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2018 CANNABIS
INVESTMENT REPORT
GLOBAL CANNABIS CONSUMERS
Contents
Foreword
I Executive Summary
II Cannabis Science 101
III Cannabis Industry Segmentation
IV U.S. Legal Landscape
V Global Cannabis Regulation
VI U.S. and International Cannabis Market Estimates
VII Capital Markets for Cannabis Companies
VIII Top 100 Private Cannabis Companies 2018
IX Cannabis Industry Risk Factors
X Glossary of Terms
Disclosures, Disclaimers, Sources and Use
Ackrell Capital Cannabis Team
Inside Back Cover: The Green Field 2018
About Ackrell Capital
Founded in 2003, Ackrell Capital is a leading
independent investment bank focused on
emerging growth companies. Ackrell Capital’s
expertise includes:
Private Equity
Mergers and Acquisitions
Private Placements
Corporate Development
Cannabis, Consumer, Technology, Digital
and Other Emerging Growth Industries
The United Nations recently estimated that more than 180 million people
globally between the ages of 15 and 64, or more than 4% of this age group,
consume cannabis annually.
At least 20 countries have implemented medical cannabis laws, including
Australia, Canada, Colombia and Germany; countries without such laws
include China, Japan, Russia and the United States.
Although federally illegal in the United States, 46 states and the District of
Columbia have passed at least one law that permits the manufacture,
distribution, dispensing or possession of cannabis. While most of these laws
are medical cannabis laws, 8 states have enacted recreational laws.
Across all medical cannabis laws in the United States, cannabis is legally
recognized as a form of therapy or medicine for more than 50 qualifying
conditions, including Alzheimer’s disease, anorexia, arthritis, cancer, chronic
pain, epilepsy and post-traumatic stress disorder.
California is poised to become the largest recreational cannabis market
in the world with the implementation of its recreational law in January
2018—a watershed moment for the industry.
The illegal cannabis market in the United States is estimated to be more
than $45 billion annually. (We estimate that the 2017 U.S. state-legal
cannabis market was $8.0 billion.) If federal legalization occurs, we believe
that the legal market could be more than two times the size of the current
illegal market, ultimately exceeding $100 billion annually.
The cannabis industry provides a broad range of investment opportunities
in both the public and private markets for sophisticated investors who are
willing to take significant risks.
Ackrell Capital is based in San Francisco, CA.
Ackrell Capital is a member of
FINRA and SIPC.
This report has been compiled for informational purposes only, and is not a research report. This report is not and should not
be construed as an offer to sell securities or a solicitation of an offer to buy securities. The information in this report is of a
general nature, and this report should not be construed, relied upon or acted upon as investment, legal, medical, health or
tax advice. Ackrell Capital has made investments in and conducted investment banking services for companies mentioned
in this report, and may do so in the future. Readers should be aware that Ackrell Capital may have a conflict of interest that
could affect the objectivity of this report. Ackrell Capital, LLC is a member of FINRA and SIPC. © 2017 Ackrell Capital, LLC.
REPORT HIGHLIGHTS
Select Countries with Legalized Cannabis Access (January 2018)
Recreational Law*
Medical Law
State/Province Conflict
with Federal Law
*Canada currently has a medical law. Assumes Canada enacts a proposed recreational law in mid-2018.
U.S. State Cannabis Laws (January 2018)
Recreational Law
Medical Law
CBD/Limited Law
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
Progression of U.S. State Cannabis Laws
1996
2004
2008
2012
2014
TODAY
Recreational Law Medical Law CBD/Limited Law
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
U.S. Legalized Cannabis Market
$140,000
Path to Federal Legalization
70 M
($ millions)
$120,000
$100,000
$80,000
$60,000
$40,000
FDA Approves Cannabis-Derived Pharmaceuticals
More States Adopt Medical Cannabis Laws
More States Adopt Recreational Laws
FDA Routinely Approves CBD Drugs
FDA Routinely Approves THC Drugs
Federal Government Legalizes Cannabis
60 M
50 M
40 M
30 M
20 M
Number of Consumers
$20,000
10 M
$0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
0 M
Legalized Cannabis Market Size
Consumers
Source:�Ackrell Capital. Assumes cannabis will be legalized federally by 2027. Cannabis may never be legalized federally in the United States.
Cannabis Industry Segments
Production
Business Solutions
Cultivation
Production
Equipment and
Supplies
Production and
Testing Services
Business
Software
Business
Services
Distribution
Digital Media
Dispensaries
E-Commerce
Distribution
Services
Online Content
and Networking
Online
Directories
Consumer Products
Vaporizers and
Flower Concentrates Infused Products Pharmaceuticals
Accessories
Involves “touching the plant”
Does not involve “touching the plant”
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
Cannabis Investment Report | December 28, 2017
Foreword
Ackrell Capital is pleased to present our 2018 Cannabis Investment Report. Much has happened in the
nearly two years since we published our inaugural report: the cannabis industry grew significantly, companies
in the industry raised large amounts of capital and their stock prices performed well, and the legalization
movement continued worldwide as more countries and U.S. states implemented a framework for
legal cannabis access. There was also a presidential election in the United States; its ultimate impact on
the cannabis industry remains uncertain. What did not happen since we launched our inaugural report?
Federal legali zation: “marijuana” continues to be classified as a Schedule I controlled substance under the
Controlled Substances Act in the United States.
In this new edition, we introduce an outlook on global cannabis markets, analyze capital markets for
cannabis companies and present updated market estimates. We also expand on the first edition by providing
more in-depth analyses of the various market segments within—and analyzing the legal issues pertinent
to—the cannabis industry. The Top 100 Private Cannabis Companies list has been updated and our industry
landscape, The Green Field, has been updated and expanded to include more than 500 companies.
Cannabis legalization has accelerated domestically and internationally. In the 2016 U.S. elections, four
states, including California, legalized recreational cannabis (bringing the total number of states with recreational
laws to eight) and an additional four states legalized medical cannabis. Cannabis use is now statelegal
in some form in 46 states.
In January 2018, California will implement its recreational law, making it the largest market globally
for the recreational use of cannabis. Similarly, Canada is expected to pass its recreational law in mid-2018.
And in 2017, Germany became the most populous country in the world to pass a medical cannabis law.
Cannabis has mass consumer appeal around the world. (According to the United Nations, more than
180 million people per year use cannabis and it is the most-consumed drug worldwide). While it is clear
that there is significant demand for cannabis, less clear is how quickly illegal markets will transition to
legal markets, as well as the extent to which legalization may increase overall demand.
We continue to believe that it is a question of when—not if—the U.S. federal prohibition on cannabis
will end. We believe that a path toward federal legalization exists and we believe this process has commenced.
According to Gallup, 64% of Americans today believe that cannabis use should be legal.
Who is the cannabis consumer? It is the 80-year-old cancer patient ingesting cannabis to treat side
effects of chemotherapy. It is the 12-year-old child using cannabis extracts on a doctor’s recommendation
to reduce epileptic seizures. It is the 30-something mother or father seeking to relax after a full day. It is
a group of 20-year-olds on a Friday night heading to a concert. It is the millions of people suffering from
anxiety and depression. It is the millions of people treating chronic pain and nausea. It is the millions of
people using cannabis recreationally.
Our team has met with more than 1,000 companies in the cannabis industry. We understand the opportunities
and challenges facing the industry, and we are happy to provide our insights.
Sincerely,
The Ackrell Capital Cannabis Team
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC
Cannabis Investment Report | December 2017
n Table of Contents
CHAPTER I Executive Summary .......................................................... 1
n Global Cannabis Consumers n To Watch in 2018 n Investment Outlook
CHAPTER II Cannabis Science 101........................................................ 15
n The Cannabis Plant n The Human Endocannabinoid System
n Cannabinoids n Terpenes n Cannabis Formulations
CHAPTER III Cannabis Industry Segmentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
n Production n Distribution n Consumer Products
n Business Solutions n Digital Media
CHAPTER IV U.S. Legal Landscape ........................................................ 61
n U.S. State Law n U.S. Federal Law n The Path to Federal Legalization
CHAPTER V Global Cannabis Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
n Global Cannabis Legalization Momentum n United Nations Conventions
n Global Legal Developments n Global Outlook
CHAPTER VI U.S. and International Cannabis Market Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
n Global Market Overview n U.S. State-Legal Cannabis Market
n U.S. Legalized Cannabis Market Forecast
n International Legal Cannabis Market Forecast
CHAPTER VII Capital Markets for Cannabis Companies ....................................117
n Capital Markets Overview n Public Capital Markets
n Public Capital Markets: United States n Public Capital Markets: Canada
n Private Capital Markets n Final Thoughts
CHAPTER VIII Top 100 Private Cannabis Companies 2018 ..................................137
CHAPTER IX Cannabis Industry Risk Factors .............................................165
CHAPTER X Glossary of Terms ..........................................................169
Disclosures, Disclaimers, Sources and Use ...................................175
Ackrell Capital Cannabis Team ..............................................176
FRONT COVER
Report Highlights
BACK COVER The Green Field 2018
ii © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
n Global Cannabis Consumers
Cannabis has mass consumer appeal around the world. Millions of people use cannabis recreationally.
Millions more use it medicinally. In aggregate, across all state medical cannabis laws in the United States,
cannabis is legally recognized as a form of therapy or medicine for more than 50 medical conditions,
including Alzheimer’s disease, anorexia, arthritis, cancer, chronic pain, epilepsy and post-traumatic
stress disorder. Similar to the alcohol and pharmaceutical markets, we believe that the total addressable
consumer market for cannabis consists of a significant portion of the global adult population.
Cannabis is the most widely cultivated, produced, trafficked and consumed drug worldwide,
according to the United Nations Office on Drugs and Crime (UNODC). In 2003, the UNODC
estimated that the global illegal cannabis market was $113 billion, with 160 million consumers. The
UNODC continues to estimate the number of cannabis users worldwide and recently estimated that
183 million people globally between the ages of 15 and 64, or more than 4% of this age group, consumed
cannabis in 2015.
In 2010, the RAND Corporation (RAND) estimated that the U.S. illegal cannabis market was
$40 billion. Adjusting this estimate solely for inflation and population growth, the U.S. illegal market
would now be approximately $48 billion.
Both the UNODC and RAND acknowledge the challenges inherent in studying an illegal consumer
market, and both allow significant room for error in their estimates. However approximate,
their estimates make clear that there is significant global demand for cannabis. Less clear is how quickly
illegal markets will transition to legal markets, as well as the extent to which legalization may increase
overall demand.
We believe that the growth of the global legal cannabis industry will be driven by increasing penetration
in largely untapped “mainstream” consumer markets, and that the legal industry could grow
to more than two times the estimated size of the current illegal market. We believe that cannabis will
eventually become federally legal in the United States, for recreational enjoyment by adults and for use
in a broad range of safe drugs and therapeutic products. After U.S. federal legalization, we believe that
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 1
Cannabis Investment Report | December 2017
the U.S. market will exceed $100 billion annually, with more than 50 million consumers. Globally, we
estimate that the legal cannabis market has the potential to reach $500 billion annually, approaching
one billion consumers.
The Global Legal Cannabis Market
Cannabis legalization is gaining momentum around the world. This momentum is driven primarily by
the increasing recognition that cannabis may have a range of legitimate medicinal benefits and therapeutic
applications. At least 20 countries now have medical laws that facilitate patient access to cannabis
or cannabis concentrates for treating specified medical conditions. Notable countries with such
medical laws include Australia, Canada, Colombia and Germany; countries without such laws include
China, Japan, Russia and the United States. (Contrary to U.S. federal law, 29 states, encompassing
62% of the U.S. population, permit the production and possession of cannabis or concentrates for use
in treating a broad range of qualifying medical conditions.) While the merits of medical cannabis are
currently driving legalization, we believe that—like Uruguay and numerous U.S. states—other countries
will ultimately enact legislation permitting the production, sale and use of recreational cannabis.
(Canada is widely expected to do so in mid-2018.)
The following world map illustrates select countries that (i) have enacted medical laws that facilitate
patient access to cannabis or concentrates for treating specified medical conditions, (ii) have enacted
recreational laws that permit the commercial production and sale of cannabis to adults for recreational
and other uses, or (iii) include a state or province that has a cannabis law or policy in conflict with
federal law.
Select Countries with Legalized Cannabis Access (January 2018)
Recreational Law*
Medical Law
State/Province Conflict
with Federal Law
*Canada currently has a medical law. Assumes Canada enacts a proposed recreational law in mid-2018.
2 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
The U.S. State-Legal Cannabis Market
The legal landscape for the cannabis industry in the United States continues to be characterized
by conflict between federal prohibition and the steady advance of state legalization. According
to federal policy, Americans can access tobacco, alcohol and prescription drug products that
kill thousands each year, but they cannot access cannabis because it is a dangerous drug with no
currently accepted medical application in the United States (notwithstanding the federal government
holds a U.S. patent for methods of treating diseases with cannabinoids). Meanwhile,
46 U.S. states have enacted at least one law that permits the manufacturing, distribution, dispensing or
possession of cannabis or concentrates. These laws fall into three general categories:
• 29 U.S. states (and the District of Columbia) have enacted medical cannabis laws that permit
the production and possession of cannabis or concentrates for use in treating a broad range of
qualifying medical conditions.
• 19 U.S. states have enacted narrow CBD/limited laws that permit possession of small amounts
of low-THC/high-CBD cannabis concentrates for use in treating a few serious medical conditions—in
particular, severe forms of childhood epilepsy.
• 8 U.S. states have enacted recreational laws that permit the commercial production and sale of
cannabis to adults for recreational and other uses.
The following map of the United States shows states with medical cannabis laws, CBD/limited laws
or recreational laws (a state with more than one of these laws is represented on the map by its most
permissive law).
U.S. State Cannabis Laws (January 2018)
Recreational Law
Medical Cannabis Law
CBD/Limited Law
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 3
Cannabis Investment Report | December 2017
The U.S cannabis industry has proven adept at navigating this federal-state conflict, and is experiencing
rapid growth despite it. We estimate that the 2017 U.S. state-legal cannabis market was $8.0
billion, with more than four million consumers. While the overall state-legal market has grown significantly,
the addressable market has been constrained due to the lack of access to purely recreational
consumers and the sometimes-narrow scope of medical conditions that qualify a patient for access to
medical cannabis. The breakdown of this market estimate by state is shown in the following chart.
2017 U.S. State-Legal Cannabis Market Estimate
Other States
$1.9 B
$8.0B
California
$3.2 B
Colorado
$1.5 B
Oregon
$470 M
Washington
$929 M
Source: Ackrell Capital
U.S. Federal Law
Current federal law effectively prohibits all cannabis use and all commercial cannabis activity in the
United States. Producing, selling and possessing cannabis are federal crimes. No cannabis-derived drug
has ever been federally approved for use in treating any medical condition. Otherwise legitimate business
transactions conducted by cannabis companies —and their banks, for those who can access banking
services—are legally suspect. Certain intellectual property and bankruptcy protections critical to
many U.S. businesses are not available to cannabis companies. Cannabis companies pay federal income
tax at effective rates significantly higher than other businesses.
Despite official prohibition, however, federal policies and laws recently passed by Congress have
carved out a limited space in which the state-legal cannabis industry has managed to thrive. Enforcement
policies published by the U.S. Department of Justice have unofficially invited cannabis business
to proceed if certain conditions are respected. The U.S. Department of the Treasury established reporting
policies that create room for banks to service the cannabis industry. Federal budget legislation
4 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
has prevented allocated funds from being used to prosecute conduct that complies with state medical
cannabis laws. And recent developments indicate the federal government may be pursuing policies and
practices that create space for cannabis research and approval of cannabis-derived drugs.
The following chart shows three general areas of federal law that impact the cannabis industry—food
and drug regulation, banking and finance, and intellectual property—as well as specific
laws and federal policies related to each area. (We expand on these laws, regulations and policies in
Chapter IV, U.S. Legal Landscape.)
Federal Laws and Policies Impacting the Cannabis Industry
Controlled
Substances
Act
Justice
Department
Cole Memo
Bank Secrecy Act
and Financial
Transaction
Laws
Rohrabacher-
Blumenauer
Amendment
Treasury
Department
FinCEN Memo
Agricultural
Act
of 2014
DRUG
AND FOOD
REGULATION
Federal Laws
and Policies
Impacting the
Cannabis
Industry
BANKING
AND
FINANCE
Securities
Law
Bankruptcy
Law
Food, Drug,
and
Cosmetic Act
INTELLECTUAL
PROPERTY
Internal
Revenue
Code
© 2017 Ackrell Capital, LLC
Patent
Act
Plant
Variety
Protection
Act
Trademark
Act
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 5
Cannabis Investment Report | December 2017
The Path to Federal Legalization
We believe that the variable which will most impact the future size of the U.S. legal cannabis market
is the federal legalization process. How and when federal legalization occurs will impact other
primary drivers of the market, including the number of eligible consumers, penetration rates and
consumer spending. We predict six developments relating to federal legalization: (1) the U.S. Food
and Drug Administration (FDA) will begin approving individual pharmaceutical-grade drugs derived
from cannabis; (2) more states will adopt medical cannabis laws; (3) more states will adopt recreational
laws; (4) the FDA will adopt routine approval procedures for drugs with extracts of low-THC/
high-CBD cannabis varieties; (5) the FDA will adopt routine approval procedures for drugs with
extracts of high-THC cannabis varieties; and (6) cannabis parts and derivatives will be removed from
the CSA schedules (either incrementally, starting with CBD, or all at once) and will be fully legal
for medical and recreational purposes. (We expand on these predicted developments in Chapter IV,
U.S. Legal Landscape.)
We do not predict that these developments necessarily will occur in the order presented. We do
expect some of them to develop in parallel, and none of them depends fundamentally on any other.
