Last week, the Department of Health and Human Services (HHS) recommended rescheduling cannabis from schedule I to III under the Controlled Substances Act (CSA). My colleagues already covered various implications of the proposed cannabis rescheduling (see here and here). Today, I want to talk about one of the most important consequences of the announcement other than 280E reform: the effect on cannabis investments.
What’s been happening with cannabis investments?
Some stage-setting is in order. In the earlier days of cannabis legalization, cannabis startups typically did fundraising via equity investments. Everyone and their grandma wanted to own a piece of a cannabis company, and many of these people were willing to pay top dollar for a piece of the pie. I don’t have an exact statistic, but early on it seemed like debt finance was pretty uncommon, whereas equity finance was the norm.
At the time, cannabis investors and businesses alike thought that if they could pay a lot up front, get their feet in the door, and expand market share, they’d succeed. A lot of this rested on the false assumption that federal legality was around the corner – and that federal legalization would end 280E, allow interstate commerce, and so
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