Investing in Cannabis

Today’s post is about a recent seminar I attended on the topic of Investing in Cannabis.

Investing in Cannabis

A few weeks ago I attended an event focused on Investing in Cannabis, or to give it its full title: Investing in the European Cannabis and CBD Market.

• It was arranged by Master Investor and held at the offices of city lawyer DAC Beachcroft.

The event was over-subscribed and had twice been relocated to larger venues, but on the (very hot) day, it was under-attended.

• This was not a terrible thing from my personal point of view, as it meant that the seminar was also over-catered, and to a pretty high standard.

The format of the event was pretty simple: two panels of four, each chaired by Master Investor regular Victor Hill.

Panel number one also included:

• Jonathan Deverill, a cannabis lawyer (partner) from DAC Beachcroft
• Anna Morera Leralta (known as “Dr Anna”) – a medical doctor with a line of CBD-infused “nutraceuticals”
• Philip Shum, a business development executive for the CSE (Canadian Securities Exchange – a junior market similar to AIM)

Panel number two had:

• Ed McDermott, another Master Investor regular who runs EMMAc Life Sciences and who I think is also involved with Master Investor Big Cheese Jim Mellon’s company Fast Forward Innovations
• Leon Giese, CEO of South African health supplement firm Biodelta
• Melissa Sturgess, an Australian executive previously with African mining firms, but who now runs Ananda Developments, a firm which invests in the Cannabis sector

In the event, the panels were not as interesting as they looked.

• It turned out to be more of a showcase event, which each member pitching their own wares, rather than a detailed discussion of the cannabis market in Europe.
• There was also little time for Q&A with the audience.
• There was quite a focus on Africa, and the whol thing reminded me of one of those natural resources (mining and energy) evenings that I no longer attend.

As a result, I didn’t take many notes.

• Luckily, there was also a pamphlet called “The Edge”, with the same subtitle as the event.

This contained essays by four of the panellists, and one person who wasn’t at the event.

• So let’s take a quick run through those.

Legal challenges

First up is Jonathan Deverill with a piece on the challenges of investing in these markets.

It is difficult to buy cannabis investments here in the UK, so the typical approach would be to buy things listed in the US or Canada, where cannabis is (partially) legal.

• The fly in the ointment is the Proceed of Crime Act 2002

Any dividends from shares (or interest from bonds) could be seen as the “proceeds of crime”.

• Receiving such proceeds is itself a criminal offence in the UK.

There are two tests:

1. Is the underlying activity legal in the jurisdiction where it is taking place, and
2. Would the same activity carried out in the UK be punishable by more than 12 months in prison.

The first of these is not always too much of the problem, but the second one is:

• The Misuse of Drugs Act 1971 allows for maximum sentences of between five and fourteen years.

The first test does cause problems in the US, where some states allow recreational cannabis use, but federal law does not.

• Hemp-based activities are exempt under the Farm Bill.

But in Canada, both medical and recreational use is permitted at the federal level, so the first test is passed.

But in any case, recreational activity is not legal in the UK, so what we are looking for is:

• medical cannabis / CBD products ONLY.

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There are now more than 1,000 businesses in the UK which plan to offer CBD oil products.

To get around the Misuse of Drugs act, these products will need to be made from seeds with a THC level of less than 0.2%.

• And a unit of the product (eg. a bottle) must not contain more than 1mg of THC in total.

If this test is passed, the products can be marketed as “wellbeing” products, or food supplements.

• The European food safety body classifies such products as “novel foods”.

This means anything that had not been eaten by humans in the EU before May 1997.

• Note that the regime isn’t aimed specifically at CBD products.

Novel foods need to be safe, properly labelled and no worse than the food they are intended to replace.

• In January 2019 the EU added CBD products to the novel foods list and the UK’s FSA has confirmed that it accepts this inclusion.

There are no specific rules from the FSA on how CBD products should be introduced to the market, but there has been no call for existing products to be withdrawn.

A history of investing in cannabis

The second article is from Ed McDermott, billed in the booklet as a non-exec director of Fast Forward Innovations.

THC (psychoactive) and CBD (therapeutic?) are the main active compounds in cannabis.

• CBD can be produced from hemp (used widely in textiles) with low (0.2% to 0.3%) levels of THC.

There are four cannabis markets:

1. Pharmaceuticals derived from cannabis
2. Medical cannabis (doctor prescribed plant-based treatment containing THC)
3. Wellness (CBD oil, hemp tea)
4. Recreational

Number four is illegal for UK investors, as discussed above.

Twenty-four European countries now have a legal policy for medical cannabis, though some of the big names (like France and Spain) are still missing.

Ed says:

Europe is still thin on the ground with publicly quoted medical cannabis companies. There are some micro-cap offerings .. but [they] mostly lack the capital and operational capabilities to scale up quickly.

Ed also stressed that Fast Forward Innovations (FFWD) is the only AIM-listed company that is invested in medical cannabis.

• He expects it to be joined by others during 2020.

Terpenes

Here comes the science bit, or at least a science bit.

• Article number three was from Melissa Sturgess of Ananda.

She wrote about terpenes, which are the chemicals responsible for the taste and smell of cannabis.

• So not the active ingredients, which are THC and CBD, as discussed above.

I’m not too interested in this, but here is a summary table in case you are:

Smoking

Article number four was by Jeff Robinson of M J MedTech, and was about how CBD oil can help you stop smoking.

• He is an associate of “Dr Anna” from the panels.

Jeff himself wasn’t on the panels, so here is his bio:

This could be a big opportunity if CBD oil really helps, but it’s a bit too blue-sky for me at the moment.

There’s also a sense that this is a problem that has already been solved.

• People who want to quit use nicotine patches and people who want to avoid the health impacts of tobacco switch to vaping.

Even if CBD oil does help, there’s a good chance it will become just another vaping solution, generating little cash flow compared to, say, recreational cannabis.

Africa

The fifth and final article was from Leon Giese of Biodelta, who was on the panels.

• He wondered whether Africa could become the new global leader in cannabis production.

Africa has a lot of uncultivated arable land, plus clean water, heat, sunlight and a cheap workforce.

Leon’s company Biodelta began as a spirulina producer in a wine region of South Africa.

• Spirulina is an algae supplement which I have both taken myself and also fed to my ornamental fish.

So it’s easy to see why Leon would like to switch to cannabis production.

• His company is partnered with Wuhan, who employ Dr Anna.

But the investment opportunity was not so clear to me.

Conclusions

Apart from the catering, it was a disappointing evening:

• There are few listed opportunities to invest in today.
• And UK investors are locked out of the most promising – and potentially the most lucrative – market, that of recreational cannabis.

Until next time.