For example, Congress could cause development (6) at any time by passing legislation that removes
Path to Federal Legalization
1. The U.S. Food and Drug Administration will
begin approving individual pharmaceuticalgrade
drugs derived from cannabis.
2. More states will adopt medical cannabis
laws.
3. More states will adopt recreational laws.
4. The FDA will adopt routine approval
procedures for drugs with extracts of
low-THC/high-CBD cannabis varieties.
5. The FDA will adopt routine approval
procedures for drugs with extracts of
high-THC cannabis varieties.
6. Cannabis parts and derivatives will be
removed from the CSA schedules and will
be fully legal for medical and recreational
purposes.
cannabis from the CSA schedules and establishes
a national framework for recreational and medical
cannabis regulation. Developments (1) through (3)
largely reflect incremental developments within
the existing legal environment. We do not expect
developments (4), (5) or (6) to occur during the
current presidential term, but we believe that there
is a reasonable chance development (4) could begin
within the next five years and development (5)
could occur within two years thereafter. In total, we
believe it could take up to 10 years or more before
the federal legalization process reaches development
(6) and can nabis becomes fully legal under federal
law. For our market estimates, we assume (i) development
(4) begins in 2023, (ii) development (5)
follows two years thereafter and (iii) development
(6) occurs by 2027 and cannabis becomes fully
legal in the United States.
We believe that federal legalization will trigger
rapid growth in the U.S. market, propelled by interstate commerce, access to the federal banking system
and acceleration of the cannabis-derived pharma ceuticals market. A change in the federal status of
cannabis in the United States will not only drive U.S. market growth, but should provide a significant
catalyst to the market worldwide.
The following graph illustrates the timeline of our predicted developments and the estimated
impact on the U.S. legalized cannabis market. As discussed on page 175, readers are cautioned to not
place undue reliance on our predictions or estimates. Almost certainly, our predictions and estimates
will prove inaccurate in some respects.
6 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
U.S. Legalized Cannabis Market
$140,000
Path to Federal Legalization
70 M
($ millions)
$120,000
$100,000
$80,000
$60,000
$40,000
FDA Approves Cannabis-Derived Pharmaceuticals
More States Adopt Medical Cannabis Laws
More States Adopt Recreational Laws
FDA Routinely Approves CBD Drugs
FDA Routinely Approves THC Drugs
Federal Government Legalizes Cannabis
60 M
50 M
40 M
30 M
20 M
Number of Consumers
$20,000
10 M
$0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
0 M
Legalized Cannabis Market Size
Consumers
Source:�Ackrell Capital. Assumes cannabis will be legalized federally by 2027. Cannabis may never be legalized federally in the United States.
n To Watch in 2018
We believe that the following events will impact the legalized
cannabis industry in 2018.
Increasing Recreational Legalization
We expect 2018 will be a watershed year for recreational
markets, both in the United States and internationally. California
will begin implementing its new recreational law in
January 2018, and Canada’s proposed recreational law is
widely expected to be approved in some form by mid-2018.
California, which has a population of 38 million people
and receives 250 million visitors annually, is poised to transition
from the world’s largest medical cannabis market to
the largest recreational market with the implementation of
its recreational law in January 2018.
In each of the three largest U.S. states to implement recreational
laws—Colorado, Oregon and Washington—the
To Watch in 2018
• Increasing Recreational
Legalization
• Cannabis Consumer Experience
goes “Mainstream”
• FDA Approval of Cannabis-
Derived Pharmaceuticals
• Commoditization of
Cannabis Flower
• Access to Banking Services for
U.S. Cannabis Companies
• Increasing Strategic Investor
Activity; Continuing Funding
Gap
size of the legalized cannabis market expanded significantly, doubling the size of the overall market in
each of these states in the first full calendar year after implementation. The world has yet to experience
a legalized recreational cannabis market in a jurisdiction as large as California, and how the supply
chain, consumer response and regulatory framework will coalesce in such a market remains to be seen.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 7
Cannabis Investment Report | December 2017
Nonetheless, we believe that California’s state-legal market may double from an estimated $3.2 billion
in 2017 to approximately $6.5 billion in 2018.
Canada has assumed the role of a global leader of cannabis legalization. Although Canada’s legal
cannabis market is presently limited to medical cannabis, it is currently the largest federally legal cannabis
market in the world, estimated at $1.5 billion in 2017. In April 2017, a proposed recreational
law was introduced in the Canadian parliament; the proposed Cannabis Act would allow adults to purchase
cannabis from federally licensed producers and to possess and share cannabis with other adults.
The Cannabis Act is widely expected to be approved in some form by the Canadian parliament by mid-
2018. If approved, Canada would be the largest country in the world to legalize recreational cannabis
on a national level, and we believe that the implementation of the Cannabis Act would significantly
expand the size of Canada’s overall market. Canada has demonstrated that by providing a national
legal framework for cannabis, companies operating legally within the industry have had a clear “first to
market” advantage, allowing them to raise significant amounts of capital and to pursue domestic and
international expansion opportunities.
If these recreational laws stimulate demand, as expected, and are otherwise viewed as successful, we
expect more U.S. states and additional countries to follow suit with similar laws. In the United States,
legislatures in eight states (Arizona, Delaware, Florida, Michigan, New Jersey, Ohio, Rhode Island and
Vermont) are expected to introduce ballot measures or explore regulatory frameworks for recreational
cannabis in 2018.
Cannabis Consumer Experience Goes “Mainstream”
Cannabis consumer product companies and retailers are rapidly evolving to meet the needs of the
“mainstream” cannabis consumer. Cannabis consumers are no longer limited to smoking flower with
joints, pipes or bongs, but have their choice of an increasing variety of products, including concentrates,
infused products and topicals. Products coming to market increasingly address the attributes
demanded by the modern consumer—greater discretion, ease of use, product safety and accurate
dosing. To attract more mainstream customers, companies have responded to these demands with
increasingly sophisticated packaging and advertising.
Where a consumer purchases a product can be as important as the product itself. In the United
States, cannabis dispensaries play a critical role by providing consumers with access to a wide variety
of products and “high-touch” education and sales services. Merchandising and branding have become
more prominent as dispensaries increasingly seek to provide consumers with an experience similar to
other mainstream retail shopping experiences. In 2018, we see an opportunity for cannabis dispensaries
to drive consumer penetration and mainstream acceptance of cannabis by establishing storefronts in
malls and other high-profile retail locations.
In 2018, we believe that product innovation and advancements in cannabis varieties, concentrates,
infused products, vaporizing technology and cannabis-derived pharmaceutical products will drive
consumer adoption and spending. However, because numerous product categories have low barriers
to entry, we expect a significant influx of cannabis brands that will aggressively compete for limited
display space in dispensaries. We also believe product differentiation and availability will be more
prevalent in legalized cannabis markets and will drive consumer transition from illegal to legal markets.
8 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
“Mainstream” Consumer Experience
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 9
Cannabis Investment Report | December 2017
FDA Approval of Cannabis-Derived Pharmaceuticals
The FDA’s first-ever approval of a cannabis-derived pharmaceutical may occur in 2018. The FDA
has previously approved several drugs with chemically synthesized cannabinoids or cannabinoid-like
compounds, but has never approved a drug derived from the cannabis plant. In October 2017,
U.K.-based GW Pharmaceuticals submitted a New Drug Application (NDA) to the FDA for Epidiolex,
an oral formulation of cannabis-derived cannabidiol, or CBD, intended to treat severe forms of
childhood epilepsy. (GW Pharmaceuticals also manufactures Sativex, a mouth spray used for treatment
of spasticity caused by multiple sclerosis; it includes THC and CBD derived from cannabis. Sativex
was first approved for use in the United Kingdom in 2010, and has been approved for use in at least
30 countries, but not in the United States.) If the FDA approves Epidiolex, such a precedent could
be followed by similar approvals in the United States for other cannabis-derived drugs and result in a
significant increase in the medical use of cannabis by consumers.
Commoditization of Cannabis Flower
The supply of cannabis in the United States has increased considerably with expanded state legalization.
This increase has started to dampen retail and wholesale prices in various markets. While retail
prices vary across the country, an examination of the price per gram of cannabis flower, or “bud,” in
the three largest states to implement recreational laws—Colorado, Oregon and Washington—reveals
a downward trend. The following graph shows the average price per gram of cannabis flower in these
three states since the beginning of 2016.
Consumer Pricing Trends: Cannabis Flower Price per Gram
$8.00
$7.50
$7.00
$6.50
$6.00
$5.50
$5.00
Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17
Source: BDS Analytics
10 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER I
Executive Summary
As prices decline, we are starting to see closer price parity between state-legal and illegal markets
(in the United States, cannabis is generally priced lower in illegal markets than in state-legal markets).
We believe that lower retail prices in state-legal markets will accelerate consumer transition from illegal
to state-legal markets and drive increased overall penetration rates. However, state and local taxes will
continue to impact pricing for cannabis products in state-legal cannabis markets, which will impede
the transition to legal markets.
In international markets, cannabis cultivators in South America, particularly in Colombia and
Uruguay, are expected to proceed with large-scale operations in 2018, with the anticipated supply of
cannabis entering the market in late 2018 or early 2019. These operations are designed to produce output
that exceeds local demand, and South American countries are expected to export products to other
legal markets, such as Canada and Germany. As legal markets increasingly import cannabis products,
we anticipate downward-pricing pressure for cannabis in both the wholesale and retail markets. Cannabis
cultivators in domestic markets that permit imports may be challenged by large, low-cost cannabis
producers in South America and elsewhere. While these dynamics are expected to impact international
cannabis markets, they should not materially affect prices in the United States until the importation of
cannabis products becomes legal under federal law.
Access to Banking Services for U.S. Cannabis Companies
Because most cannabis-related businesses in the United States violate federal law, most domestic financial
institutions do not provide services to participants in the cannabis industry. Companies in the
cannabis industry may not be able to open or maintain bank accounts or access other products and
services—such as credit facilities, payment processing and insurance coverage—typically provided by
traditional financial institutions. A lack of access to banking and other traditional financial products
and services continues to impede the growth of the industry; it increases the time, effort and expense
related to ongoing operations and increases risks associated with cash transactions and the use of alternative
products and services.
The California State Treasurer’s Cannabis Banking Working Group—a panel convened by California
State Treasurer John Chiang that includes representatives from the cannabis industry and financial
institutions, and government tax collection, law enforcement and regulatory agencies—issued a report
in November 2017 on the cannabis industry’s banking challenges. In the report, the State Treasurer’s
Office stated that the cannabis industry’s lack of access to banking services is one of the biggest threats
to the success of the state’s recreational cannabis law, which is scheduled for implementation starting
in January 2018.
The U.S. Bank Secrecy Act (BSA) requires financial institutions to file “suspicious activity reports”
(SARs) with the Financial Crimes Enforcement Network (FinCEN) regarding customers engaged in
“marijuana-related business.” From February 2014 through June 2017, FinCEN received a total of
33,692 marijuana-related SAR filings from a total of 390 banks and credit unions (out of approximately
11,500 depository institutions). The following graph based on FinCEN data shows the number
of banks and credit unions making such filings. While the percentage of the total number of depository
institutions serving the cannabis industry remains small, the growing number of depository institutions
making SAR filings indicates that cannabis businesses increasingly are accessing the federal banking
system despite federal law.
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Depository Institutions Making Marijuana-Related SAR Filings
350
300
250
200
150
100
50
0
Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017
Banks
Credit Unions
Source: Financial Crimes Enforcement Network
FinCEN has published guidance outlining how financial institutions can, consistent with their BSA
obligations, provide services to marijuana-related businesses. However, this guidance does not provide
financial institutions with a legal defense for any violation of federal law. Consequently, financial institutions
willing to serve the cannabis industry tend to be smaller institutions, such as credit unions and
state-chartered banks. “Big” banks generally do not serve, or are not willing to state publicly that they
serve, the cannabis industry. For example, according to American Banker, a spokeswoman for Wells
Fargo Bank recently said the bank’s policy worldwide is to not bank marijuana businesses.
However, as cannabis-related companies increasingly participate in the formal U.S. economy, the
notion of what constitutes a “marijuana-related business” is being blurred, and banks are finding it
more difficult to institute and follow their own policies. For example, it may be straightforward for a
bank to identify and refuse to transact with a cannabis cultivator, but the bank may be unsure whether
it can provide services to (or whether it is providing services to) the cultivator’s accountant, landlord or
investors. For example, Constellation Brands, Inc. (NYSE: STZ), a large beverage company, recently
invested approximately $190 million in Canopy Growth Corporation (TSX: WEED), a Canadian
cannabis company. According to public filings, Constellation Brands has credit agreements with a
number of large financial institutions, including Bank of America, Bank of the West, Fifth Third Bank,
Goldman Sachs Bank, JPMorgan Chase Bank, PNC Bank, SunTrust Bank and Wells Fargo Bank. How
these institutions respond to the investment by Constellation Brands and other similar transactions
may indicate how large financial institutions will interact with the industry in the foreseeable future.
In the current environment, we believe more financial institutions will start to provide some level of
service to the cannabis industry. We also agree with the view of the California State Treasurer’s Office,
as expressed in the working group’s report, that it is only a matter of time until cannabis businesses
have normal access to banking services. However, if the U.S. federal government were to change its
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CHAPTER I
Executive Summary
current practice and aggressively enforce existing federal cannabis laws, including penalizing financial
institutions for serving the cannabis industry, it would have a dampening effect on the industry both
in the United States and abroad.
Increasing Strategic Investor Activity; Continuing Funding Gap
We share the belief held by many that, ultimately, established companies from analogous indus -
tries—alco hol, pharmaceutical, tobacco and consumer products—will enter the cannabis industry
through minority investment, by acquisition or otherwise. We have already seen examples: Constellation
Brands’ investment in Canopy Growth referenced above and the more than $400 million spent by
The Scotts Miracle-Gro Company (NYSE: SMG) to acquire soil, fertilizer, hydroponic equipment and
lighting companies that supply the cannabis industry. These types of transactions help validate investor
enthusiasm for and valuations in the cannabis industry, and we expect similar transactions to occur
with increasing frequency during 2018 and beyond.
Retail investors and an increasing number of family office and strategic investors are providing most
of the investment capital to the cannabis industry. Cannabis-related companies raised more than $2.0
billion in the public and private markets in 2017, but many of the financings were small—less than $5
million. We expect that many institutional investors (most notably, the traditional venture capital and
private equity communities) will not invest in the industry until it matures and the legal environment
becomes more favorable.
Without institutional support for the cannabis industry, a funding gap exists—companies are seeking
more capital than investors are willing or able to provide. We believe that this is especially true in
the private markets, where many companies struggle to raise necessary financing. Although capital may
be available for select issuers in both public and private markets, we believe that without participation
from institutional investors, the cannabis industry will continue to face a significant funding gap for
the foreseeable future.
n Investment Outlook
Hundreds, if not thousands, of cannabis-related companies are seeking to raise capital—thus presenting
investment opportunities for sophisticated investors who want to participate in the cannabis
industry. Investors have their choice of investing in the more than 300 publicly traded cannabis-related
companies, or in the significant number of private companies raising capital. Investors may also choose
among stock markets (both within the United States and internationally), type of security (equity
versus debt) and type of company (companies across all segments of the industry are raising capital).
Most of the cannabis-related companies raising capital—even publicly traded companies—are in
early stages of development, have de minimis revenue and are not profitable. More than 85% of publicly
traded cannabis-related companies have annual revenue less than $5 million, and less than 5%
have annual revenue greater than $25 million.
To help investors better evaluate investment opportunities in the cannabis industry, we currently
define five primary segments: production, distribution, consumer products, business solutions and
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digital media. We further divide each segment into multiple subsegments. Each segment has unique
opportunities and risks. For example, companies that possess, manufacture or distribute cannabis
(commonly known as “touching the plant”) face risks related to violating federal law—and state-law
compliance obligations— not generally faced by providers of business software or digital media content.
Many businesses operate in multiple segments, and we expect industry leaders to emerge in each
segment. The five primary segments and their subsegments are illustrated in the following chart.
Cannabis Industry Segments
Production
Business Solutions
Cultivation
Production
Equipment and
Supplies
Production and
Testing Services
Business
Software
Business
Services
Distribution
Digital Media
Dispensaries
E-Commerce
Distribution
Services
Online Content
and Networking
Online
Directories
Consumer Products
Vaporizers and
Flower Concentrates Infused Products Pharmaceuticals
Accessories
Involves “touching the plant”
Does not involve “touching the plant”
In our view, valuations and stock price fluctuations in the cannabis industry continue to be driven
more by expectations for the cannabis industry in general than by individual company fundamentals.
Today, in the public markets for cannabis-related companies, trading volumes are too low, trading
prices are too volatile and operating histories are too limited to place any reliance on current valuation
levels. We believe that this dynamic will continue until cannabis-related companies have matured and
start to realize meaningful revenue, profitability and other financial metrics that will allow investors to
evaluate companies within the industry by more traditional methodology.
It is still too early to know how the cannabis industry or its sectors will be valued in the future. It
may come to pass that companies in the cannabis industry are valued comparably to public companies
in industries with similar characteristics, such as the alcohol, tobacco, pharmaceutical and consumer
products industries, especially as companies from those industries look to enter the cannabis industry,
through acquisition or by other means. What is clear now, however, is that investors will continue
to have a range of investment opportunities from which to choose in this rapidly growing, dynamic
industry.
14 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER II
Cannabis Science 101
n The Cannabis Plant
Cannabis is a genus of flowering plant indigenous to Eurasia. For millennia, humans have consumed
cannabis for therapeutic, medicinal, social or spiritual purposes and have used the seeds and fibrous
stalks of the cannabis plant to produce goods such as rope, paper, clothing and soap.
