Pubdate: Sat, 17 Dec 2016
Source: Globe and Mail (Canada)
Copyright: 2016 The Globe and Mail Company
Author: Andrew Willis
Page: B2


When marijuana is being passed around and someone holds the spliff a
little too long, that's called bogarting the joint.

Right now, a handful of Canada's independent investment banks are
bogarting the legal and lucrative medical marijuana market, raising
more than $230-million to fund fledgling companies in the past two
years. These dealers in dope stocks have created firms expected to be
valued at $5-billion or more by the time lighting a joint is totally

The high times are not going to last for the independent dealers.
Canada's banks have been just saying no to doing business with weed
companies - for a variety of reasons. But the big banks - dominant
players in capital markets - plan to target the marijuana business as
soon as the federal government signs off on recreational pot with
rules it pledged this week to have in place by 2019.

"When marijuana is totally legal, the banks will rush in," predicts 
lawyer Barbara Miller at Fasken Martineau DuMoulin LLP. Ms. Miller and 
finance executives compare the emerging marijuana sector to the Canadian 
liquor business during U.S. Prohibition: Fortunes will be made, but 
there are considerable risks.

The comparison to Prohibition helps explain why the bank-owned dealers
steered clear of the sector. The banks fear the reputational risks
that would come with backing a pot producer who got ahead of the law.
It was always a stretch to believe medical marijuana was only going to
patients with a prescription.

Risk tolerances were higher at independent investment dealers that
have long focused on raising money for small companies with plenty of
promise, but unproven plans. GMP Securities, Dundee Securities Corp.,
Infor Financial Group Inc., Clarus Securities Inc. and Cormark
Securities Inc. led stock sales for start-up medical marijuana
companies such as Canopy Growth Corp., Apria, Mettrum Health Corp. and
OrganiGram Holdings Inc.

Collectively, these dealers earned approximately $13-million in fees
over the past two years by selling shares in pot producers. While
that's decent money for firms that have been hit hard by the slump in
financing for junior mining and energy plays, investment banks earned
$104-million in fees for underwriting just one massive equity sale
from utility TransCanada Corp.

Early investors got a tremendous buzz off the pot stocks, as all of
them soared after the federal Liberals were elected. Investment banks
can now look forward to another round of financing and M&A activity,
as medical marijuana producers gear up to produce enough weed to
satisfy the recreational market. However, some financiers caution the
bull market for Canadian pot stocks cannot last. There are concerns
about putting relatively risky stocks into the portfolios of retail
clients. An executive at one bank-owned firm said: "These are concept
stocks - unproven businesses with unproven management - and we've seen
that movie before with everything from fuel cells to IPOs from
China-based companies." There has already been a shakeout in stores
that sell pot in markets such as Colorado, where recreational weed was
legalized last year. The same sort of rationalization is expected to
happen among Canadian producers.

In the not-too-distant future, the marijuana sector is likely to look
like alcohol and tobacco: a regulated industry dominated by large
companies with economies of scale in production and sophisticated
marketing and distribution. Only Seagram made the leap from local
whisky distiller to global player following the repeal of Prohibition.
Independent dealers are going to keep financing pot producers, and the
bank-owned firms will jump in just as soon as recreational weed is
legal on the prospect of backing a leader in an emerging consumer
product sector. But not every small medical marijuana player will make
it into the big leagues.
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