Pubdate: Mon, 12 Jun 2017
Source: National Post (Canada)
Copyright: 2017 Canwest Publishing Inc.
Author: Sunny Freeman
Pages: FP1 and FP7


Private Placement Rejigged Over Conflict of Interest

Cannabis Wheaton Income Corp.'s chief executive and marijuana industry
pioneer Chuck Rifici admits the intricacies of large private placement
deals are not his forte.

But he trusts the Vancouver-based company's team of legal and banking
experts would have flagged any conflict of interest in the
controversial $80-million private placement cancelled last Monday amid
questions about the personal stakes taken in the deal by some of those
very same advisers.

"As an entrepreneur, I rely on the professionals around me and this
issue was not raised as an issue going into our financing as something
that would preclude our deal," he said in an interview. "What was
disclosed was vetted by lawyers for both underwriters and Cannabis
Wheaton. If (conflict of interest) was the case, I would suspect that
our disclosure would have been different."

Rifici moved swiftly to contain the damage fuelled by speculation
about the deal's ethics that sent the stock of the world's first
marijuana streaming company plunging 70 per cent from its peak of
$3.35 per share reached ahead of its public listing in May.

Though he "categorically" denied that there was any wrongdoing in the
way the company went about raising its money, Rifici spent a busy
weekend negotiating with investment bankers to improve the optics of
the deal, which was finally scrapped and a new $50-million deal put in
its place.

There is perhaps no one more familiar with how to get up after being
knocked down in the nascent marijuana space than Rifici.

Chief executive officer is no stranger to controversy

The man who has been called "the Godfather of Canadian weed" is used
to controversy and even boasts it has helped his career.

As the former chief financial officer of the federal Liberal party,
his name has been thrown into political spats about cannabis sector
cronyism - though he points out it was a Conservative government that
gave another company he co-founded, Tweed, one of the first medical
marijuana licences back in 2013.

And as chief executive of that company, now called Canopy Growth
Corp., Rifici was instrumental in planting the seeds of growth at the
world's first cannabis unicorn - a $1-billion valuation. That is, of
course, before he was ousted by the board in 2014 shortly after it
became North America's first publicly listed marijuana company.

He and fellow co-founder Bruce Linton made the decision to list
publicly not because they expected to attract huge amounts of capital
the way companies do now, but because the resulting attention in an
advertisingrestricted market was key to distinguishing the company
with early customers.

But Rifici is also no stranger to taking legal action when the
controversy no longer benefits him. He's involved in a libel suit
against former MP Rona Ambrose for retweeting a disparaging remark and
also a wrongful dismissal suit against Canopy, whose board ousted him
as chief executive in 2014.

In Canopy's early days, a partnership was struck in which Rifici would
serve as chief executive and take a 70 per cent stake, while Linton,
who was busy with other ventures, would act as chairman for 30 per

"That's probably been something he regrets given how healthy the
industry has become," Rifici said.

The company's early growth - which included growing from zero to 50
employees in eight months - also led to a cash burn that put the
company, which was not yet earning revenue, at a financial crossroads.
It became increasingly clear that difficult decisions needed to be
made about which cofounder's vision the company should follow, Rifici

Linton's point of view on what happened is slightly more succinct, if
less diplomatic: "He was fired by the unanimous consent of the board."

Nevertheless, Linton, who is now Canopy's chief executive, is rooting
for Cannabis Wheaton to overcome its current controversy, he said,
because it has reflected poorly on the entire nascent sector.

Rifici insists he isn't bitter despite his suit against the Canopy
directors, including Linton. He considers getting fired as a founder a
"rite of passage." It certainly didn't stop him. Determined to be a
part of a sector he helped launch, and still with a 19 per cent share
of a company skyrocketing toward a billiondollar valuation, he came up
with a new venture to put in place once his one-year noncompete clause
was up: a private holding company that would invest in lucrative
aspects of the business that do not involve a federal government licence.

That company, founded in 2015, is called Nesta Holding Co. and it
casts a wide net that includes everything from proprietary products to
snapping up Canadian brand rights.

Cannabis Wheaton, the highest-profile Nesta company, had a business
model Rifici felt was too good to pass up - providing seed money and
guidance to marijuana producers in exchange for a slice of future
production - despite his reluctance to be involved with licensed producers.

The royalty company has already invested in 15 companies in six
provinces, including some of Canada's existing 40 licensed producers
as well as new applicants. Rifici said those deals are completely
unaffected by the recent controversy surrounding Cannabis Wheaton's
recent financing.

After Cannabis Wheaton's public debut in May, the company embarked on
a road show to sell potential investors on its unique business model,
but it was soon overshadowed by questions about how it is financed.

Company insiders, who hold about 55 per cent of the company' stock,
purchased shares at fractions of a penny earlier this year before it
went public in a reverse takeover of TSX venture-listed shell
Knightwood Capital. The controversy eventually boiled over and an
$80-million financing deal was scuppered when Eight Capital and
Knightwood Capital, who lead the deal and own eight per cent of the
company, "mutually agreed" to terminate it on June 5.

The next day, Cannabis Wheaton said it was launching a $50-million
financing with a new investment bank, Mackie Research Capital Corp.
And it announced the following day that its lawyer Hugo Alves, who
owns a "significant" personal stake in the company, was leaving his
firm, Bennett Jones, to become the company's president.

Those early backers are making a hefty return even under the new deal,
which prices the stock at $1, down from $1.15 in the cancelled agreement.

"Any false information doesn't help when you're in the middle of a
transaction," Rifici said. "The message was that these were investors
and bankers second, these are people that made an investment into a
company before there was really a business there."

Alves said in hindsight perhaps having his firm advise the company on
the deal was not the right move, not because of a conflict of
interest, but from a "noise" perspective.

He said he took a stake in Cannabis Wheaton in March, noting that it's
not uncommon for lawyers to take an equity position in clients as
payment, and decided to join Cannabis Wheaton after first clearing it
with his firm.

"It's unfortunate that there's noise around the deal, but that's not
something I'm going to focus on and it's not something that in any way
detracts from the fact that in my view this is a phenomenal business
idea," he said.

Rifici believes the trouble the company has encountered since it went
public in May is already in the rearview mirror and will subside
further as more investors understand the many doors opened by its model.

"We've created a lot of value quickly and that's going to bring a lot
of volatility with it," he said. "The cannabis space moves very fast
and I've been through it once before and I think that's helped prepare
me for the ride ahead."
- ---
MAP posted-by: Matt