There are at least three principal cannabis species: Cannabis sativa, Cannabis indica and Cannabis
ruderalis. 1 These three species can be distinguished by their plant structures and leaves. Sativa plants are
generally tall, thin and wispy; indica plants tend to be shorter and bushier than sativa plants; and ruderalis
plants are shaggy and the shortest of all three species. The following pictures depict the Cannabis
sativa, Cannabis indica and Cannabis ruderalis plants and their leaves.
Cannabis Sativa Plant Cannabis Indica Plant Cannabis Ruderalis Plant
1
Botanists disagree about whether sativa, indica and ruderalis are distinct species or are instead distinct subspecies of a single plant
species. Some botanists propose renaming these three species to reflect their geographic origins. This report takes no position on
these botanical debates; it merely adopts one set of commonly used nomenclature.
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Cannabis Sativa Leaf Cannabis Indica Leaf Cannabis Ruderalis Leaf
Many hybrid varieties of cannabis—sometimes referred to as strains—have developed from these three
species, both through selective breeding and in the wild. Most cannabis varieties grown today are hybrids
that exhibit features of two or more of these principal species. Cannabis varieties consumed for physio -
logical effects generally are hybrids of sativa and indica that produce relatively large and dense flowers.
Certain cannabis varieties—known as hemp—that are grown to produce industrial goods generally
are sativa-dominant varieties or hybrids of sativa and ruderalis that produce relatively small and sparse
flowers.
Cannabis yields more than 100 different compounds known as “cannabinoids,” which, when consumed,
act on cannabinoid receptors in cells in the human nervous and immune systems. The primary
cannabinoid in most cannabis is tetrahydrocannabinol, or THC, the psychoactive compound responsible
for the “high” or euphoric feeling commonly associated with cannabis consumption. The next
most abundant cannabinoid is cannabidiol, or CBD, which produces a physical effect without the
psychoactive effects associated with THC.
Cannabis also includes a variety of compounds known as “terpenes,” which are understood to
interact with cannabinoids to produce some of the physiological effects sought by cannabis consumers.
Terpenes are present in cannabis and many other types of plants and are responsible for a plant’s aroma
and flavor. Examples of terpenes found in cannabis include limonene, which is known for its citrus
smell and is also present in citrus fruit rinds, and pinene, which is known for its pine and fir aromas
and is also found in pine resin.
The highest concentrations of cannabinoids and terpenes are found in the “trichomes” on the
flowers of unpollinated female cannabis plants. Trichomes are crystalline or hairlike components that
secrete cannabinoids, terpenes and other compounds; they generally occur all over the cannabis plant
but are found in highest concentration on the flower. The following illustration shows the basic anatomy
of a cannabis plant, and the images to the right show a female cannabis plant flower and a close-up
view of trichomes.
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CHAPTER II Cannabis Science 101
Cannabis Flower
Trichomes
Cannabis Plant Anatomy
Cannabis can be consumed in a variety of ways that introduce its active compounds into the body:
smoking cannabis flower or its extracts, vaporizing cannabis flower or its extracts, ingesting cannabis
extracts or food products prepared with cannabis and topical application of cannabis products. Human
consumption of cannabinoids and terpenes is widely believed to have numerous medicinal benefits and
therapeutic applications. Depending on the types and relative concentrations of the cannabinoids and
terpenes consumed, these benefits may include pain relief, reduction of inflammation, and promotion
of an energetic, uplifting mood or a calm, relaxed mood.
Although humans have used cannabis therapeutically for thousands of years, only recently have
scientists begun to research and understand at the chemical and biological levels how cannabis works
with the human body. In the 1940s, the American organic chemist Roger Adams performed numerous
studies on cannabis and identified and isolated the cannabinoids THC, CBD and cannabinol, or
CBN. In the 1960s, a team of scientists led by Raphael Mechoulam at the Weizmann Institute of
Science in Israel more completely determined the chemical composition of THC, CBD and certain
other cannabinoids. This research on cannabinoids ultimately led to the discovery that the human
body naturally produces its own cannabinoids and uses them to regulate homeostasis (a process by
which biological systems tend to maintain internal stability, or balance).
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n The Human Endocannabinoid System
The human endocannabinoid system consists of nervous and immune system receptors involved in
regulating health and physiological functions. There are two types of endocannabinoid receptors, CB1
and CB2 receptors, which are located in the brain and in other organs, tissues and glands throughout
the human body. The human body actively regulates variables related to appetite, immune response,
memory, mood, pain, sleep and other functions by naturally creating compounds known as “endocannabinoids”
and delivering them to these receptors. The following illustration depicts the human
endocannabinoid system and the location of CB1 and CB2 receptors.
Human Endocannabinoid System
CB1 Receptors
CB2 Receptors
Immune Cells
CB1
Brain
Lungs
Vascular system
Muscles
Gastrointestinal tract
Reproductive organs
CB2
Spleen
Bones
Skin
Glial cells
CB1 and CB2
Immune system
Liver
Bone marrow
Pancreas
Brain stem
The physiological effects of cannabis consumption are believed to be primarily the result of THC,
CBD and other cannabinoids bonding with the body’s endocannabinoid receptors and the consequent
impact on functions regulated by the endocannabinoid system. As scientists gain a deeper understanding
of the human endocannabinoid system, they are beginning to explore the application of cannabinoids
to a broad range of medical conditions and ailments. Although medical research on cannabinoids
is nascent, cannabis is currently being used to manage many conditions, including anxiety, depression,
inflammation, insomnia, nausea, neural disorders and pain.
CB1 and CB2 Receptors
CB1 and CB2 endocannabinoid receptors, which are found on cell surfaces throughout the body, are
believed to be more numerous than any other cellular receptor signaling system in the human body.
The CB1 receptors are located primarily in the brain, central nervous system and other tissues; these
receptors play a modulatory role in memory, mood, sleep, appetite and pain sensation. The CB2 recep-
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CHAPTER II Cannabis Science 101
tors are located primarily in peripheral organs associated with the immune system, with the greatest
concentration in the spleen, and are responsible for managing inflammation and autoimmune function.
Many tissues contain both CB1 and CB2 receptors, with each receptor type linked to a different
physiological function.
Human Endocannabinoids
Endocannabinoids are the cannabinoids created naturally by the human body for delivery to CB1 and
CB2 receptors. In contrast with cannabinoids introduced through cannabis consumption, endocannabinoids
are broken down quickly by the body and cause effects with shorter durations. One wellstudied
endocannabinoid is anandamide (AEA). AEA is associated with the maintenance of mood,
and AEA deficiency is understood to be anxiogenic (anxiety-inducing). Maintaining appropriate AEA
levels within the human body is believed to reduce pain and inflammation, counter the proliferation
of cancer cells, relieve anxiety and promote adult neurogenesis (a process whereby nerve cells are generated
from neural stem cells). Like THC, AEA has a small molecular structure that binds to CB1 receptors.
AEA is currently being studied for its effects on angiogenesis (the process of developing new blood
vessels), anxiety, cancer and memory consolidation. AEA is also present outside the human body; for
example, it is a natural component of chocolate.
Endocannabinoid Systems in Animals
Nonhuman mammals, including dogs, cats and horses, have been shown to have endocannabinoid
systems that are similar to their human counterparts: these systems employ CB1 and CB2 receptors
and function through the natural production of endocannabinoids. This implies that the endocannabinoid
system is not a recent evolutionary development, but rather an ancient physiological feature of
mammals in general. The cannabinoids found in cannabis, particularly CBD, have been shown to have
a range of therapeutic applications for certain animals, including antibacterial and anti-inflammatory
properties, appetite and bone-growth stimulation, and pain relief. The following chart depicts the
canine endocannabinoid system and CB1 and CB2 receptors.
Canine Endocannabinoid System
CB1
CB2
CB1 and CB2
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n Cannabinoids
Cannabinoids are compounds present in the cannabis plant that act on human cannabinoid receptors
in cells in the nervous and immune systems. Scientists have identified more than 100 cannabinoids in
the cannabis plant. Generally, the most abundant cannabinoid is THC, a psychoactive compound that
causes a euphoric “high,” and the second most abundant cannabinoid is cannabidiol, or CBD, which
produces a relaxing physical effect without a psychoactive effect. Consuming cannabinoids has been
shown to have numerous medicinal benefits and therapeutic applications. The following table lists
20 common conditions for which medical cannabis use has been legalized under U.S. state laws and
identifies 8 cannabinoids that are used or being studied to treat these conditions. A brief description of
these cannabinoids follows the table.
Common Qualifying Medical Conditions and Potentially Therapeutic Cannabinoids
THC CBD CBC CBG CBGA CBN THCA CBDA
Alzheimer's disease � �
Amyotrophic lateral sclerosis (ALS) � � �
Anorexia
�
Arthritis � �
Cachexia � �
Cancer � � � � � �
Chronic pain � � � � � �
Crohn's disease
�
Epilepsy
�
Glaucoma � � �
Hepatitis C � �
HIV/AIDS � �
Inflammation � � � � � �
Migraine � �
Multiple sclerosis
�
Nausea � � �
Nervous system degeneration �
Parkinson's disease
�
Post-traumatic stress disorder (PTSD) � �
Spasms � � � �
THC Tetrahydrocannabinol: THC refers to delta-9-tetrahydrocannabinol and certain chemical
variants, including delta-8-tetrahydrocannabinol. THC is the most abundant cannabinoid in cannabis
and is understood to be the psychoactive compound in cannabis primarily responsible for the euphoric
feeling of being “high.” Both recreational and medicinal users often seek the psychoactive effects of
THC and may prefer certain cannabis products based solely on the quality and level of THC. THC
is believed to have wide-ranging medicinal benefits: analgesic, antianxiety, antibacterial, anticancer,
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CHAPTER II Cannabis Science 101
antidepressant, antiemetic, anti-inflammatory, antinausea and antispasmodic. It also is believed to have
therapeutic applications, such as appetite stimulation, bronchodilation, neuroprotection and pain relief.
CBD Cannabidiol: CBD is considered to be the second most abundant cannabinoid in cannabis.
It is nonpsychoactive and is believed to counteract the psychoactive effects of THC. CBD also is
believed to have wide-ranging medicinal benefits: analgesic, antianxiety, antibacterial, anticancer, anticonvulsant,
antidepressant, antiemetic, anti-inflammatory, anti-insomnia, anti-ischemic, antipsychotic
and antispasmodic. In addition, CBD is believed to have therapeutic applications, including appetite
stimulation, bone-growth stimulation, immunosuppression and neuroprotection. CBD can be derived
from many cannabis strains, including low-THC strains ordinarily grown to produce industrial hemp
products.
CBC Cannabichromene: CBC is thought to be the third most abundant cannabinoid in cannabis
and is nonpsychoactive. Like THC and CBD, CBC is believed to have several medicinal benefits,
including analgesic, antibacterial, anticancer, antidepressant, antifungal, anti-inflammatory and
anti-insomnia. CBC is also used as a therapeutic bone-growth stimulant. Ongoing research seeks to
determine the role of CBC in reducing gastrointestinal inflammation. CBC may also have applications
in pain management—in addition to binding to the CB1 and CB2 endocannabinoid receptors, it has
been shown to interact with certain pain receptors.
CBG Cannabigerol: CBG is nonpsychoactive and is believed to have several medicinal benefits—
analgesic, antibacterial, anticancer, antidepressant and antifungal—as well as a therapeutic application
for bone-growth stimulation. CBG is present primarily during the early stages of the cannabis plant’s
growth cycle; only small amounts can be extracted from the plant during its flowering stage (although
strains of cannabis have recently been bred to have high levels of CBG). CBG is believed to partially
counteract the psychoactive effects of THC and to decrease anxiety and muscle tension.
CBGA Cannabigerolic Acid: CBGA is a nonpsychoactive precursor to all other cannabinoids,
including THC, CBD, CBC and CBG. Much of a cannabis plant’s CBGA ultimately transforms into
other cannabinoids through the chemical process of decarboxylation. CBGA is used for analgesic and
anti-inflammatory applications. Certain cannabis strains cultivated to produce industrial hemp products
are believed to contain high levels of CBG relative to other strains.
CBN Cannabinol: CBN has been shown to produce some psychoactive effects and is believed to
have several medicinal benefits, such as analgesic, antibacterial, anticonvulsive, anti-inflammatory and
anti-insomnia. Unlike many other cannabinoids, CBN is not derived directly from CBGA decarboxylation;
instead, it results from THC degradation. The CBN level of a cannabis plant is sometimes used
as a measure of the plant’s overall quality for consumption.
THCA Delta-9-Tetrahydrocannabinolic Acid: THCA is found abundantly in raw cannabis flower
and is the precursor to THC. THCA is nonpsychoactive and is believed to have several medicinal
benefits, including anticancer, anti-inflammatory and antispasmodic. THCA decarboxylates into THC
through drying or application of intense heat, such as the heat applied during smoking or vaporizing
the cannabis plant.
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CBDA Cannabidiolic Acid: CBDA, the precursor to CBD, is nonpsychoactive and is believed to
have several medicinal benefits— anticancer, antiemetic and anti-inflammatory—as well as therapeutic
applications. Generally, CBDA is present in the cannabis plant in low levels, although recently some
strains have been grown with CBDA levels comparable to typical THC levels. Like THCA, CBDA
decarboxylates into other compounds when heated. (An explanation of decarboxylation follows.)
Cannabinoid Composition Levels
As a general rule, THC and CBD are the most prevalent cannabinoids found in many strains of the
cannabis plant, with other cannabinoids appearing in relatively minuscule amounts. (One exception
to this rule is the low-THC strains grown to produce industrial hemp.) THC-dominant strains historically
have been the most popular with cannabis consumers, but CBD-dominant strains and strains
with high levels of other cannabinoids are believed to have medicinal benefits and hold promise for
therapeutic applications.
Cannabinoid Creation: Decarboxylation
All cannabinoids present in cannabis begin as cannabigerolic acid, or CBGA. CBGA is ultimately
transformed into various other cannabinoids through decarboxylation, a process by which a compound’s
chemical structure changes due to light, heat, alkaline conditions or other chemical forces. The
two main catalysts for decarboxylation of CBGA and other cannabinoids are heat and time (the aging
process). The following chart depicts the process of cannabinoid decarboxylation.
Cannabinoid Decarboxylation Process
RAW
CBGA
THCA
CBCA
CBDA
THCVA
CBCVA
CBDVA
HEATED
THC CBC CBD CBG
THCV
CBCV
CBDV
CBGV
AGED
CBNA
8 - THC CBN CBL CBLA
Source: Elemental Wellness
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CHAPTER II Cannabis Science 101
As examples of the decarboxylation process, consider the changes to THCA that result from heat
and aging. If the nonpsychoactive THCA naturally present in raw cannabis is heated, it quickly decarboxylates
into psychoactive THC; this is what commonly occurs when cannabis flower is smoked or
vaporized for its psychoactive effect. THCA may also be stored and aged to produce CBN.
Cannabinoid Boiling Points
Cannabinoids boil at temperatures lower than the temperature at which cannabis flower burns. Based
on this property, vaporizers have been developed to heat cannabis flower to a point at which its active
compounds boil and can be inhaled as vapor but at which point the flower does not combust and create
smoke. The approximate temperatures at which select cannabinoids boil and cannabis flower combusts
are shown in the following table.
Compound Boiling and
Flower Combustion Temperatures
Compound/Flower
THCA
CBDA
THC
CBD
CBN
Flower
Temperature (°F)
220
250
315
355
365
450
Smoking cannabis flower remains the most popular form of cannabis consumption, even though
it is believed to destroy as much as 30% of the active cannabinoids and is less efficient than merely
heating the desired compounds to their boiling points. Vaporizers are becoming increasingly sophisticated,
and those that can maintain temperatures which target the activation of specific cannabinoids
are becoming popular.
n Terpenes
Terpenes are a class of organic compounds present in cannabis and
many other plants; they are responsible for a plant’s aroma and flavor.
The strong odors produced by terpenes are believed to be part of the
natural defense of many plants. Cannabis contains more than 100 different
terpenes, which are believed to interact with cannabinoids in a
way that contributes to the medicinal benefits and therapeutic applications
of cannabis. Like cannabinoids, terpenes are present in highest
concentration in the flowers of cannabis plants. (Terpenoids are certain
chemical variants of terpenes, and this report uses the general term
“terpene” to refer to both terpenes and terpenoids.)
Terpenes are believed to interact in various ways with the human
physiology: by acting on receptors and neurotransmitters, combining
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Cannabis Investment Report | December 2017
or dissolving with fats, inhibiting serotonin uptake and increasing dopamine activity in the brain. Scientists
have yet to develop an extensive and detailed understanding of the mechanisms and effects of
many terpenes. However, consumption of certain cannabis strains with particular terpene profiles and
corresponding aromas are generally associated with certain experiences. For example, cannabis strains
that smell of musk or clove (indicating the presence of myrcene) tend to cause sedative and relaxing
effects, strains with a piney scent (indicating the presence of pinene) are used to promote focus and
memory retention, and strains with a lemony scent (indicating the presence of limonene) are consumed
for mood uplift.
The following table identifies eight terpenes found in cannabis and lists the medicinal benefits and
therapeutic applications commonly associated with each.
Potential Medicinal Benefits and Therapeutic Applications of Notable Terpenes
Antianxiety
Antibacterial
Anticancer
Anticonvulsive
Antidepressant
Antifungal
Anti-inflammatory
Anti-insomnia
Anti-ischemic
Antiseptic
Antitumor
Appetite suppressant
Bronchodilator
Camphene
�
�
�
�
Caryophyllene Humulene Limonene Linalool Myrcene Pinene Terpinolene
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
��
�
�
�
�
�
Camphene: Camphene smells strongly of damp woodlands and fir needles and is believed to have
several medicinal benefits , such as antibacterial, antifungal and anti-inflammatory, and a therapeutic
application as a bronchodilator. Some studies have shown that camphene could be used to combat
heart disease as an alternative to other pharmaceutically based therapies with harsh side effects. Camphene
is a minor component of many essential oils and is used as a food additive.
