Alternative Harvest Archives - Green Market Report

Debra BorchardtDebra BorchardtOctober 22, 2020
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6min7450

As the Presidential election nears, it seems the topic of cannabis legalization is driving investor interest in the industry. Cannabis ETF issuer ETFMG,  who manages ETFMG Alternative Harvest ETF (NYSE Arca: MJ), reported its 1,000th creation unit sold on October 12, 2020. The company said that the subject of legalization of cannabis in several states has led to increased investor demand evidenced by the increased daily trading volume. Shortly after the Vice-Presidential debate, MJ saw trading volume increase three times its normal activity, 750,000 to nearly 2.4 million. MJ currently has 50 million shares outstanding. Since the beginning of Q4 2020, the Fund is up 10.66%.

The Democrat party platform of Vice President Joe Biden & Senator Kamala Harris, officially says they would seek to decriminalize marijuana use and reschedule it (from DEA Schedule I) through executive action on the federal level. They support the legalization of medical marijuana nationwide and believe states should be able to make their own decisions about recreational use. Their platform believes the Justice Department should not launch federal prosecutions of conduct that is legal at the state level, as well as that all past criminal convictions for cannabis use should be automatically expunged (this is a combination of previously proposed STATES ACT and MORE ACT).

On the Republican side, if President Trump were reelected, some say it would not be seen as negative for the cannabis industry.  In the past four years under the Trump Administration, legal sales of cannabis in the U.S. have expanded more than at any other time in history.  In addition, his administration has not interfered with state law cannabis legalization, which has increased tremendously. However, President Trump did ask some swing states to remove any cannabis legislation from the ballots because that would draw more Democrats to vote. Plus, despite many cannabis supporters who believe Trump is friendly to the industry, the Uniform Crime Report from the FBI reported that more people were arrested for cannabis in 2019 than for all violent crimes put together. The hard data from the FBI’s report clearly showed that police arrested 545,602 people for cannabis-related crimes in 2019. “That arrest rate is 9% higher than the 495,871 people arrested for violent crimes the same year.”

Looking back in history, Democratic President Franklin D. Roosevelt’s 1932 presidential campaign included the repeal of Prohibition. Following his win, Congress proposed the 21st Amendment to end Prohibition.

“Regardless of who wins the White House, U.S. cannabis expansion is expected to continue past November,” said Dan Ahrens, chief operating officer, and portfolio manager at AdvisorShares. Ahrens serves as the portfolio manager of the AdvisorShares Pure Cannabis ETF (Ticker: YOLO), AdvisorShares Pure US Cannabis ETF (Ticker: MSOS) and the AdvisorShares Vice ETF (Ticker: ACT). He added that Arizona and New Jersey each have ballot proposals for voters to decide on legalizing recreational cannabis use. Both states currently have successful medical marijuana programs too.  “Other states including South Dakota, Montana and Mississippi also have recreational and/or medical marijuana proposals up for vote.  Pending New Jersey’s ballot vote, it is widely thought that Pennsylvania and New York could soon approve recreational marijuana use by legislative action, rather than ballot measure, which was how Illinois approved recreational use last year.  At the very least, given the populations of Arizona and New Jersey, recreational cannabis legalization would be a huge victory for U.S. cannabis companies.”


Debra BorchardtDebra BorchardtMarch 5, 2018
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9min37480

There is strong demand for ETF’s (Exchange Traded Funds) with cannabis stocks, but the barriers in the marketplace have made filling that demand difficult. Investors would like to put their money in an ETF versus indivdual stocks because they can diversify their holdings, but also because they can rely on a portfolio manager to do the research.

Since there can be so many sketchy marijuana stocks that are publicly traded, investors prefer someone else do the homework to make sure they are investing in a quality company. Normally Wall Street is thrilled to create a financial instrument where there is demand. Hey they’ll create financial instruments even where there isn’t demand and convince investors they want it. Yet the cannabis ETF is a tricky challenge to solve.

“There are two problems I see with the public trading of anything cannabis,” said David Friedman, CEO of Panther Capital. “First is the regulatory fear around the custody and trading of the underlying securities. There are regulatory risks as well as reputational ones.” Friedman added, “The second is the liquidity of the underlying assets and the ability to trade them.”

