled against the prospect of being dunked in water.

Then he learned that dogs, like humans, respond to the properties of cannabidiol, also known as CBD, a cannabis compound that helps the body relax without producing intoxicating effects. Bozin got to work on a line of CBD-infused dog products, including a dry shampoo and puppy treats, that he calls ZenPup.

But in trying to find customers for his new company, Bozin faces a unique challenge in today’s market. He doesn’t have access to Google, Facebook or Instagram (owned by Facebook), which have banned CBD and marijuana promotions. The two dominant online advertising platforms account for 57 percent of the U.S. digital ad market, according to eMarketer, and almost all emerging brands today count on Google’s search ads and Facebook’s precision targeting to efficiently get the word out.

“Facebook is not the end all, be all. Instagram is not the end all, be all,” Bozin told CNBC. “Does that mean you’re not going to see as much traffic at the get go? Sure. But at the end of the day the most important point is conversion,” or getting people to buy your products, he said.

Marijuana is legal for recreational use in 10 states and Washington, D.C., and available for medical purposes in many others parts of the country. CBD is a bit more complicated because the laws are murky.

Currently, 47 states allow some form of CBD sales. The 2018 Farm Bill, which Congress passed this week, allows states to decide if CBD products made from hemp can be sold in their jurisdiction. However, it doesn’t protect the products from the Food and Drug Administration, which can penalize companies for making inaccurate health claims.

“We avoid talking about anything too specific about what the product will do,” said Cary Smith, senior vice president at agency North 6th Agency. “If you come from an educational standpoint, you skew towards less restrictions, and have a bit of a larger organic reach.”

With so much uncertainty in the market, Google and Facebook have shied away from allowing marijuana and CBD advertising, taking a similar approach to how they handle tobacco and related paraphernalia. When it comes to alcohol, Google prohibits companies from targeting underage users or promoting unsafe behavior, while alcohol advertising on Facebook has to adhere to local laws.

In the absence of Google and Facebook, ZenPup has been forced to find alternative ways to launch its products. The co-founders, who worked in marketing and public relations, are spending time building relationships with media companies, high-end dispensaries and pet accessory retailers, along with other brands that might be open to partnering with a CBD provider. They’re finding popular social media influencers, who can support the products organically on their accounts.

ZenPup has also focused on clean, attractive packaging so that it’s appealing for “shelfies,” or staged product photos that people post on their feeds.

“Those younger consumers are looking for something different from an aesthetic standpoint, that also is top quality and at a good price point,” said Nicholas Weatherhead, ZenPup’s chief marketing officer and co-founder.

Other approaches are available to CBD companies, depending on the specific industry. Hillary Wirth, media director at the agency Noble People, said there are plenty of ways to get your brand in the right place.

To promote Viceland’s digital show “Weed Week,” in April Noble People bought local and national TV ads with DirecTV and Comcast, as well as on channels like IFC , USA and BBC America, and focused on pornography site Pornhub. There are also digital ad networks like like Traffic Roots that allow marijuana and CBD ads.

“So you can’t advertise on Facebook or Google – it’s not the end of the world,” said Wirth. “There are plenty of other media channels that will get you contextually next to relevant weed content.”

Noble People got creative in other ways. The firm organized a Washington, D.C., Viceland event to allow people to “Smoke Weed with Jeff Sessions.” But it wasn’t the former attorney general — just a man from Wisconsin with the same name.

Another approach is storytelling and finding a narrative that can generate PR.

For example, branding agency Abel told the story of Charlotte’s Web, a dietary supplement company named after Charlotte Figi, a young girl who suffered from epileptic seizures. With the help of CBD, Figi was able to to reduce her seizures and improve her health.

With “brands like Charlotte’s Web, the founders, who are very positive about the cannabis opportunities, have been able able to use PR as a marketing channel,” Abel CEO Julian Shiff said. “The word of mouth is so strong they are developing a tribe around their brand.”

Sponsoring sporting events and concerts are effective ways to find brand resonance. Smaller gatherings can work as well. Recess, which makes a CBD-infused seltzer, holds information events at places like hip-hop yoga chain Y7 Studio and samplings at Rise by WeWork. The company is based around a beverage, but it’s really trying to sell a lifestyle, said CEO and founder Ben Witte, who used to run mobile strategy for ad tech company AdRoll.

Witte said Recess has reached 50 times its projected sales this year, amounting to hundreds of thousands of dollars. The product is mostly sold online, but is also available in New York City stores.