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CHAPTER II Cannabis Science 101
Caryophyllene: Caryophyllene is known for its peppery, woody and spicy smell. It is believed to have
several medicinal benefits, such as antibacterial, anticancer, antifungal and anti-ischemic, and a therapeutic
application as a bronchodilator. Caryophyllene is found in many plants, including Thai basil,
cloves, cinnamon leaves and black pepper.
Humulene: Humulene is well known for giving beer its hoppy aroma and is believed to have several
medicinal benefits: antibacterial, anti-inflammatory and antitumor. Humulene is used to aid weight
loss by acting as an anorectic (appetite suppressant). It is also found in hops and coriander.
Limonene: Limonene is recognized for its citrusy smell. Its medicinal benefits are believed to include
antianxiety, antibacterial, anticancer, anticonvulsive, antidepressant and antifungal. Limonene present
in cannabis quickly enters the bloodstream upon inhalation, which may facilitate the quick absorption
of other terpenes and thus contribute to an uplifting experience. Limonene is also present in citrus fruit
rinds, rosemary, juniper, peppermint and pine needle oils, and its strong smell serves as a natural insect
repellent.
Linalool: Linalool has floral and lavender aromas. It is believed to have medicinal benefits that
include antibacterial, antidepressant, antifungal and anti-insomnia. Linalool may also counteract anxiety
induced by THC consumption. Some research suggests that linalool may boost the immune system,
reduce lung inflammation and restore cognitive and emotional function (potentially making it
useful in the treatment of Alzheimer’s disease). Linalool is found naturally in hundreds of plants and is
a common ingredient in bath products.
Myrcene: Myrcene is generally the most abundant terpene found in cannabis and is known for its
musky and earthy herbal smell, comparable to the smell of cloves. Myrcene is believed to have several
medicinal benefits, including antibacterial, anticancer, antifungal, anti-inflammatory and antiseptic.
Myrcene is understood to enable and hasten the psychoactive effect of THC by lowering resistance
posed by the blood-brain barrier and increasing the THC saturation capacity of the CB1 receptors.
Consuming cannabis with high levels of myrcene may contribute to sedative and relaxing effects suitable
for the treatment of insomnia and pain. Myrcene is present in hops, citrus fruits, bay leaves, eucalyptus,
wild thyme, lemongrass and many other plants.
Pinene: Pinene is known for its pine and fir aromas and is believed to have medicinal benefits, such
as antibacterial, antifungal and anti-inflammatory, and a therapeutic application as a broncho dilator.
Pinene has shown potential to function as an anticancer agent and is believed to counter some of the
psychoactive effects of THC. Pinene is present in conifers, pine resin and citrus fruits and is one of the
terpenes most prevalent in nature.
Terpinolene: Terpinolene has a piney aroma and subtle herbal and sweet floral scents similar to
citrus fruits. Terpinolene is believed to have medicinal benefits, including antibacterial, antifungal,
anti-insomnia and antiseptic. It is also thought to be a central nervous system depressant and is used
to induce sleep or reduce psychological distress. Terpinolene is found in sage and rosemary and is used
in soaps and perfumes.
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Cannabis Plant Terpene Profile
Myrcene is the most abundant terpene found in many cannabis strains, and other terpenes are generally
present in lesser, varying amounts. The following chart shows the terpene levels (percentage by
weight) found in the flower of a typical strain of cannabis.
Typical Cannabis Flower Terpene Levels (Percentage by Weight)
0.3%
0.3%
0.3%
0.6%
0.3%
0.3%
0.9%
0.3%
Camphene
Linalool
Caryophyllene
Myrcene
Humulene
Pinene
Limonene
Terpinolene
n Cannabis Formulations
The “Entourage Effect”
The cannabis industry is currently focused on identifying and producing customized formulations of
cannabinoids and terpenes that may effectively target specific health conditions or otherwise cause an
intended, desirable effect on users. Cannabis strains with specific THC to CBD ratios are currently
the predominant focus for therapeutic applications. THC to CBD ratios in strains popular for treating
certain medical conditions generally range from 100:1 through 1:100, as illustrated by the following
chart.
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CHAPTER II Cannabis Science 101
THC and CBD Formulation Spectrum
THC Dominant Balanced CBD Dominant
THC:CBD
25:1 to 100:1
THC:CBD
10:1 to 25:1
THC:CBD
5:1 to 10:1
THC:CBD
4:1
THC:CBD
1:4
THC:CBD
1:5 to 1:10
THC:CBD
1:10 to 1:25
THC:CBD
1:25 to 1:100
THC Level
CBD Level
• Alzheimer’s disease
• Anorexia
• Appetite stimulant
• Chronic pain
• Amyotrophic lateral
sclerosis (ALS)
• Cachexia
• Cancer
• Glaucoma
• Hepatitis C
• HIV/AIDS
• Migraine
• Multiple sclerosis
• Nausea
• Spasms
• Anxiety
• Epilepsy
• Depression
• Inflammation
• Nervous system degeneration
• Parkinson’s disease
• Post-traumatic stress disorder
(PTSD)
1:100
The “entourage effect” refers to the overall user experience produced by the interactions among all
active compounds in the cannabis plant. The various cannabinoids and terpenes in a particular cannabis
plant are believed to work synergistically with each other and with the human endocannabinoid
system to create an effect very different from the effect any one compound would create. This phenomenon
may partially explain why different cannabis strains are used to treat diverse medical conditions.
There are several generally accepted examples of the entourage effect. CBD is believed to regulate
the psychoactive effects of THC and reduce short-term memory loss, sleepiness and paranoia that may
be caused by THC. Myrcene is understood to enable and hasten the psychoactive effect of THC by
lowering resistance posed by the blood-brain barrier and increasing the THC saturation capacity of the
CB1 receptors. Other terpenes have been shown to block endocannabinoid receptors in the brain while
promoting bonding by endocannabinoid receptors located elsewhere in the body.
Many cannabinoid and terpene formulations developed for therapeutic applications are created
by combining extracts from multiple cannabis strains, a process known as “Frankensteining.” Some
believe Frankenstein formulations are less effective than formulations developed from a single strain
because the natural balance of compounds in a single strain translates to a naturally balanced effect on
the human body.
An understanding of entourage effects and how to effectively combine cannabinoids and terpenes
is believed to be critical to the development of targeted cannabis therapies. Examples of cannabis-based
therapies being developed with specific cannabinoid-terpene profiles include acne medication containing
CBD and limonene, linalool and pinene; antiseptic agents containing CBG and pinene; treatments
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for social anxiety disorders containing CBD, limonene and linalool; and sleeping medicines combining
CBD, THC, caryophyllene, linalool and myrcene.
Genetics and Propagation
Selective breeding and other botanical techniques are being used to develop cannabis varieties with
desired profiles of compounds, and scientists are developing tools to synthesize isolated cannabinoids
in laboratory settings in order to study cannabis at the genetic level. For example, the first mapping
of a cannabis genome was completed in 2011 by a team of Canadian botanists, led by Jon Page from
the National Research Council Canada and Timothy Hughes from the University of Toronto, who
sequenced 30,000 genes in a sativa variety named “Purple Kush.”
Cannabis Genome
Genetic copies, or “clones,” of cannabis plants are generally produced using two methods, “clone
clipping” and micropropagation, or “tissue culture.” Clone clipping involves cutting a growing
tip from a cannabis plant that is several inches long and inserting the cut tip into a grow -
ing medium, where it then grows into a new plant. Tissue culture involves taking a small tissue sample
(which may even be a single cell) from a plant and growing it temporarily in a sterile nutri ent solution
before transferring it to a permanent growing medium. Controlling cannabis plant genomes is
expected to be an important intellectual property issue in the cannabis industry (at least one U.S. patent
has been issued for a strain of cannabis).
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Cannabis Plant Tissue Cultures
Synthetic cannabinoids and terpenes can be manufactured by modifying plant-based compounds
or through tools of synthetic biology and biocatalysis. For example, a synthetic version of THC
known as dronabinol is the active compound in the pharmaceutical product Marinol, which was
approved by the FDA in 1985 for use in treatment of nausea and vomiting associated with cancer
chemotherapy. Methods for biosynthetic production of cannabinoids have been patented in the United
States. Some medical practitioners and cannabis users have found synthetic compounds to be less effective
than plant-based cannabinoids and have attributed this reduced efficacy to the lack of an entourage
effect.
Dosage, Safety and Side Effects
Cannabis dosing schedules provided by doctors and producers generally lack scientific rigor and,
although industry participants strive to create a reliable dosing framework, users generally determine
dosage through self-titration and trial and error. (This method of dosing does not always lead to the
desired effect, but it is generally agreed that there is a low risk of death from an overdose of cannabis.)
Product packaging commonly indicates that a 10-mg serving of cannabinoids represents one dose,
and servings of 2 mg to 5 mg are commonly characterized as “microdoses.” Examples of representative
dosage amounts used to treat some common medical conditions are presented in the following table.
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Representative Dosage Amounts
Desired Effect or Ailment
“High”
Anxiety, depression, spasms
Cancer
Chronic pain
Epileptic seizures
Glaucoma
Increased appetite
Multiple sclerosis
Schizophrenia
Sleep disorders
Dosage
10 mg THC
25 mg CBD
25 mg CBD
2.5–20 mg THC
200–300 mg CBD
20–40 mg CBD
2.5 mg THC
2.5–120 mg THC
40–1,280 mg CBD
40–160 mg CBD
Dosage Ratio
(THC:CBD)
10:1 to 100:1
1:10
1:1
10:1
1:5
1:2 to 1:4
5:1
1:1
1:4 to 1:128
1:4 to 1:16
Neither the potential medicinal benefits and therapeutic applications of cannabis consumption nor
the negative side effects of cannabis use have been thoroughly researched by medical science. Shortterm
negative side effects are believed by some to include sensory distortion, panic, anxiety, poor coordination
of movement, reduced reaction time, lethargy or drowsiness, depression and elevated heart
rate. Longer-term effects may include suppression of the immune system, growth disorders, destruction
of lung fibers, brain lesions, reduced sexual capacity, difficulties with concentration, reduced ability
to learn and retain information, and personality and mood changes. There is also an ongoing debate
about whether cannabis consumption may lead to the abuse of more harmful substances (the so-called
“gateway drug” debate).
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CHAPTER III
Cannabis Industry Segmentation
The nascent cannabis industry is often viewed by investors and others as a single, homogeneous industry,
in much the same way the “technology” industry was viewed in the early 1990s. As the technology
industry became more important to the global economy and was better understood by the investment
community, however, investment banks and other industry analysts tracked an increasing number of
discrete yet related industry segments. In the cannabis industry we are seeing a similar trend, which we
expect to continue as the industry evolves.
To help investors better evaluate investment opportunities in the cannabis industry, we currently
define five primary segments: production, distribution, consumer products, business solutions and
digital media. We further divide each segment into multiple subsegments. Each segment has unique
opportunities and risks. For example, companies that possess, manufacture or distribute cannabis
(commonly known as “touching the plant”) face risks related to violating federal law—and state-law
compliance obligations— not generally faced by providers of business software or digital media content.
Many businesses operate in multiple segments, and we expect industry leaders to emerge in each
segment. The five primary segments and their subsegments are illustrated in the following chart.
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Cannabis Industry Segments
Production
Business Solutions
Cultivation
Production
Equipment and
Supplies
Production and
Testing Services
Business
Software
Business
Services
Distribution
Digital Media
Dispensaries
E-Commerce
Distribution
Services
Online Content
and Networking
Online
Directories
Consumer Products
Vaporizers and
Flower Concentrates Infused Products Pharmaceuticals
Accessories
Involves “touching the plant”
Does not involve “touching the plant”
n Production
We divide the production segment of the cannabis industry into three subsegments: cultivation, production
equipment and supplies, and production and testing services. Cultivation involves operating
grow facilities, propagating cannabis strains, and harvesting and curing cannabis flower. Production
equipment and supplies include the physical components used in production, such as extraction
equipment, testing equipment, lighting, irrigation systems and plant nutrients. Production and testing
services include services that support production, such as extraction or packaging, as well as testing services
related to product safety, composition and quality control. Each of these production subsegments
is described in more detail in the following discussion.
Cultivation
The principal function of a cannabis cultivator is to produce cannabis plants and flowers with the
aromas, flavors, active compounds and overall quality demanded by consumers and production intermediaries.
A cultivator can access hundreds of existing cannabis strains by purchasing seeds or clones
from commercial seed banks or nurseries, or developing unique strains through selective breeding. A
cultivator seeks to optimize the quality and quantity of a plant’s yield by managing cultivation input
variables such as light, air, nutrition, and drying and curing times.
Cannabis Cultivation Process
Ordinarily, a period of three to ten months is required to grow and prepare cannabis flower for consumption.
The cultivation process generally can be organized into six phases: seed selection, seedling,
vegetative, flowering, harvesting and curing. Each of these phases is summarized in the following table.
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Cultivation Process Overview: Seed to Bud
Time
Start
Seed Selection
Selecting a seed is the first step of the cultivation process. A cultivator can
choose from more than 1,500 unique seed varieties, each of which has the
capacity to produce a cannabis strain with a particular cannabinoid and
terpene profile and other unique characteristics.
1–4
Weeks
Seedling
The seedling stage is the period during which the seed sprouts and the
plant stem starts to grow. During this stage, cultivators manage growth to
avoid long stems that may lack the strength to support further vegetation.
3–8
Weeks
Vegetative
The vegetative stage is characterized by the plant’s rapid growth and revelation
of sexual characteristics. During this stage, cultivators remove male
plants and control growth inputs, such as light and nutrients, to maximize
the plant’s yield of unpollinated female flower (which generally contains
the highest concentration of active compounds).
6–16
Weeks
Flowering
The flowering phase comprises the growth and maturation of the cannabis
flower and the trichomes on the flower. Trichomes are hairlike components
that secrete cannabinoids, terpenes and other compounds. Trichomes generally
occur all over the surface of the plant, but are found in highest concentration
on the flowers of unpollinated female plants.
2–4
Weeks
Harvesting
Harvesting involves clipping the leafstalks (on which the flowers grow)
from the main plant stem, drying the leafstalks and flowers, and trimming
the dried flowers. Cultivators harvest at a time calculated to maximize
flower yield and optimize cannabinoid and terpene content.
2–8
Weeks
3–10
Months
Curing
The curing phase is a period of controlled fermentation of the dry cannabis
flower. The conditions under which fermentation occurs, as well as the
duration of the fermentation process, further affect the cannabis flower’s
aroma, taste and cannabinoid composition.
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Cultivation Facilities
There are three general types of cannabis cultivation facilities: outdoor facilities, where cannabis is
grown under natural sunlight and widely exposed to the elements; greenhouse facilities, where cannabis
is grown under filtered sunlight and environmental conditions are partially controlled; and indoor
facilities, where cannabis is grown under electrical lighting and environmental conditions are tightly
controlled. Some facilities combine features of these general types. For example, some greenhouses rely
primarily on filtered sunlight but also employ supplementary electrical lighting to influence the plant
flowering cycle. Each type of facility is suitable for certain purposes.
Growing indoors under electrical lighting is the most expensive way to grow cannabis, but typically
yields the highest quality cannabis by providing for maximum control over variables such as
light, air, nutrition, and exposure to contaminants and pests. Electrical lighting products for indoor
cultivation include traditional and compact fluorescent lamps, high-intensity discharge (HID) lamps
and light-emitting diode (LED) lamps. Adequate carbon dioxide levels can be maintained indoors with
either bottled CO 2 or CO 2 generators. Common indoor growth mediums include soil, hydroponic
systems (wherein nutrients are added to sand, gravel or liquid growth medium) and aeroponic systems
(wherein roots hang suspended in a nutritional aerosol solution). Indoor cultivation facilities are prevalent
in Canada and certain parts of the United States where climatic conditions are not favorable to
outdoor cannabis cultivation.
Indoor Grow Rooms
Aeroponic Systems
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Cannabis Industry Segmentation
Compared to indoor cultivation facilities that use electrical lighting, greenhouse and outdoor facilities
are generally less expensive to operate and more appropriate for large-scale projects, but provide less
control over growing conditions. The use of natural sunlight provides substantial savings on lighting
equipment and energy costs, but may limit the number of grow cycles per year. Outdoor and greenhouse
environments are more exposed to environmental risks that may negatively affect crops, such as
pests, contaminants and adverse weather. Outdoor and greenhouse cultivation facilities are prevalent in
Oregon, California and certain Latin American countries, which have climates conducive to outdoor
growing.
Outdoor Greenhouses
The Business of Cannabis Cultivation
Cultivation businesses must navigate a host of operational challenges, including state and local licensing
requirements, facility design and construction, research and acquisition of cannabis strains, intellectual
property protection, cultivation process engineering, supply-chain management, yield optimization,
facility management and security. Many cultivation businesses retain outside consultants to advise
on one or more of these issues, although some businesses manage their entire cultivation operations
internally. A cultivator may wholesale cannabis flower and other plant material to cannabis concentrate
manufacturers or retail dispensaries, or it may be part of a vertically integrated production and retail
business that sells its flower and other internally manufactured products through its own dispensaries.
Certain U.S. laws, foreign laws and international treaties currently restrict interstate and some
international movement of cannabis products. A cultivation business that wishes to scale its operations
into a new jurisdiction often must invest significant capital in a new cultivation facility located within
the new jurisdiction. As laws change to allow more interstate and international transportation of cannabis
products, cultivators who are operating redundant facilities or expensive indoor facilities will face
increased margin pressure. As the cannabis industry matures and becomes more commodi tized, we
expect the most successful cultivators will be those with strong consumer brands or scalable low-cost
operations in regions where the climate is conducive to agricultural production.