Custodial Banks

So, let’s unpack that first problem where we dive into the back office. The assets of an ETF in the U.S. have to be custodied in a U.S. bank. It can’t be offshore or in Canada. The custodial bank actually holds the securities of the ETF. This is why the main cannabis ETF’s are in Canada with the Horizons company. The Marijuana Life Sciences ETF trading under the ticker HMMJ and the Emerging Marijuana Growers Index (HMJR).

Recently, the Alternative Harvest ETF (MJ) launched with great fanfare as the only U.S. cannabis ETF. Then just as quickly, its custodian U.S.Bancorp changed its mind and declined to hold the assets. The fund used to invest in Latin American Real Estate, but with the money pouring into Horizons fund the ETF did a pivot and set itself up for cannabis.

The custodial bank has the right to terminate the contract and must give the company notice, which is usually 90 days. During this time, the ETF company can go look for another bank, except in this case that is easier said than done. Since marijuana is still federally illegal and the Cole Memorandum was recinded by the Justice Department, banks are extremely reluctant to do business with any cannabis company, even if it doesn’t “touch the plant.” If Alternative Harvest can’t replace the bank and find another custodian, it would more than likely be forced to close the fund and liquidate the holdings it has already amassed. The fear is that a large scale dumping of cannabis stocks would wreak havoc on the cannabis companies as their stock prices would plunge. For now though, the MJ is up and running.

This is why the Horizons ETF has been so successful and now has C$720 million in assets under management. Banks in Canada haven’t had the same issue as the U.S. banks since that country has legalized medicinal marijuana. Mark Noble, head of Sales Strategy at Horizons said that since Canada already had the capital infrastructure set up it wasn’t difficult to establish the ETF. “Our only difficulty was getting a sign off from the brokers and the auditors,” he said. “After numerous conversations, it was able to be done. All the stocks that are held are running legal businesses through Canadian standards.”

Liquidity

The stocks in the Horizon ETF’s are also trading on major exchanges in Canada, which brings us to the second problem, liquidity. As millions pour into these ETF’s, the funds have to actually go out and purchase those underlying stocks. There has to be enough to go around and when the ETF wants to sell, there have to be enough buyers in the market.

Most of the cannabis stocks in the U.S. are traded in the OTC Marketplace. There are a handful of biotech stocks traded on the NASDAQ Exchange (NDAQ) that have a cannabis component. High Times Media also called Origo Acquisition Group (OACQ) is trying to remain listed on NASDAQ, but the exchange keeps trying to delist them and Canadian medical marijuana producer Cronos Group (CRON) recently uplisted from the International Exchange to the Global Exchange. The New York Stock Exchange (NYA)  is also hesitant to list cannabis stocks, but a few have managed to squeeze their way in the door. However, the majority of pure cannabis stocks are at the OTC.

“Not every structure allows you to automate trading of the OTC stocks in baskets,” said Friedman. “Most of the OTC stocks trade too thinly to build any assets under management. It won’t be liquid if it grows too large.” Of course that is the name of the game, these ETF’s need to be big to be profitable.

Horizons saw the interest in the smaller names and created its junior ETF that recently launched has quickly grown to C$50 million in AUM. “The newer ETF is targeting cultivators one hundred percent,” said Noble. “The growers for a lack of a better term with a market cap of C$50-500 million. It’s smaller companies with the most amount of upside growth potential.”

Alternatives For Alternatives

One way around these cannabis ETF barriers is to create a less than pure cannabis ETF. Dan Ahrens, Portfolio Manager of the Advisor Shares Vice ETF (ACT) includes alcohol and tobacco stocks along with acceptable cannabis stocks. “We’re comfortable with the way we’ve invested,” said Ahrens. “We readily admit we’re not invested in pure marijuana growers, yet, but we’ll be ready for the future that’s coming.”

His fund invests in only exchanged-traded cannabis stocks. If cannabis ever gets legalized, the fund will have already established a foothold in the cannabis ETF arena. Having said that, Ahrens noted that alcohol and tobacco companies have already begun making overtures towards cannabis companies, so it isn’t inconceivable that these industries would end up overlapping. Also, by sticking with exchange-traded stocks, the Vice ETF avoids the custodial bank issues. He expressed concern about the Alternative Harvest fund, “If that fund is forced to close down and money is leaving those stocks. Their prices could go tumbling. That’s people taking out $300 million.”

That is a big problem indeed. Industry insiders are closely watching the situation at Alternative Harvest and hoping the ETF finds another custodial bank. In the meantime, it looks like money will continue to flow across the border to Canada and Horizons will be happy to fill those investors desire for a cannabis ETF.



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