While the traditional initial public offerings in the cannabis space remain rare in the U.S. and Canada, The Green Organic Dutchman's TGOD listing this month raised more than $100 million as the largest yet in North America from a cannabis production or retailing company.
The Mississauga, Ontario-based specialist in cannabis research and cultivation, priced its IPO at $2.21 a share on May 2 and has risen mostly to $2.26 a share as of May 17.
The day after the IPO, Canada's Prime Minister Justin Trudeau said his government was moving to make recreational use cannabis legal by the summer. Following the passage of the proposed Cannabis Act by the House of Commons last November, the legislation awaits Senate's approval.
With cannabis still illegal on the federal level in the U.S., Canada is poised to lead the sector for now because its legalization efforts are in a much more advanced stage.
"The capital market in Canada for cannabis investing has become one of the most vibrant in the world," said Scott Greiper, president, Viridian Capital Advisors, a New York-based advisory and research firm in the cannabis space.
The potential size of the adult recreational market in Canada alone is estimated to be between $3.8 billion and $6.7 billion, according to estimates by Deloitte. Production of cannabis would have to be about 600,000 kilograms per year to meet expected demand in Canada alone. That's a big increase from the estimated 22,771 kilograms sold to medical patients in the 12 months ended September 30, according to figures from Health Canada. Cannabis research firm ArcView estimates that legal cannabis sales in North America will grow to $47.3 billion in 2027 from about $9.2 billion in 2017.
These macro forecasts have stoked interest in Canadian cannabis companies.
Still, hurdles remain in Canada for passage. While Ontario passed legislation to regulate and sell cannabis, other provinces have yet to do so. And any legislative process typically draws delays. At last check, some senators have called for a delay on the Canada's cannabis legislation to work more closely with the country's Indigenous people.
In terms of IPOs and stock listings, the Canadian market remains more receptive to stocks from companies that produce or sell cannabis. The Nasdaq and NYSE are still cautious about listing companies with any cannabis-derived revenue from the domestic market.
The Green Organic Dutchman stands out among a very small class of stocks, since US-based companies that either grow or sell cannabis have yet to debut a traditional IPO on the Nasdaq or the NYSE.
In Canada, The Green Organic Dutchman (TSX: TGOD) ranks as the largest of three IPOs. Medreleaf Corp raised $62.6 million in 2017 and Cannimed Therapeutics raised $53 million in 2016.
The company is a standout for another reason: Green Organic Dutchman has raised more cash from pre-IPO investors than it did when it went public. Typically dollar proceeds in IPOs are larger than pre-IPO funding rounds simply because they are sold to a much wider audience of investors in public equity markets. But in the case of The Green Organic Dutchman, the company mined a large group of individual investors eager to take part in private placements and buy stakes in the company. Companies typically do not cast such a wide net for investors prior to going public, but in the case of The Green Organic Dutchman, it paid off.
The company began with $7.8 million financing at 40 cents per unit with 1,300 accredited retail investors, followed by a $16.8 million round.
Last year, The Green Organic Dutchman issued an Offering Memorandum that allowed non-accredited Canadians to invest in private placements. After setting a goal of $15.5 million in September at $1.28 per unit, the company ended up raising another $44.2 million from an additional 2,000 shareholders. All told, the company raised $73.7 million from 5,000 shareholders.
With its units now trading at nearly $3.1 unit, the pre-IPO investors are all in the black thus far.
Danny Brody, vice president of investor relations for The Green Organic Dutchman, told Real Money the company chose to do the extra retail investor legwork to allow potential end users of the product to be part of the company from inception.
"This is a new style of thinking and we did not deviate, even though it would have been much easier to simply take one or two large checks from institutional investors," Brody said in an email. "The greatest part of our shareholder base is that each person is a potential patient, customer and brand ambassador."
In addition to money from individual investors, acquisitive pot company Aurora Cannabis (TSX: ACB) put in $42.7 million prior to the IPO as a strategic investor, plus an additional $17.8 million in the IPO for a total 17.5% stake in The Green Organic Dutchman. In return, Aurora Cannabis secured an offtake agreement to purchase up to 20% of the company's organic cannabis production per year.
Including the IPO, Aurora Capital investments, and money from the retail investors, the company raised $224.9 million. A big chunk of these proceeds will go toward construction of an 820,000 square foot laboratory and greenhouse in Quebec. Brody said the facility will rank as the largest hybrid organic cannabis production facility on the planet.
TOGD has a market cap of about $561 million. That's not bad for a company with no revenue and an operating loss of $11.9 million last year.
Such valuations are not unusual nowadays, however, as investors pile into cannabis.
GW Pharma (GWPH) , the Nasdaq-listed pharmaceutical company with a cannabis-based epilepsy medicine called Epidiolex readying its US commercial launch, has a market capitalization of $3.7 billion, against a loss of $175 million and revenue of $11 million last year.
Canadian cannabis stocks are just as frothy.
"The market in Canada is beyond good or even strong -- I'd categorize it as fluffy and overheated," Viridian Capital's Greiper said. "Due to the fact that it's a federally legal cannabis market, the capital market in Canada for cannabis investing has become one of the most vibrant in the world."
Overall, the pace has become "frenetic" as Canada moves toward a legal use market, he said.
Greiper declined to comment on Green Organic Dutchman specifically, but said larger capital-raisings outside of the IPO arena such as equity offerings have already taken place in the cannabis space and more will likely come. For example, Canopy Growth Corp raised $190 million in an equity offering in November.
The cannabis space has seen 223 capital raisings including IPOs, M&A, private placements and other transactions that took in $2.8 billion globally YTD 2018 as of May 4, according to Veridian's Cannabis Deal Tracker. That's up sharply from 150 deals that drew in $954 million in the year-ago period.
Money continues to pour into the space, with Canadian companies playing a prominent role. This all points to transactions that may soon dwarf The Green Organic Dutchman. Stay tuned.
Based on current interest in the space, it's likely The Green Organic Dutchman may not keep its IPO size record for long.
"We anticipate increased interest in the sector as we close in on recreational legalization in Canada," Brody said. "That being said, we are proud to be the largest cannabis IPO on the TSX to date."
Meanwhile, U.S. has been lagging behind Canada in terms of IPOs in the cannabis space. But a couple of new listings have been working their way into domestic markets, although they are not traditional IPOs.
On the Nasdaq, Cronos Group (TSX, NASDAQ: (CRON) ), a specialist in the production and sale of cannabis in federally legal jurisdictions such as Canada, listed its shares earlier this year after trading on the Toronto Stock Exchange. On the NYSE, Canada's Canopy Growth (TSX: WEED) on May 14 said it would trade on the Big Board by the end of May under the symbol CGC. The company has already broken ground as the first regulated cannabis producer to list its shares in North America with its 2014 debut on the TSX.