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Production Equipment and Supplies
Production equipment and supplies include the physical components used in cannabis production.
Many industry participants in this subsegment provide products to a broad range of fully legal industries
and do not “touch the plant”; therefore, these participants typically do not require special cannabisrelated
licenses and generally avoid legal risks related to violations of federal law.
Some components of cannabis production are similar or identical to components used in other
agricultural industries (such as irrigation systems), and some are specialized for application to the
cannabis industry (such as extraction machines). Components supplied for many indoor and greenhouse
cultivation facilities include electrical lighting equipment, air filtration and circulation systems,
irrigation systems, nutrient management systems, drying and curing equipment, and computercontrolled
automation and monitoring systems. Specialty cannabis equipment companies now provide
“all-in-one” automated indoor cultivation systems that can be used for in-home cultivation or scaled
for commercial purposes.
Extraction System
Cultivation System
Production and Testing Services
Production services include cannabis extraction and product manufacturing services provided primarily
on a business-to-business basis to cultivators, consumer product companies and retail dispensaries.
Extraction companies invest in specialized equipment that transforms cannabis flower into concentrates
intended for wholesale. Product manufacturing services companies process cannabis flower or
concentrates, or provide packaging and wholesale services.
Testing services include scientific testing of cannabis products and reporting of information about
product quality, safety and composition. Cannabis products are tested at multiple stages of production
for genetic information and strain verification, cannabinoid and terpene composition and
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Cannabis Industry Segmentation
potency, moisture content and the presence of contaminants, such as residual solvents, heavy metals,
mycotoxins, microorganisms and pesticides. Testing, labeling and certification requirements vary
widely across jurisdictions, but increasingly are being required by state law and demanded by supplychain
intermediaries and consumers. Uniform standards for testing and reporting are expected to
emerge as scientific understanding of cannabis increases and as industry consensus about cannabisrelated
health and safety concerns develops.
Providers of extraction, manufacturing and testing services generally must obtain state and local
cannabis licenses and are exposed to risks related to federal legal violations.
Composition and Potency
Laboratories ordinarily test cannabis for the specific amounts of 10 to 15 cannabinoids and more than
30 terpenes. Cultivators and production intermediaries rely on these test results to identify and track
cannabis varieties and to monitor the quality and consistency of production methods. Retailers and
consumers use test results information to assist in purchasing decisions. Almost all consumer products
now include labeling that, at a minimum, indicates the amounts of THC and CBD.
Pesticides
Controlling and disclosing the presence of pesticides in cannabis products is increasingly becoming
a focus of regulators and producers. Even cannabis grown under organic conditions can be exposed
to pesticides inadvertently, so many states now require all cannabis products to be tested by a statelicensed
laboratory for pesticides. Pesticides can be especially problematic in cannabis concentrates;
studies have shown extraction processes may concentrate pesticides at a rate higher than cannabinoids
and terpenes.
Microbiological Organisms
Certain molds, other fungi and bacteria found in and on the cannabis plant can damage the plant
or certain cannabis products and can be harmful if consumed by humans. Mold is a problem most
commonly found in indoor growing environments and during the cannabis drying and curing process.
Organisms found in cannabis and identified by testing includes aspergillus, salmonella, pseudomonas
and E.coli.
Residual Solvents
Most extraction processes use solvents to extract the active compounds from cannabis plant material.
Commonly used solvents include butane, carbon dioxide, ethanol or propane. Residual solvents are
those trace amounts of solvents that remain in a cannabis concentrate after the extraction process.
Some residual solvents can be harmful if consumed by humans in sufficient amounts, and others
should not be consumed in any amount.
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Sample Laboratory Test Results
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CHAPTER III
Cannabis Industry Segmentation
Production Opportunities
We believe opportunities in this segment include:
Specialized Production Services. Production services companies that invest in the necessary equipment
and facilities should see strong demand for high-margin specialized services from cultivators
and other production intermediaries. We expect opportunities will expand for companies that provide
extraction services (particularly those who professionally manage hazardous processes such as hydrocarbon
extraction) or develop proprietary infused-product manufacturing processes.
Energy-efficient, Integrated Cultivation Components. We anticipate continued design and construction
of sophisticated indoor cultivation facilities, which should present a significant opportunity
for suppliers of advanced cultivation components that improve yield and reduce energy costs. We
believe companies that provide all-in-one integrated systems for automation, monitoring and control
of the production process are more likely to succeed than companies that merely offer a single-point
solution.
Branded Laboratory Test Certification. Given the importance of product testing, we believe that
leading providers of high-quality testing services have an opportunity to establish an industry recognized
“certification,” and that such a certification may become a key factor in influencing consumer
confidence and demand.
Efficiencies in Cannabis Cultivation. We believe that certain segments of the market will become
increasingly commoditized and that cultivators with low production costs and high yields will have
significant competitive advantage. Cultivators with operations in regions conducive to low-cost natural
production should benefit as laws are changed to facilitate interstate and international cannabis
commerce.
Production Challenges
Challenges in this segment include:
Scaling Cultivation Operations. Current laws typically force cultivators to build, and obtain licenses
for, potentially redundant, capital-intensive cultivation facilities in each jurisdiction they serve. The
capital requirements and uncertainty around licensing present serious challenges to cultivators seeking
to scale their operations.
Downward-pricing Pressure on Cannabis Flower. Cannabis wholesale prices are declining as largescale
cultivators begin to commoditize cannabis flower. Small and inefficient cultivators (including
high-cost indoor producers) may struggle to produce cannabis at effective margins as cannabis cultivation
migrates to global regions with conditions that support low-cost, sustainable production.
Lack of Standardized Testing. Currently, it may be difficult or impossible to reliably compare test
results between providers of testing services because the cannabis industry has not yet developed uniform
testing standards. Until the industry adopts uniform standards that address testing procedures
and reporting for a broad variety of flower, concentrates and infused products, providers of testing
services may struggle to develop an industry-wide brand and reputation for quality.
Access to Capital. Participants in this segment generally engage in capital-intensive operations.
In particular, cultivation, contract manufacturing and testing facilities require significant capital
investment. Emerging companies in this segment may struggle to raise sufficient capital to compete
effectively.
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Production Outlook
Due to U.S. federal and international legal restrictions on cannabis commerce, producers currently
must invest significant capital in potentially redundant facilities located in separate jurisdictions, and
many large agricultural producers and equipment suppliers that could effectively compete in the cannabis
industry are reluctant to enter the market. In the near term, we expect that cultivators will continue
to raise capital for facilities across multiple jurisdictions, and well-managed and well-financed
cultivators will differentiate themselves by creating consistent, high-quality strains, developing strong
distribution relationships, vertically integrating other supply-chain functions and offering branded
products and competitive pricing. We also expect production services companies will benefit from
increasing demand for specialized extraction and manufacturing services that cultivators and other
production intermediaries cannot efficiently perform themselves, and providers of testing services will
benefit from increasingly robust testing and safety regulations. In the long run, we expect more permissive
domestic and foreign laws will result in increased competition from large enterprises that are
able to realize economies of scale or have operations in regions best suited for efficient, sustainable
production.
n Distribution
We divide the distribution segment of the cannabis industry into three subsegments: dispensaries,
e-commerce and distribution services. Dispensaries are retail outlets where consumers purchase cannabis
products for medical or recreational purposes. E-commerce includes digital applications used to
enhance the cannabis shopping experience. Distribution services include wholesale and related transportation
and logistics services. Participants in the distribution segment generally “touch the plant”
and therefore must comply with state and local regulations—which often require licenses or permits—
and must accept legal risks related to federal cannabis restrictions.
Dispensaries
Cannabis dispensaries are “point of sale” retail establishments where consumers may purchase medical
or recreational cannabis products. Cannabis dispensaries are the face of the cannabis industry in many
communities and, consequently, they occupy one of the most heavily regulated and scrutinized positions
in the cannabis supply chain.
Dispensaries in established state-legal markets provide consumers with a typical retail shopping
experience. Dispensaries typically range in size from 1,000 to 10,000 square feet of retail space. A dispensary
may offer between 10 to 50 strains of cannabis flower and a variety of concentrates, edibles,
topicals and accessories. Inventory is either acquired from cultivators and other wholesale product
suppliers, or cultivated and produced internally. Products may be illustrated in menus or displayed on
shelves and may also be available for customers to touch, smell or otherwise examine. Trained customer
service staff, often known as “budtenders,” are typically available to educate customers about product
offerings.
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Cannabis Industry Segmentation
Dispensary Exterior Views
Dispensary Interior Views
Customer Interactions
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Because dispensaries “touch the plant,” they must usually obtain a state license. Obtaining a state
dispensary license generally involves a multi-month application process that requires the applicant to
demonstrate compliance with complex license criteria and local regulations, such as producing their
own products (or being prohibited from doing so), locating their dispensary outside a city’s ordinary
retail or commercial zones, operating as a nonprofit cooperative or collective, tracking cannabis products
from “seed to sale,” and collecting taxes on behalf of the state. Dispensaries must also comply
with applicable regulations related to product testing, packaging and labeling, security, and health and
sanitary conditions.
An extensive network of dispensaries across jurisdictions will facilitate the growth of the cannabis
industry and its ability to attract new consumers. Currently, states with the most extensive networks
of dispensaries are those that have both recreational and medical cannabis laws, such as Colorado,
Oregon and Washington, and those that have had medical cannabis laws for a long period of time, such
as California. For example, according to the Rocky Mountain High-Intensity Drug Trafficking Area,
as of June 2017, in Colorado there were 491 cannabis dispensaries, compared to 392 Starbucks and
208 McDonald’s.
E-Commerce
E-commerce refers to the use of digital applications to enhance the cannabis shopping experience. For
example, a mobile application may facilitate the comparison of cannabis products and pricing or the
delivery of orders from local dispensaries. These applications are being developed by a host of market
participants, ranging from software development companies to retail dispensaries. Due to federal
restrictions, cannabis e-commerce transactions are currently conducted only intrastate. If and when
federal restrictions change to allow interstate cannabis commerce, we expect that home-delivery and
e-commerce services will increase significantly. E-commerce solutions with high consumer engagement
(such as those providing reviews and price comparisons for a broad selection of products) will help
retailers acquire and retain customers.
Sample E-Commerce Menus
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Cannabis Industry Segmentation
Distribution Services
Distribution services is emerging as a prominent subsegment of the cannabis industry; services in this
subsegment include wholesale distribution of cannabis products to retailers and production intermediaries,
as well as related transportation and logistics services. Historically, a high percentage of
product manufacturers have sold directly to retail dispensaries, and some of those manufacturers with
established “in-house” distribution channels are now leveraging their experience to offer distribution
services to third-party manufacturers.
Currently, distribution activities must be conducted only intrastate, and providers of distribution
services must comply with regulations related to “touching the plant,” including testing and taxcollection
requirements. As laws are changed to allow more interstate and international transportation,
purchasers will be able to compare products and prices on a national or international basis, and distributors
who provide superior product selections and transportation logistics should have significant
competitive advantage.
Distribution Opportunities
We believe opportunities in this segment include:
E-Commerce Distribution. The ability to accept electronic orders and deliver cannabis products
on demand represents an attractive distribution channel and growth opportunity. Companies that
provide digital retail platforms for cannabis products will benefit as consumers migrate to e-commerce
transactions.
Branded and Vertically Integrated Dispensaries. We believe that consumers will ultimately concentrate
their purchases with a small group of branded dispensaries that provide a distinct, consistent
and trusted retail experience and offer supporting e-commerce solutions. Dispensaries that integrate
vertically to offer their own branded products should achieve superior margins on those products.
High-profile Retail Locations. We see an opportunity for cannabis dispensaries to attract significantly
more customers by establishing storefronts in malls and other high-profile retail locations.
“Land Grab” of Desirable Locations. Companies able to navigate the licensing and real estate challenges
required to secure and operate multiple dispensaries in desirable locations should benefit from
existing high barriers to entry and capture significant market share.
Distribution Challenges
Challenges in this segment include:
Customer Acquisition and Retention. Like e-commerce businesses in other industries, providers of
e-commerce solutions in the cannabis industry face intense competition for customers who can easily
change vendor loyalties. Companies will be challenged to minimize customer acquisition costs and
retain customers.
Restrictive and Changing Regulations. Obtaining a state dispensary license or other type of distribution
permit typically involves a multi-month application process that requires the applicant to
demonstrate compliance with complex criteria. In addition to state laws and regulations, dispensaries
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and other distribution intermediaries are subject to county, municipal and other local regulations that
may restrict or even prohibit distribution activities. The success of any dispensary operator or distributor
depends on anticipating and complying with these regulations.
Tax Issues Related to Distribution. States and localities that legalize cannabis are focused on the
potential to generate tax revenue from the industry. Ambiguous, constantly changing and potentially
burdensome taxation rules may make it difficult for dispensary operators or distributors to remain in
good standing with licensing, regulatory and tax collection agencies and may negatively impact their
financial results.
Distribution Outlook
We expect dispensaries across the United States to increasingly seek to provide modern retail experiences
that are supported by e-commerce applications. We also expect that the most well-run dispensaries
will continue to generate significant cash flow at compelling margins. Dispensaries should be able
to gain advantage by producing their own products, by developing strategic or exclusive relationships
with specialty producers or by finding ways to generate customer loyalty. However, oversaturation
in the number of dispensaries in certain jurisdictions, such as Colorado, has led to a very competitive
environment, consolidation and moratoriums on issuing new local dispensary licenses by various
municipalities.
The distribution segment is subject to some of the strictest and most frequently changing regulations
applicable to the cannabis industry. While distribution opportunities may arise with changes
in law, some legislation may cause significant disruption. For example, the number of dispensaries
operating in the greater Los Angeles region is expected to decrease significantly in the short term as
California’s new cannabis regulatory agency begins its oversight and enforcement efforts in 2018.
The distribution services subsegment in the United States is still in its infancy and has experienced
a number of growing pains related to a lack of well-established distribution channels. For example, a
Nevada law generally requiring dispensaries to use third-party distributors proved troublesome when
dispensaries sold out of product within 48 hours after legal recreational cannabis sales commenced in
the state. As more distribution channels and points of contact are established, we believe that opportunities
for third-party distribution services companies will increase.
In certain legalized international markets, such as Germany and Uruguay, cannabis products
are sold primarily through existing pharmacy networks (Argentina plans to do the same). While
cannabis-derived pharmaceuticals may ultimately be distributed the same way in the United States,
we believe the future domestic distribution channels of other types of cannabis products will closely
resemble those of alcohol and tobacco products.
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n Consumer Products
Cannabis may be consumed in many different forms, which fall into three broad categories: flower,
concentrates and infused products. The most popular way to consume cannabis historically has been
to smoke the flower or “bud” from the cannabis plant, which can be done using a pipe, a hand-rolled
cigarette (often referred to as a “joint”) or a water pipe (often referred to as a “bong”). Cannabis flower
can also be vaporized and inhaled (using a product known as a “vaporizer”). The active compounds
in cannabis can be extracted and concentrated into oil or waxlike substances known as concentrates.
Concentrates, in turn, can either be vaporized and inhaled or infused into products known as “infused
products.” Infused products may be applied topically, such as lotions and creams, or consumed orally,
such as food and drinks (known as “edibles”), capsules, pills and tinctures.
When smoke or vapor from heated flower or a concentrate is inhaled, the active compounds travel
directly to the central nervous system and the physiological effects typically begin within one to five
minutes. When infused products are consumed orally, the active compounds are digested in the stomach
and metabolized by the liver before taking effect, typically in one to two hours. Compared to
inhaled products, infused products deliver a smaller relative amount of cannabinoids to the bloodstream,
but they produce longer-lasting effects.
Innovative companies continue to expand the universe of cannabis products, developing brands
with packaging that increasingly emphasizes education about the product’s effects and appeals to mainstream
consumers. Cannabis flower is currently the most widely sold form of cannabis, but concentrates
and infused products are gaining in popularity.
The following chart shows the combined relative sales by product category for Colorado, Oregon
and Washington (three states with relatively mature recreational and medical cannabis markets) for the
three months ended September 30, 2017.
Product Sales by Category: Q3 2017
14%
12%
51%
23%
Flower Concentrates Edibles Other
Source: BDS Analytics
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Cannabis Flower
Cannabis flower, or “bud,” is the most popular product among cannabis consumers. Cannabis flower
is usually green (although some varieties have a purple or orange hue), slightly sticky to the touch and
spongy in density. The flower has a strong, pungent aroma owing primarily to the trichomes on the
flowers, which contain the highest concentrations of cannabinoids and terpenes of any part of the
plant.
Branded Cannabis Flower
There are thousands of different cannabis varieties, each with its own cannabinoid and terpene
profile and corresponding aroma, flavor and potency. Leading cultivators are recognized each year in
contests and ceremonies for their indica, sativa and hybrid varieties. Award-winning varieties—which
are often given unique identifying names—frequently become the most in demand by consumers.
Popular varieties today include “Blue Dream,” “Gelato,” “OG Kush,” “Pineapple Express” and “Sour
Diesel.”
The flower of a typical cannabis variety produced for human consumption contains approximately
15% to 30% THC, approximately 0.1% to 1% CBD and nominal levels of other cannabinoids. Due
to advancements in cultivation techniques, THC levels in cannabis flower available today are generally
much higher than in the past.
Concentrates
Cannabis can be processed into a variety of concentrates, many of which are sold as finished products
for smoking or vaporizing and some of which can be infused into other products, such as edibles and
topicals. Concentrates include CO 2 oil, butane hash oil or “BHO,” shatter, wax, live resin, budder,
kief, ice water hash and rosin.
