Since 2018, millions of dollars have been raised in cannabis-focused special buy acquisition companies, or “PSPCs.” A PSPC is basically a “blank check” company with no operating history or assets. A SPAC is formed for the purpose of raising capital under an initial public offering (IPO) and using this capital to acquire an existing business and have that business go public as part of this referred to as a “de-SPAC” merger operation. IPO funds are held in trust for a period of time following the IPO, typically up to 24 months, until they are used to acquire and operate an existing business. If there is no de-SPAC transaction completed within the specified time frame, then the SPAC is liquidated.
The viability of a PSPC and the ultimate success of the business following a de-PSPC transaction depend in large part on the reputation of the PSPC sponsor. Typically, the sponsor (s) are an experienced team of individuals with significant industry experience and knowledge that will ultimately be relied on once a target business is acquired. For example, Joe Caltabiano, former CEO of Cresco Labs, and Peter Kadensand, former CEO of Green Thumb Industries, are involved in Choice Consolidation Corp., a PSPC that raised $ 150 million when it went public in February 2021. In other cases, the sponsor is backed by a celebrity who is looking to get involved simply as a source of capital. Before there is a de-SPAC acquisition, the role of the sponsor is to provide the necessary funding to form the PSPC and to pay the expenses arising from the IPO of the PSPC.
For an existing cannabis company who are potential targets for a de-PSPC transaction, an acquisition by a PSPC offers several advantages over a traditional IPO transaction, including (1) cost savings over the traditional IPO process, (2) more leverage to negotiate its purchase price versus a pricing by underwriters based on market demands during a traditional IPO, and (3 ) Typically a company has little recourse if the traditional IPO fails and is not started, whereas in a de-PSPC transaction, a company can negotiate a break-up fee to reimburse the target for expenses related to the IPO. acquisition if the transaction is not completed. As an example, WeedMaps and Clever Leaves were acquired and went public via a de-SPAC transaction in 2020. It is important to note that to date, many cannabis-focused PSPCs have been trained as Canadian companies where cannabis is legalized. . To the extent that cannabis-related PSPCs register in the United States, documents filed with the SEC generally indicate that the investment criteria for any target entity will be limited to companies operating in accordance with all applicable laws and regulations in the United States. the jurisdictions in which they are located and do not. otherwise operate in violation of United States federal laws, including the United States Controlled Substances Act. Until there was a movement in federal policy to legalize or defer cannabis as a Schedule 1 narcotic, PSPCs had to withdraw their securities from any U.S. stock exchange when acquiring a a company dealing with plants (such as a grower, processor, or dispensary) and relist those titles on a Canadian stock exchange.
As businesses continue to consider the viability of raising capital through PSPC and entering into de-PSPC transactions, it will be important to follow the SEC guidelines on PSPC registrations and disclosures. The SEC recently issued guidelines regarding the treatment of warrants issued in connection with a PSPC IPO. These warrants can generally be exercised subsequently for common shares at a predetermined price and used to induce investors to participate early. SEC guidelines treat them as liabilities of PSPC, which could harm the balance sheet and ultimately affect PSPC’s ability to complete an acquisition. Additionally, the SEC cautioned against closer scrutiny in examining forward-looking projections and accounting disclosures for blank check offerings that could have a chilling effect on the PSPC market in the future.
Please stay tuned to our blog for updates on the cannabis industry’s PSPC transactions and other related SEC developments.