“The most important thing is to have a clear mission and purpose,” Witte said. “The best way to communicate that mission and purpose is not through a Google or Facebook ad.”

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How Cannabis Could Become The Next Real Estate Disrupter – Forbes




Outdoor restaurant renderingDesign by M-Rad Inc.

For a while it looked like the best thing to bring to a neighborhood was a new Whole Foods grocery store. One study showed that homes in these neighborhoods would appreciate at a much faster rate than if they were near a Trader Joe’s (and both were better than a Starbucks). Another sign a neighborhood is on the cusp of revitalization is when the yoga studios start vying for space with the arthouses. Usually it is not long after that the expensive coffee shops and cupcake stores start showing up at street level. But now that so many states have passed laws favorable to the marijuana movement, the next big thing to bring a neighborhood back from the brink just might be the increasing number of organizations that work in the industry.

Downtown Los Angeles could be the first case study to see this phenomenon in action. Next month, a seven-story building in the heart of Los Angeles’ Jewelry District will open up, filled with tenants who all have cannabis somewhere in their job description. The 67,000-square-foot Green Street Building (the name is in reference to its anchor tenant, the Green St. Agency, which works solely with clients in the marijuana industry) will house everything from co-working spaces to an art gallery, dispensary, restaurant, law firm, luxury spa and lounge. Real estate investment company Bow West Capital purchased the property last year for a reported $14 million. Once open it will be the largest real estate space dedicated to cannabis in the U.S.

“The buildings in [the Jewelry District] have not received the proper upkeep, allowing for low sale prices of the buildings but also requiring full renovations,” said Matthew Rosenberg, CEO and Founder of M-Rad, Inc, the design team behind the project. “With the prosperity and funding in the cannabis industry on the rise, this is a perfect combination for this exciting new industry to make this area their home, with Green St. being the catalyst.”

While there are not many residential properties for sale within the Jewelry District itself, data from shows the few that are on the market have a median asking price of $525,000. Surrounding neighborhoods vary quite a bit with the neighborhood of Florence-Graham about five miles away to the southwest seeing median list prices of $440,000 compared to Greater Wilshire a few miles to the northeast seeing median list prices of $1.7 million.

Lounge renderingDesign by M-Rad Inc.

M-Rad took the 1913 building and completely renovated the interiors to create mixed-use spaces that cater both to the requirements of offices and restaurants as well as the unique needs of cannabis companies. They needed to create the right proportion of an open-plan design matched with a set of cloistered, secluded rooms for those who want privacy. Here are some images of the interior provided exclusively to Forbes.

For example one concept for behind the hidden door of the library bookshelf could be the Bud Bar, with a custom-designed table. (Interested? A Forbes contributor put together a Gift Guide which includes some of the most unique marijuana rolling papers, with some that are made from gold and others that look like money.)

Concept of tableDesign by M-Rad Inc.

The lounge, MOTA—which if, like me, you didn’t know is a Spanish slang term for marijuana (at least one dispensary out there has ascribed the words Medicine Of The Angels to the letters, but the term doesn’t have its origins as an acronym)—will complement the restaurant which may prepare cannabis-infused menu items and have a U-shaped bar designed specifically for potential cannabis tastings. It will also have fully transparent windows into the kitchen so guests can see the food being prepared. Sound-proof rooms are also available for private meetings and the Flower Room can be a designated smoking area. [Update: The design team followed up after this was published to clarify these features are just in concept stage and have not been confirmed or approved. No cannabis products will be sold on site based on current plans.]

MOTA Cafe renderingDesign by M-Rad, Inc.

“The companies who are part of the building are some of the biggest players in the industry,” says Rosenberg. “Which will bring in high-level clientele and investors who may feel encouraged to invest in the development of the area. The building itself will host a number of cannabis-related programs such as cultural activities and gastronomic experiences which will attract new clientele.” Some of the big names affiliated with the project are prolific investor Gary Vaynerchuck, who is a 50% stakeholder in Green Street Agency, and Vicente Sederberg LLC, dubbed The Marijuana Law Firm, is one of the tenants.

Typically neighborhood revitalization follows the pattern of stores opening up on a neglected city block one retail space at a time. But this model is different. By bringing a critical mass of companies to the neighborhood all at once, the sudden influx could accelerate the resurgence all the more quickly. Los Angeles’ Jewelry District could become a major player in a matter of months, not years.

Follow me on Twitter @amydobsonRE

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[Winner] November 1, 2018 Giveaway (Episode 2)

William Mottl



Brady Shepherd wins our 2nd Rate.Review.Win! Giveaway!

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