Concentrates are quickly becoming popular for a host of reasons. Some believe vaporizing or ingesting
concentrates are healthier methods of cannabis consumption than smoking plant material. Extracting
cannabinoids from the cannabis plant produces higher-potency dosing (THC content can exceed
80% in concentrates), enables custom formulations and flavor profiles, and facilitates consumption
that is more convenient and discreet than smoking. The concentration of specific cannabinoids varies
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across cannabis varieties and even across flowers from the same plant, which limits the accuracy of laboratory
tests conducted on a sample of plant material. Cannabis concentrates, however, are generally
homogeneous and their active elements can be more precisely measured and reported so as to facilitate
standardization of products and accurate dosing by consumers.
The following chart shows the combined relative sales by category of concentrates for Colorado,
Oregon and Washington for the three months ended September 30, 2017.
Concentrates Sales by Category: Q3 2017
18%
6%
8%
16%
35%
17%
Live resin Oils Other concentrates Shatter Vape oil Wax
Source: BDS Analytics
Concentrates are prepared with extraction techniques that fall into two general categories, solventbased
extraction and solvent-free extraction. Solvent-based extraction techniques include the use of
hydrocarbon, carbon dioxide (CO 2 ) or ethanol solutions to chemically isolate cannabinoids and other
active compounds. Solvent-based extraction can be performed relatively quickly and can produce high
yields and customized formulations, but requires the use of expensive equipment and skilled labor and
also may leave residual solvents in the resulting concentrate. Solvent-free techniques include the use of
filters, ice water or heat to physically separate parts of the cannabis plant with high cannabinoid concentrations.
Generally, solvent-free extraction is inexpensive and can be performed without specialized
equipment, but it is also slow and labor-intensive and it typically results in low yields.
Hydrocarbon Extraction
Hydrocarbon extraction is a process whereby a hydrocarbon solvent (typically butane or propane)
chemically extracts cannabinoids, terpenes and other compounds from cannabis plant matter. The
solvent is then purged using heat and pressure, leaving a concentrated form of the extracted compounds.
Because hydrocarbon extraction involves a risk of explosion and usually leaves behind residual
solvents, regulations are becoming more restrictive in specifying where and how the process can occur
and prescribing acceptable levels of residual solvents in the resulting products. Concentrates prepared
through hydrocarbon extraction—including BHO, shatter and wax—are popular with some consumers
because hydrocarbon extraction generally preserves terpenes and the source plant’s aroma and
flavor.
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CO 2 Extraction
CO 2 extraction is a process whereby cannabis is introduced into a system of supercritical CO 2 (CO 2
at a pressure and temperature at which it exhibits properties of both a gas and a liquid). Cannabinoids
and other compounds dissolve in the supercritical CO 2 ; pressure is released, and the CO 2 then
evaporates, leaving a concentrated form of the dissolved compounds. CO 2 extraction is considered a
relatively safe and clean extraction process because CO 2 is nonvolatile, CO 2 concentrates are generally
free of residual solvents and CO 2 extraction kills mold and bacteria. CO 2 extraction is commonly used
to produce viscous CO 2 oil for vaporizer cartridges and low-terpene concentrates for infused products.
Ethanol Extraction
Ethanol extraction is a method used in a number of industries to extract essential oils and food flavorings
from plants. When used to produce cannabis concentrates, the process involves soaking cannabis
plant material in ethanol, which separates cannabinoids, terpenes and other compounds from the
plant matter. The solution is then heated until the ethanol is purged to acceptable levels. Ethanol is
generally much safer to use for extraction than hydrocarbons and is particularly useful for creating concentrates
with “whole-plant” compound profiles that mirror the source plant. Unfortunately, ethanol
also extracts certain plant compounds —particularly chlorophyll—that have undesirable aromas and
flavors.
Solvent-Free Extraction
Most solvent-free extraction techniques are inexpensive and do not require special training or equipment,
but they also tend to produce low yields. Kief, ice water hash and rosin are examples of concentrates
produced with solvent-free methods. Kief is a collection of trichomes that are separated from
cannabis flower by sifting the flower with specialized filtering screens. Ice water hash is a collection
of trichomes produced by stirring cannabis in ice water, filtering the mixture through a sequence of
increasingly fine screens, removing the trichome collection from the finest screens and allowing it to
dry. Rosin is created by heating and pressing cannabis plant material between parchment paper and
collecting the concentrate that oozes onto the paper.
Oil Concentrate (Cartridge) BHO Wax Rosin
Cannabis Concentrate Products
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Infused Products
Infused products are ingestible products that have been infused with cannabinoids and other active
compounds from the cannabis plant. There are two general categories of infused products: those consumed
orally, such as foods and beverages (known as “edibles”), capsules, pills and tinctures; and those
applied topically, such as lotions, balms and creams. Infused products may either be infused with
concentrates (that are prepared through one of the extraction techniques discussed previously) or prepared
with other infused products, such as cannabis-infused butter (a concentrate prepared by heating
cannabis in butter to release the active compounds, and then filtering out the plant material).
The following chart shows the combined relative sales by category of infused products for Colorado,
Oregon and Washington for the three months ended September 30, 2017.
Infused Products Sales by Category: Q3 2017
8%
2%
10%
44%
11%
25%
Candy Chocolates Tinctures Infused foods Pills Other
Source: BDS Analytics
Edibles
Popular edibles include infused candies, chocolates and beverages. The active compounds in edibles
are digested and metabolized by the liver before taking effect; typically, the time from ingesting to
onset of an effect is one to two hours, but the effect lasts longer than that resulting from inhaling
smoke or vapor. Edibles generally deliver body-focused effects, which may be preferred by consumers
seeking pain relief.
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Edibles: Chocolate, sparkling water, mints, candies, brownies, gummies
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Capsules and Tinctures
Capsules are cannabis concentrates with various cannabinoid profiles encapsulated in a gelatin coating
for easy swallowing. Capsules are digested and metabolized like edibles; typically, the time from swallowing
to onset of an effect is one to two hours. Tinctures are concentrates suspended in an alcohol
solution and are usually placed under the tongue using a dropper; effects generally begin within 10
to 15 minutes. Capsules and tinctures are preferred over edibles by some consumers who believe they
deliver more consistent dosing than edibles.
Capsules
Tincture
Topicals
Topicals are any form of product infused with cannabinoids and applied topically, such as lotions,
balms, creams, lubricants and transdermal patches. Topicals often include noncannabis ingredients,
such as essential oils or herbal extracts. They are commonly used for localized relief of muscle soreness
and inflammation and for relief of headaches and cramping.
Topicals
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Vaporizers and Accessories
Smoking or vaporizing cannabis flower or concentrates is the most popular method of cannabis consumption,
in part because the effects of inhaled cannabis smoke or vapor begin almost immediately.
Accessories used to smoke cannabis include glass, wood or metal pipes; glass or plastic water pipes
known as “bongs”; and cigarette papers used to roll “joints.” A vaporizer is a device that heats cannabis
flower or concentrate to a temperature at which its active compounds boil and can be inhaled as vapor.
Vaporizers are increasing in popularity faster than any other cannabis-consumption device, in some
measure because vaporizing is perceived by many as a healthier method of cannabis consumption than
smoking. Distinguishing features of a vaporizer include whether it vaporizes flower or concentrate, the
form of the heating mechanism, or “atomizer,” power output, battery efficiency, durability, reusability
(there are both refillable and disposable vaporizers) and design aesthetics. Hundreds of vaporizers are
marketed, ranging from simple to complex, including handheld vaporizers that retail for $10 to $500
and tabletop vaporizers that retail for $100 to more than $1,000.
Vaporizers
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Cannabis Consumers Using Vaporizers
In addition to smoking and vaporizing devices, an increasing variety of other cannabis-related
accessories are available, including personal storage and transportation products. Some of these products
focus on safety or discretion, such as childproof containers and smell-proof bags. Other products
are designed more for style, such as vaporizer pouches and tabletop storage containers intended as
decor. The market for both safety-focused accessories and style pieces is expected to grow as laws
and regulations increasingly impose requirements related to storage and transportation and as taboos
regarding cannabis use wane.
Accessories
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Pharmaceuticals
Cannabinoid-based pharmaceuticals are drugs containing cannabinoids or cannabinoid-like compounds
that are either derived from natural cannabis or chemically synthesized. A handful of such
drugs have been approved for use to treat certain medical conditions both in the United States and
elsewhere. Examples of cannabinoid-based pharmaceuticals that have been approved for use in various
countries include Marinol, Syndros, Cesamet and Sativex. Another cannabinoid-based pharmaceutical,
Epidiolex, has not yet been approved but could become the first medicine derived from the cannabis
plant to be approved by the U.S. Food and Drug Administration (FDA).
The drug Marinol is comprised of dronabinol (a synthetic THC) encapsulated with sesame oil in a
soft gelatin capsule. Marinol has been approved by the FDA for use in treating (i) anorexia associated
with weight loss in patients with AIDS and (ii) nausea and vomiting associated with cancer chemotherapy.
Marinol is a Schedule III controlled substance under the U.S. Controlled Substances Act
(CSA). Syndros is a drug that contains dronabinol in a liquid solution; it has been approved by the
FDA for use by adults in treating the same symptoms for which Marinol has been approved. Syndros
is a Schedule II controlled substance under the CSA. Forms of dronabinol have been approved for use
in jurisdictions outside the United States, including Canada and Denmark.
Cesamet is a drug made up of encapsulated nabilone, a synthetic cannabinoid similar to THC.
Cesamet has been approved by the FDA for use in treating nausea and vomiting associated with cancer
chemotherapy. Cesamet is a Schedule II controlled substance under the CSA. Forms of nabilone have
been approved for use in jurisdictions outside the United States, including Australia, Canada, Mexico
and the United Kingdom.
Sativex is a mouth spray used for treatment of spasticity caused by multiple sclerosis; it includes
THC and CBD derived from cannabis. Sativex was first approved for use in the United Kingdom in
2010, and has been approved for use in at least 30 countries (but not in the United States). Sativex is
manufactured by U.K.-based GW Pharmaceuticals and is generally recognized as the first prescription
drug in the world to include plant-based cannabinoids. The cannabis extract used in Sativex is a Schedule
I controlled substance under the CSA.
Pharmaceuticals
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Epidiolex is an oral formulation of cannabis-derived cannabidiol, or CBD, intended to treat severe
forms of childhood epilepsy. Epidiolex has not been approved for use in any country, but the drug’s
manufacturer, GW Pharmaceuticals, recently submitted a New Drug Application for Epidiolex to the
FDA, which is an important step toward FDA approval in the United States. If approved by the FDA,
Epidiolex would be the first FDA-approved prescription drug derived from cannabis. The cannabis
extract used in Epidiolex is considered to be “marijuana,” a Schedule I controlled substance under the
CSA. Therefore, even if Epidiolex were approved by the FDA, Epidiolex would need to be rescheduled
and excepted from the “marijuana” definition before it could be lawfully prescribed in the United
States.
Consumer Products Opportunities
We believe opportunities in this segment include:
Consumer Product Brands Focused on Health and Wellness. We believe there is a substantial opportunity
for companies to develop leading brands of cannabis-based health and wellness products. Marketing
a broad line of such products under a common brand should provide a competitive advantage.
Direct E-Commerce Distribution. The e-commerce market for cannabis products is expected to
expand and consumer awareness of product options is expected to increase, enabling more consumer
product companies to sell their products directly to consumers through online purchasing platforms
rather than selling only through wholesale.
Advanced Vaporizer Functionality. Vaporizer technology has advanced rapidly in recent years, a
trend we expect to continue. In the future, vaporizers may be able to identify the composition and
potency of the product being consumed, monitor consumption and dosing of the product, or reorder
the product at the push of a button.
Specialty Formulations. We believe that scientific knowledge about the relationships between specific
cannabinoid formulations and targeted health conditions will continue to improve, and markets
will be created for highly specialized products developed to relieve particular symptoms.
FDA Approval and CSA Rescheduling. If Epidiolex is approved by the FDA and rescheduled under
the CSA to permit lawful prescriptions to be written within the United States, it would be the first federally
legal cannabis-derived drug in the country. Such a precedent could result in a significant increase
in the use of cannabis by consumers as medicine, and it could also be followed by similar approvals in
the United States for other cannabis-derived drugs.
Consumer Products Challenges
Challenges in this segment include:
Marketing and Customer Loyalty. As more products become available to consumers through dispensaries
and e-commerce solutions, consumer product providers may need large marketing budgets
to drive product awareness and customer loyalty.
Wholesale and Retail Distribution. Providers of cannabis products may struggle to develop wholesale
and retail distribution relationships because of the breadth of products being marketed. Providers
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should seek to develop strong relationships with a large number of dispensary operators, directly or
through a distributor, in order to obtain preferred shelf placement.
FDA Approval: Risk, Time and Expense. Assuming that cannabis-derived drugs will eventually be
permitted to be sold in the United States, considerable time and expense will be spent by manufacturers
to obtain FDA approval and bring approved products to market. There is no guarantee that
investments of significant time and money into research, development and clinical trials will result in
FDA approval of cannabis products.
Product Liability Claims. Companies may be exposed to various product liability claims associated
with human consumption of cannabis products. Consumer claims that products cause injury or illness,
include inadequate instructions for use or warnings concerning health risks, or cause possible side
effects or interactions with other substances may be expensive to defend or settle.
Consumer Products Outlook
We believe that there are significant market opportunities for well-recognized brands to develop in
various categories of consumer products, particularly in flower, concentrates, edibles and vaporizers.
In addition, we believe that there are opportunities for companies targeting niche applications for the
pet industry. Many companies will struggle to create strong brands because the consumer products
segment generally has low barriers to entry and is currently oversaturated. As the cannabis industry and
legal environment develop, we expect that national brands will emerge from companies with large marketing
budgets, operational scale and reputations for quality, and that large alcohol, tobacco, consumer
products and pharmaceutical companies will play a larger role in this segment.
n Business Solutions
The business solutions segment of the cannabis industry comprises business software, such as seedto-sale
tracking solutions, and business services, such as legal, compliance, operational consulting and
financial services. Software and services providers in this segment generally do not “touch the plant”
and do not require cannabis-related permits or licenses.
Business Software
Software solutions tailored to the cannabis industry are present throughout the cannabis supply chain.
Although solutions from other manufacturing and retail industries are used in the cannabis industry,
industry-specific solutions are emerging as some of the most popular. Some companies provide point
solutions that target bottlenecks in the supply chain, while others offer broad platforms that consolidate
multiple capabilities. Industry-specific software applications exist and are being developed in the
following areas: cultivation cycle management; concentrate production management; infused product
manufacturing management; product testing and compliance; retail operations (including point-ofsale,
inventory, tax reporting and compliance solutions); mobile, e-commerce and delivery applications;
supply-chain management; customer relationship management; and management reporting and
business intelligence.
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Cannabis Software Platforms
Business Services
The business services market includes (i) operational consulting, including facility planning, construction
and security; (ii) financial services, including accounting and payment-processing services;
(iii) legal, compliance and other professional advisory services; (iv) temporary and full-time staffing
services; (v) real estate services; and (vi) industry events and conferences. These services are typically
provided by professional services firms; some of these firms focus solely on the cannabis industry while
others serve a broad range of industries.
Business Solutions Opportunities
We believe opportunities in this segment include:
Industry-specific Solutions. As the cannabis industry emerges, there will be a significant market
opportunity for providers of solutions tailored for the industry. Point-solution providers may be acquisition
targets if larger companies enter the market in the future.
Integrated Platforms. We believe that integrated “seed-to-sale” solutions will be ideally positioned.
“Big Data” Analytics. We believe that there is an attractive opportunity to develop and license
industry datasets. Such datasets should provide strategic advantages to organizations that establish
substantial reach early and may also be licensed more broadly to enhance targeting, services, cross-sales
and product development.
Business Solutions Challenges
Challenges in this segment include:
Development and Deployment Risk. Due to the time and investment required to develop software
products and the emerging nature of the cannabis industry, there is a risk that developed applications
may not be effective or widely adopted. In addition, certain segments of the cannabis industry are more
mature than others; this disparity may present challenges in developing solutions that support cohesive
and scalable business models.
Low Barriers to Entry. Numerous sectors of the business services market are becoming increasingly
crowded.
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Business Solutions Outlook
The cannabis industry presents a significant market opportunity for software and services providers
because of the large number of potential new clients and the need for industry-specific solutions. In
particular, we believe that substantial opportunities exist for providers of industry-specific, platform
and “big data” solutions. We also believe that financial, legal and compliance service providers that have
developed knowledge of the cannabis industry are well positioned for growth. Similar to the production
segment, large software and services companies serving traditional industries have been reluctant
to enter the cannabis market due to concerns over the regulatory landscape. While this dynamic has
created a short-term opportunity for some smaller companies, as the regulatory environment becomes
clearer we expect competition in this segment to increase significantly as large companies enter the
market.
n Digital Media
The digital media segment of the cannabis industry includes digital content, networking and directory
platforms. Digital media providers do not “touch the plant” and generally do not need a cannabisrelated
license or permit. Digital media focused on cannabis is a niche sector within the broader digital
media market. Companies in this segment compete for viewers and subscribers and generally draw
revenue from content licensing fees, service fees, advertisement fees and subscription fees. They provide
a broad range of content and networking tools, including news related to the cannabis industry and
legalization efforts, humor and entertainment focused on the cannabis-user demographic, traditional
media and branding services, social networking tools that allow users to share pictures and information
related to their cannabis activities, and business directory tools that connect industry participants.
Cannabis Digital Media
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Digital Media Opportunities
We believe opportunities in this segment include:
Premium Content. We believe that opportunities exist to establish industry-specific publications
and media platforms for both the business-to-business and business-to-consumer markets that are
viewed as the legitimate voices of the industry.
Mobile Applications. E-commerce and digital media applications are well positioned for mobile
deployment within the cannabis industry. We expect a proliferation of mobile applications, even in the
early stages of the industry.
Enabling Technology. Continued development of core and shared technology platforms remains
an opportunity for digital media companies seeking to provide a better user experience. Technologies
that provide targeted experiences should enable digital media companies to realize greater returns on
investments.
Digital Media Challenges
Challenges in this segment include:
Limited Number of Advertisers. Broad, general-market advertisers are not commonly participating
in the cannabis industry due to concerns about legal compliance and mass-market perception. As a
result, companies are currently competing for limited advertising revenue targeted at the cannabis-user
demographic.
Venues. Established digital media companies—such as Facebook, Google, Twitter and Yelp—limit
the activities of cannabis-focused media companies on their sites in accordance with company policies.
This creates opportunities for niche publishers in the near term, but we believe that, ultimately, large
media companies will view cannabis as a mainstream industry.
Digital Media Outlook
The opportunity for cannabis-oriented digital media is substantial. We believe that companies with
well-executed strategies will emerge as the recognized voices of the industry and will be relied on by
consumers for a wealth of information from product recommendations to industry news. As regulatory
constraints relax, we expect the currently disparate and fragmented digital media services segment to
consolidate into integrated publishing, mobile and e-commerce offerings. However, as stated previously,
we believe that digital media companies focused solely on the cannabis industry will eventually
face considerable competition from —but may be logical acquisition targets for—traditional media
companies.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 59

CHAPTER IV
U.S. Legal Landscape
The legal landscape for the cannabis industry in the United States continues to be characterized by
conflict between federal prohibition and the steady advance of state legalization. According to federal
policy, Americans can access tobacco, alcohol and prescription drug products that kill thousands each
year, but they cannot access cannabis because it is a dangerous drug with no currently accepted medical
application in the United States (notwithstanding the federal government holds a U.S. patent for
methods of treating diseases with cannabinoids). Meanwhile, 46 U.S. states permit some use of cannabis
products as medicine by adults or children, and 8 of those states have laws that regulate cannabis
like alcohol.
The U.S cannabis industry has proven adept at navigating this federal-state conflict and is experiencing
rapid growth despite it. Moreover, we believe that federal policy will move (and may already be
moving) in a new direction—one that would facilitate federal approval of cannabis-derived drugs and
ultimately, we believe, give rise to a regulatory and political environment in which the U.S. Congress
could fully legalize both medical and recreational cannabis.
In this chapter, we summarize three categories of state cannabis laws and examine certain federal
laws and policies that impact the cannabis industry, including federal laws related to drug and food regulation,
banking and finance, and intellectual property. Finally, we offer our views about how the cannabis
legalization trend and related developments likely lead to a federally legal U.S. cannabis industry.
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n U.S. State Law
Of the 51 jurisdictions comprising the 50 U.S. states and the District of Columbia, 47 have enacted
at least one law that permits the manufacturing, distribution, dispensing or possession of cannabis or
concentrates. These laws fall into three general categories:
• 29 U.S. states and the District of Columbia have enacted medical cannabis laws that permit
the production and possession of cannabis or concentrates for use in treating a broad range of
qualifying medical conditions.
• 19 U.S. states have enacted narrow CBD/limited laws that permit possession of small amounts
of low-THC/high-CBD cannabis concentrates for use in treating a few serious medical conditions—in
particular, severe forms of childhood epilepsy.
• 8 U.S. states have enacted recreational laws that permit the commercial production and sale of
cannabis to adults for recreational and other uses.
Some states have passed more than one of these laws, and some state laws do not fall clearly into
any one of these categories. Florida and Delaware have both medical cannabis and CBD/limited laws.
Every state that has enacted a recreational law has also passed a medical cannabis law. A District of
Columbia law that permits adults to grow and consume cannabis is often cited as a recreational law;
however, we do not characterize it as such because it does not permit the commercial production and
sale of cannabis. The following map of the United States shows states with medical cannabis laws,
CBD/limited laws or recreational laws (a state with more than one of these laws is represented on the
map by its most permissive law).
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U.S. State Cannabis Laws (January 2018)
© 2017 Ackrell Capital, LLC
Recreational Law Medical Cannabis Law CBD/Limited Law
Alaska
California
Colorado
Maine
Massachusetts
Nevada
Oregon
Washington
No Recreational,
Medical Cannabis
or CBD/Limited Law
Idaho
Kansas
Nebraska
South Dakota
Arizona
Arkansas
Connecticut
Delaware
Florida
Hawaii
Illinois
Maryland
Michigan
Minnesota
Montana
New Hampshire
New Jersey
New Mexico
New York
North Dakota
Ohio
Pennsylvania
Rhode Island
West Virginia
Vermont
Alabama
Georgia
Indiana
Iowa
Kentucky
Louisiana
Mississippi
Missouri
North Carolina
Oklahoma
South Carolina
Tennessee
Texas
Utah
Virginia
Wisconsin
Wyoming
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An exhaustive review of each jurisdiction’s laws is beyond the scope of this report; instead we discuss
issues commonly addressed by each category of cannabis laws.
Medical Cannabis Laws
In 1996, California enacted the first medical cannabis law of any U.S. state, followed in the late 1990s
by Alaska, Maine, Oregon and Washington. Since the beginning of 2000, 24 more states and the
District of Columbia have passed medical cannabis laws that permit the production and possession of
cannabis or concentrates for use in treating a broad range of qualifying medical conditions.
A state medical cannabis law permits a patient, with a doctor’s recommendation, to use cannabis to
treat any qualifying medical condition designated by the law. It is illegal for a doctor to “prescribe” a
Schedule I controlled substance under the U.S. Controlled Substances Act (CSA), so medical cannabis
laws typically require a doctor’s “recommendation” rather than a prescription. Some medical cannabis
laws require a written recommendation, while others allow an oral recommendation. States may impose
a variety of other requirements or restrictions on a doctor or patient relating to medical cannabis access,
such as patient registration with a state medical cannabis registry, submission of a patient’s fingerprints
or prohibition of use by convicted felons or certain government employees (for example, firefighters).
The number and nature of qualifying conditions included in medical cannabis laws vary widely.
Some laws designate relatively few or highly specific medical conditions, while other laws include many
conditions or highly subjective conditions, such as chronic pain. Some medical cannabis laws also
give doctors discretion to recommend cannabis for conditions not specifically designated. In aggregate,
across all medical cannabis laws in the United States, cannabis is legally recognized as a form of
therapy or medicine for more than 50 qualifying conditions. Common qualifying conditions include
Alzheimer’s disease, amyotrophic lateral sclerosis (ALS), anorexia, arthritis, cachexia, cancer, chronic
pain, Crohn’s disease, epilepsy, glaucoma, hepatitis C, HIV/AIDS, inflammation, migraine, multiple
sclerosis (MS), nausea, nervous system degeneration, Parkinson’s disease, post-traumatic stress disorder
(PTSD) and spasms.
Some medical cannabis laws restrict the form of cannabis or the means of consumption. For example,
Pennsylvania’s medical cannabis law, enacted in 2016, prohibits smoking or vaporizing cannabis
flower, prohibits the incorporation of cannabis into foods by anyone other than the patient or the
patient’s caregiver, and authorizes cannabis to be dispensed only in certain concentrated forms.
Medical cannabis laws generally permit cannabis cultivation and distribution by a state-licensed
cultivator or dispensary, by a qualified patient or by a designated caregiver of the patient. A qualified
patient or the patient’s designated caregiver generally may grow only an amount of cannabis deemed
sufficient for the patient’s personal use. Some medical cannabis laws permit patients or caregivers to
grow cannabis only if they cannot practically obtain it by other means. For example, certain states
permit patients to grow cannabis only if they reside more than a specified distance from the nearest
licensed dispensary. Some states allow qualified patients and designated caregivers to collectively or
cooperatively aggregate their cultivation activities.
State-licensed cultivators and dispensaries must satisfy various licensing requirements related to
health, safety and security. In states that permit or require vertical integration, a licensee may be part
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of a single cultivation and dispensing enterprise. In other states, a licensed cultivator may be permitted
to sell to unaffiliated licensed dispensaries or delivery services, which then retail medical cannabis to
patients.
Each state has its own rules about whether medical cannabis activities may be engaged in for profit.
In states where caregivers and qualified patients collectively or cooperatively aggregate their cultivation
and distribution efforts, participants generally are allowed to charge amounts necessary to recover the
reasonable costs associated with those activities but may not operate for profit. In states that allow
licensed cannabis activities, such as cultivation and dispensing, the organizations engaged in those
activities generally may seek to earn a profit.
CBD/Limited Laws
From 2014 through 2017, a total of 19 U.S. states enacted CBD/limited laws that generally permit
possession of small amounts of low-THC/high-CBD cannabis concentrates for use in treating a few
serious medical conditions. Most of these laws limit qualifying medical conditions to severe forms of
epilepsy or seizure disorders, but some laws designate a moderately broader set of conditions.
Most CBD/limited laws allow CBD use by children. Many of these laws were enacted in the context
of high-profile stories about CBD treatments for children with severe seizure disorders, and the
laws have been given names like Carly’s Law (Alabama), Haleigh’s Hope Act (Georgia) and Julian’s Law
(South Carolina). Charlotte’s Web is a low-THC/high-CBD cannabis strain named for Charlotte Figi,
a young Colorado girl whose parents treat her seizure condition with CBD oil. Her case was featured
in Dr. Sanjay Gupta’s popular CNN special, Weed.
In general, each CBD/limited law establishes a narrow legal framework for use of low-THC/
high-CBD cannabis concentrates. Certain CBD/limited laws designate only one or several producers
of permitted cannabis concentrates; in some cases, these producers include a state university or research
institution. Other CBD/limited laws establish no legal framework for the production or distribution of
permitted products and merely provide a narrow affirmative defense for state-law cannabis possession
and use charges.
Recreational Laws
In 2012, Colorado and Washington voters passed the first laws in the United States (and the world) to
permit the commercial production and sale of cannabis to adults for recreational and other uses. Alaska
and Oregon passed similar recreational laws in 2014. And in the November 2016 elections, four more
states—California, Maine, Massachusetts and Nevada—passed recreational laws. (Of the five recreational
laws included on November 2016 ballots, only Arizona’s law did not receive voter approval.)
State recreational laws permit adults aged 21 years or older to legally purchase and use cannabis
sold by state-licensed commercial businesses. There are no state residency requirements for adult consumers,
and out-of-state visitors with valid proof of age may legally purchase cannabis, giving rise to
“cannabis tourism” in states with extensive dispensary networks like Colorado, Oregon and Washington.
Cannabis typically may not be consumed in public spaces or private establishments open to
the public, such as parks and restaurants. Recreational laws also generally permit adults to cultivate a
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limited number of cannabis plants (typically, 4 to 6) for personal use. (Washington is an exception,
however, and makes personal cultivation a felony unless it is done by a person registered in the state’s
medical marijuana database.) Unlike state medical cannabis laws, which may restrict the form of cannabis
products available, recreational laws permit production and sale of most common forms of cannabis
products, including a wide variety of flower, concentrates and infused products.
State recreational laws designate state agencies to issue commercial cannabis licenses and regulate
participants in the cannabis supply chain. Some of these agencies are newly established specifically to
regulate cannabis, such as California’s Bureau of Cannabis Control (BCC) or Massachusetts’s Cannabis
Control Commission. Others are existing state agencies (and typically oversee tax or alcohol matters),
such as Nevada’s Department of Taxation or Oregon’s Liquor Control Commission. These agencies
also may regulate state medical cannabis industries, as do Colorado’s Marijuana Enforcement Division,
Washington’s Liquor and Cannabis Board and California’s BCC.
State regulatory agencies issue separate licenses for different types of commercial cannabis activities.
Common categories of licenses include cultivation, production, manufacturing, distribution, transportation,
laboratory testing and retail. A state may further provide for multiple types of licenses within a
category. For example, California’s recreational law provides for 12 types of cultivation licenses, which
vary according to factors such as the size of a cultivation facility and indoor or outdoor cultivation.
Most states allow companies to hold licenses in multiple categories, thereby allowing vertically integrated
cultivation, manufacturing and retail businesses. Washington is an exception—in most cases, a
business is prohibited from holding licenses across categories. Even states that allow vertical integration
typically prohibit the holder of a laboratory testing license from holding licenses in other categories.
State laws give significant power to counties and municipalities to impose zoning and permitting
requirements that may severely restrict or prohibit cannabis activities. California requires a state-license
applicant to demonstrate it has all permits, licenses and approvals required under local law, and many
California cities and counties have effectively banned the recreational cannabis industry. Massachusetts
allows towns that voted “No” on the state’s recreational law to ban cannabis businesses through
December 2019 and requires other towns that wish to prohibit cannabis businesses to do so through
a local ballot initiative.
Each state has chosen to levy significant taxes on the recreational cannabis industry, and some state laws
authorize local governments to levy additional cannabis-related taxes. Nevada imposes a 15% excise tax on
cannabis wholesales by cultivators and a 10% excise tax on retail sales. Oregon and Massachusetts charge
a state excise tax of 17% and 10.75%, respectively, and each state authorizes local governments to levy up
to another 3%. Washington originally imposed a 25% excise tax on cannabis sales at each of three different
points in the supply chain—grower to processor, processor to retailer and retailer to consumer—but now
charges a single 37% tax on retail sales. California imposes a 15% excise tax. All state and local cannabisspecific
excise taxes are in addition to normal state and local sales tax. Although the possibility of generating
significant tax revenue is one reason state governments have embraced legal cannabis, some
proponents of legalization argue that high tax rates will keep consumer prices high and discourage
consumer transition to legalized markets.
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State governments continue to adjust recreational cannabis regulations in an effort to create favorable
industry conditions and address health and public safety concerns. State-licensed recreational
cannabis businesses must comply with a host of requirements related to security (such as video surveillance,
alarm system requirements and owner/operator criminal background checks), product diversion
(particularly seed-to-sale tracking requirements), product safety and quality (including product
labeling requirements and potency and contaminant testing), and general business operations (such as
restrictions on advertising and compliance with energy and environmental standards).
n U.S. Federal Law
Current federal law effectively prohibits all cannabis use and all commercial cannabis activity in the
United States. Producing, selling and possessing cannabis are federal crimes. No cannabis-derived drug
has ever been federally approved for use in treating any medical condition. Otherwise legitimate business
transactions conducted by cannabis companies—and their banks, for those who can access banking
services—are legally suspect. Certain intellectual property and bankruptcy protections critical to
many U.S. businesses are not available to cannabis companies. Cannabis companies pay federal income
tax at effective rates significantly higher than other businesses.
Despite official prohibition, federal policies and laws recently passed by the U.S. Congress have
carved out a limited space in which the state-legal cannabis industry has managed to thrive. Enforcement
policies published by the U.S. Department of Justice (DOJ) have unofficially invited cannabis
business to proceed if certain conditions are respected. The U.S. Department of the Treasury (DOT)
established reporting policies that create room for banks to service the cannabis industry. Federal budget
legislation has prevented allocated funds from being used to prosecute conduct that complies with
state medical cannabis laws.
Recent developments indicate that the federal government may be pursuing policies and practices
that create space for cannabis research and approval of cannabis-derived drugs. In particular, the U.S.
Drug Enforcement Agency (DEA) adopted a new policy in 2016 designed to increase the number of
DEA-registered cannabis cultivators (there has been only one such cultivator for nearly 50 years). And
the U.S. Food and Drug Administration (FDA) is reviewing a New Drug Application (NDA) submitted
in October 2017 for what could be the first ever cannabis-derived pharmaceutical approved by the
federal government.
The following chart shows three general areas of federal law that impact the cannabis industry—food
and drug regulation, banking and finance, and intellectual property—as well as specific
laws and federal policies related to each of the areas discussed later in this chapter.
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Federal Laws and Policies Impacting the Cannabis Industry
Controlled
Substances
Act
Justice
Department
Cole Memo
Bank Secrecy Act
and Financial
Transaction
Laws
Rohrabacher-
Blumenauer
Amendment
Treasury
Department
FinCEN Memo
Agricultural
Act
of 2014
DRUG
AND FOOD
REGULATION
Federal Laws
and Policies
Impacting the
Cannabis
Industry
BANKING
AND
FINANCE
Securities
Law
Bankruptcy
Law
Food, Drug,
and
Cosmetic Act
INTELLECTUAL
PROPERTY
Internal
Revenue
Code
© 2017 Ackrell Capital, LLC
Patent
Act
Plant
Variety
Protection
Act
Trademark
Act
Controlled Substances Act
The Controlled Substances Act (CSA) is a federal law enacted in 1970 that places strict legal controls
on the manufacture, distribution, dispensing and possession of any controlled substance listed on one
of five schedules established by the CSA. The CSA is enforced primarily by the U.S. Drug Enforcement
Administration, an agency of the U.S. Department of Justice. A controlled substance may be manufactured,
distributed or dispensed in accordance with the CSA only by a person properly registered
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with the DEA. Any person that manufactures, distributes, dispenses or otherwise possesses a controlled
substance in violation of the CSA is subject to civil and criminal penalties.
The CSA schedules are numbered I to V. Schedule I substances are subject to the strictest controls,
and Schedule V substances are subject to the least restrictive controls. A controlled substance is listed
on a particular schedule according to four factors:
(i) The substance’s potential for abuse.
(ii) Whether the substance has a currently accepted medical use in treatment in the United
States.
(iii) Whether the substance is accepted as safe to use under medical supervision.
(iv) The degree of physical and psychological dependence that may result from abuse of the
substance.
Upon enactment in 1970, the CSA assigned each controlled substance to a specific schedule. The
U.S. Congress may legislate a controlled substance’s addition to or removal from a CSA schedule. The
CSA also provides a regulatory framework for a substance to be added to or removed from a schedule;
such change generally involves a recommendation by the U.S. Department of Health and Human
Services (DHHS) and concurrence with that recommendation by the DEA. The U.S. Food and Drug
Administration, an agency of the DHHS, is charged with making certain safety-related determinations
used in DHHS scheduling recommendations.
Schedule I controlled substances are those found by the U.S. Congress or the DEA and the DHHS
to have a high potential for abuse, to have no currently accepted medical use in treatment in the United
States and to have a lack of accepted safety for use under medical supervision. Current Schedule I substances
include marijuana, THC, heroin, ecstasy, LSD and peyote. Unlike Schedule II through Schedule
V controlled substances, which can be prescribed by a doctor, the CSA does not allow prescriptions
to be written for Schedule I controlled substances.
Marijuana
Marijuana has been a Schedule I controlled substance since enactment of the CSA in 1970. The CSA
defines “marijuana” as
all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the
resin extracted from any part of such plant; and every compound, manufacture, salt, derivative,
mixture, or preparation of such plant, its seeds or resin. Such term does not include
the mature stalks of such plant, fiber produced from such stalks, oil or cake made from
the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or
preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake,
or the sterilized seed of such plant which is incapable of germination.
The parts and derivatives of the cannabis plant that are excluded from the CSA definition of
marijuana have industrial uses and generally contain little or no THC. Non-marijuana cannabis
products—commonly known as hemp products—including rope, clothing, animal feed and soap,
are not subject to control under the CSA. The CSA does not restrict such non-marijuana products
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from being imported into the United States. However, because the production of such non-marijuana
products ordinarily involves possession of the entire cannabis plant, including parts deemed marijuana
under the CSA, the CSA effectively prohibits such production in the United States without DEA
registration.
Tetrahydrocannabinol (THC)
In addition to and separate from marijuana’s listing on Schedule I, tetrahydrocannabinol 1 (THC) has
been listed on Schedule I since the CSA’s enactment in 1970. From 1970 until 2003, DEA regulations
defined THC for purposes of its separate Schedule I listing as including only “synthetic equivalents”
of the THC found in the cannabis plant. In 2003, the DEA purportedly amended this regulatory
definition of THC to include both synthetic equivalents of THC and THC occurring naturally in the
cannabis plant. In its 2004 holding in Hemp Industries Association v. DEA, the U.S. Court of Appeals
for the Ninth Circuit enjoined DEA enforcement of this purported amendment and held that the
THC listed separately from marijuana on Schedule I includes only synthetic THC and that any THC
occurring naturally within the cannabis plant is controlled under the CSA only if it falls within the
CSA definition of marijuana.
Penalties for CSA Violations
Federal penalties for violating CSA provisions regarding marijuana or THC include fines and imprisonment.
CSA violations may also result in federal seizure of cash and other assets related to the violations.
CSA penalties may apply to cannabis businesses that violate the CSA and also to individuals who own
or operate such businesses based on attempt, accomplice, conspiracy and criminal enterprise provisions
included in the CSA.
New DEA Registration Policy
For nearly 50 years, only one cannabis cultivation site in the United States has operated with the
required DEA registration. The site is operated by the University of Mississippi under a contract with
the National Institute on Drug Abuse to supply the country’s entire stock of federally legal cannabis,
which is used exclusively for research. In August 2016, the DEA announced a new policy designed
to increase the number of DEA-registered cannabis cultivators and permit-registered cultivators to
grow cannabis for privately funded commercial drug development projects. The DEA announcement
acknowledged the increasing interest in conducting cannabis research related to commercial pursuits,
and indicated that the best way to satisfy the increased demand was to increase the number of
DEA-registered cultivators. The DEA has since accepted at least 25 applications for registration but has
not issued any new registrations.
1
CSA Schedule I uses the plural form “tetrahydrocannabinols” to describe a category of substances that includes chemical derivatives
and isomers. This report adopts the more commonly used singular form, “tetrahydrocannabinol.”
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U.S. Department of Justice: The Cole Memo
A memorandum published by the DOJ in August 2013 (Cole Memo) provides guidance to DOJ attorneys
and federal law enforcement about prosecuting cannabis-related federal offenses. The Cole Memo
asserts that marijuana is a dangerous drug, that illegal distribution of marijuana is a serious crime which
provides revenue to criminal enterprises and that the DOJ is committed to enforcing marijuana-related
violations of federal law. The Cole Memo also notes, however, that the DOJ is committed to using
its limited investigative and prosecutorial resources to address the most significant threats in the most
effective, consistent and rational way.
The Cole Memo guides DOJ attorneys and federal law enforcement to focus on the following
eight enforcement priorities when considering prosecutions for marijuana-related CSA violations (and
also, according to a Cole Memo update issued in February 2014, when considering prosecutions for
marijuana-related violations of the federal money laundering statute, the unlicensed money transmitter
statute and the Bank Secrecy Act):
1. Preventing distribution of marijuana to minors.
2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and
cartels.
3. Preventing the diversion of marijuana from states where it is legal under state law in some
form to other states.
4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the
trafficking of other illegal drugs or other illegal activity.
5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana.
6. Preventing drugged driving and the exacerbation of other adverse public health consequences
associated with marijuana use.
7. Preventing the growing of marijuana on public lands and the attendant public safety and
environmental dangers posed by marijuana production on public lands.
8. Preventing marijuana possession or use on federal property.
The Cole Memo notes that whether marijuana-related conduct implicates any of these enforcement
priorities should be a primary question in considering prosecution and that in states with legalized
marijuana and effective regulatory systems, conduct in compliance with state law is less likely to
threaten these priorities.
The Cole Memo has provided some comfort to those operating state-legal cannabis businesses that
do not interfere with the enumerated enforcement priorities. However, the Cole Memo merely reflects
internal guidance within the DOJ and does not create a legal defense for any violation of federal law.
During the January 2017 Senate confirmation hearings for current U.S. Attorney General Jeff
Sessions, in a discussion about the enforcement priorities outlined in the Cole Memo, Mr. Sessions
acknowledged the “problem of resources for the federal government” and stated that he thought some
of the enforcement priorities were “truly valuable in evaluating cases,” but he also stated that he would
not commit to never enforcing federal law.
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Rohrabacher-Farr Amendment
The Rohrabacher-Farr amendment, first passed by the U.S. Congress and signed into law by President
Obama in 2014, prohibits the DOJ from using federal funds to prevent a state from “implementing”
state laws that authorize the use, distribution, possession or cultivation of medical marijuana.
Following the amendment’s initial 2014 enactment, the DOJ indicated that it did not plan to arrest
state regulators for “implementing” a state’s medical marijuana laws but would continue to prosecute
individuals involved in state-law compliant medical marijuana activity because, in the DOJ’s view, the
amendment did not apply to prosecutions against individuals.
The DOJ’s interpretation of the Rohrabacher-Farr amendment was rejected by a Ninth Circuit
District Court in its 2015 ruling in United States v. Marin Alliance for Medical Marijuana, and again by
the Ninth Circuit Court of Appeals in its 2016 ruling in United States v. McIntosh. The Ninth Circuit
Court of Appeals held the Rohrabacher-Farr amendment prohibits DOJ from spending funds subject
to the amendment on the prosecution of individuals who fully comply with state medical marijuana
laws. The court noted a state’s “implementation” of medical marijuana laws necessarily involves “giving
practical effect” to those laws, and that DOJ prosecution of individuals complying with those laws
prevents the state from giving the laws practical effect.
The Rohrabacher-Farr amendment generally applies only to DOJ funds made available pursuant
to the federal budget legislation in which the amendment is included, and therefore must be
renewed periodically with budget legislation to remain effective. The Rohrabacher-Farr amendment
was recently renewed in December 2017 as part of an emergency aid package that remains effective
until mid-January 2018. (With the retirement of Representative Samuel Farr from the U.S. Congress
in 2016, the Rohrabacher-Farr amendment is now also referred to as the Rohrabacher-Blumenauer
amendment; we use this name elsewhere in this report.)
Agricultural Act of 2014
The Agricultural Act of 2014 (Farm Bill) authorizes institutions of higher education and state departments
of agriculture to cultivate industrial hemp, CSA controls notwithstanding, if (i) the industrial
hemp is cultivated for purposes of research conducted under an agricultural pilot program or other
agricultural or academic research and (ii) the cultivation is allowed under the laws of the state in which
such institution of higher education or state department of agriculture is located and such research
occurs.
The Farm Bill defines “industrial hemp” as the cannabis plant and any part of such plant, whether
growing or not, with a THC concentration of not more than 0.3 percent on a dry weight basis.
Industrial hemp, like any cannabis plant, may comprise both marijuana (as defined in the CSA) and
non-marijuana. But the Farm Bill creates an exception to CSA controls on marijuana, so cultivation in
accordance with the Farm Bill of marijuana that qualifies as industrial hemp does not violate the CSA.
The following table summarizes the legal relationship between marijuana (as defined in the CSA)
and industrial hemp (as defined in the Farm Bill).
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U.S. Legal Relationship between Marijuana and Industrial Hemp
Non-Industrial Hemp
Cannabis plant and all parts and
derivatives except industrial hemp
Marijuana
Cannabis plant and all parts and
derivatives except non-marijuana
• Manufacture, distribution, dispensing
and possession controlled under CSA
• No Farm Bill exception to CSA
Non-Marijuana
Mature stalks; fiber made from mature stalks;
oil or cake made from seeds; compounds,
manufactures, salts, mixtures, preparations
or derivatives of the foregoing parts and
derivatives (except resin extracted from mature
stalks); sterilized seeds
• No CSA controls
• Farm Bill exception to CSA moot
Industrial Hemp
Cannabis plant and any part with THC
concentration not more than 0.3% on
a dry weight basis
• Manufacture, distribution, dispensing
and possession controlled under CSA
(but subject to Farm Bill exception)
• Farm Bill exception to CSA controls:
state-legal cultivation by an institution of
higher education or a state department
of agriculture for research
• No CSA controls
• Farm Bill exception to CSA moot
Industrial hemp can be used to produce CBD oil, an extract of the cannabis plant with a high
concentration of cannabidiol (CBD) but little or no psychoactive THC. CBD oil is believed to have a
range of medicinal benefits and therapeutic applications. Some have argued that the Farm Bill federally
legalizes the production and sale of CBD oil. However, it is unclear whether CBD oil produced from
industrial hemp is itself considered industrial hemp (the CSA defines marijuana by reference to the
cannabis plant, parts of the plant and derivatives of the plant, whereas the Farm Bill exception to the
CSA defines industrial hemp by reference only to the plant and parts of the plant, but does not mention
derivatives). Even if CBD oil is considered industrial hemp and may be lawfully produced under
the Farm Bill, only institutions of higher education and state departments of agriculture are authorized
to produce it, and then only for purposes of agricultural or academic research; thus the Farm Bill likely
does not create a CSA exception broad enough for large-scale commercial production and distribution
of CBD oil within the United States.
Federal Food, Drug, and Cosmetic Act
The Federal Food, Drug, and Cosmetic Act (FD&C Act) is a federal law enacted in 1938 (and since
amended multiple times) that authorizes the FDA to regulate the safety and effectiveness of drugs and
medical devices and the safety of food, tobacco products and cosmetics. The FD&C Act prohibits the
“adulteration or misbranding” of any drug, medical device, food, tobacco product or cosmetic (which
the act generally refers to as “articles”) in interstate commerce and prohibits interstate commerce in any
such adulterated or misbranded article. The FD&C Act also prohibits the “introduction or delivery for
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introduction into interstate commerce” of any drug, medical device, food, tobacco product or cosmetic
undertaken without the required FDA approval, permit or registration.
An article that includes cannabis or a cannabis derivative could conceivably qualify as a drug, medical
device, food, tobacco product or cosmetic (or a combination). For example, a skin lubricant infused
with cannabis extract and intended to relieve muscle pain may be both a cosmetic and a drug, and a
prefilled device used to administer a metered dose of vaporized THC for treating nausea may be both
a medical device and a drug. Industry dialogue regarding the FD&C Act and the FDA tends to focus
on cannabinoid-based drugs and the potential for certain cannabis products to be regulated as food or
a related category of products known as “dietary supplements,” and we expand on both topics in the
following discussion.
Drugs
Generally, the FD&C Act defines a “drug” as any one of the following:
(i) Any article recognized in the official U.S. Pharmacopoeia, U.S. Homeopathic Pharmacopoeia
or National Formulary.
(ii) Any article intended for use in the diagnosis, cure, mitigation, treatment or prevention of
disease in humans or animals.
(iii) Any article (other than food) intended to affect the structure or any function of the body
of humans or animals.
(iv) Any article intended as a component of any of the foregoing.
The FDA oversees the manufacturing of drugs by inspecting domestic and foreign manufacturing
plants, by sampling drugs from retail stores, distribution warehouses and manufacturing plants and by
evaluating complaints and reports of defects from consumers and health care professionals. The FD&C
Act generally prohibits a company from introducing a drug into interstate commerce without the FDA
having first approved the drug as safe and effective for treating a specified medical condition.
FDA approval of a drug as safe and effective for treating a specified medical condition generally
involves the following steps:
(i) The drug’s manufacturer performs laboratory and animal tests to determine how the drug
works and whether it is safe enough to test on humans.
(ii) If the manufacturer determines the drug is safe enough to test on humans, then the manufacturer
submits for FDA review an Investigational New Drug (IND) application.
(iii) Upon review of the IND application, if the FDA determines the drug is safe enough to test
on humans, then the FDA approves the manufacturer to proceed with human clinical trials.
(iv) The manufacturer performs a series of human clinical trials and submits the resulting data
for FDA review in the form of a New Drug Application (NDA). Upon review of the NDA,
if the FDA determines the drug’s benefits outweigh its known risks and the drug can be
manufactured in a way that ensures a quality product, then the drug is approved as safe and
effective for treating the specified medical condition.
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A drug generally may not be marketed for treating a condition other than a condition for which the
FDA has found the drug to be a safe and effective treatment; however, most FDA-approved drugs can
be prescribed by doctors to treat other conditions (so-called “off-label” prescriptions).
Nonprescription or over-the-counter drugs can be marketed after receiving FDA approval through
the NDA process or by conforming the drug to an existing over-the-counter “monograph” (a “recipe
book” indicating acceptable ingredients, doses, formulations and labeling) established by the FDA.
Cannabinoid-Based Drugs
Several drugs containing synthetic cannabinoids or cannabinoid-like compounds have been approved
by the FDA. Marinol, a drug comprised of dronabinol (a synthetic THC) encapsulated with sesame oil
in a soft gelatin capsule, was approved by the FDA in 1985 for treatment of nausea and vomiting associated
with cancer chemotherapy in patients who have failed to respond adequately to conventional
antiemetic treatments. It was later approved, in 1992, for treatment of anorexia associated with weight
loss in patients with AIDS. Syndros, a drug comprised of dronabinol in a liquid solution, was approved
by the FDA in 2016 for treatment of the same symptoms for which Marinol was approved. Cesamet,
a drug comprised of encapsulated nabilone (a synthetic cannabinoid similar to THC), was approved
by the FDA in 1985 for treatment of nausea and vomiting associated with cancer chemo therapy in
patients who have failed to respond adequately to conventional antiemetic treatments.
Each of the drugs Marinol, Syndros and Cesamet was placed on CSA Schedule II within one to
two years after its initial FDA approval (Marinol and Syndros were rescheduled from Schedule I upon
recommendation of the DHHS, and Cesamet’s placement on Schedule II was its initial CSA classification).
Schedule II through Schedule V substances can be prescribed by a doctor, but the CSA does not
permit prescriptions for Schedule I substances, so removal of an FDA-approved drug from Schedule I
is required before the drug can be prescribed legally.
The FDA has not approved any drug derived from the cannabis plant. However, two such drugs,
Sativex and Epidiolex (both manufactured by U.K.-based GW Pharmaceuticals), have advanced
through certain stages of the FDA approval process. Sativex is a mouth spray used for treatment of
spasticity caused by multiple sclerosis; it includes THC and CBD derived from cannabis. Epidiolex
is an oral formulation of cannabis-derived CBD intended to treat severe forms of childhood epilepsy.
Human clinical trials have been conducted with both drugs, and although an NDA has not been submitted
for Sativex, an NDA for Epidiolex was submitted to the FDA in October 2017. If approved by
the FDA, Epidiolex would be the first FDA-approved pharmaceutical derived from cannabis.
Foods and Dietary Supplements
Generally, the FD&C Act defines “food” as (i) any article used for food or drink for humans or animals,
(ii) chewing gum, and (iii) any article used as a component of any of the foregoing. The FD&C Act
defines a “dietary supplement” generally as either (i) a product intended to supplement the diet that
contains certain dietary ingredients (including vitamins, minerals, herbs, botanicals, amino acids, or
other substances used by humans to supplement the diet by increasing the total dietary intake) or (ii) a
product intended for ingestion in tablet, capsule, powder, softgel, gelcap, or liquid form and labeled as
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a dietary supplement but not represented for use as a conventional food or as a sole item of a meal or
the diet. A dietary supplement generally is deemed to be a food under the FD&C Act.
The FD&C Act does not require foods or food labels to be pre-approved by the FDA, but it does
give the FDA broad authority to regulate the safety of food and food labels and to prevent interstate
commerce in adulterated or misbranded food. Facilities engaged in manufacturing, processing, packing
or holding food for consumption in the United States are required to be registered with the FDA.
The FD&C Act requires most foods to bear nutrition labeling and requires food labels that bear
nutrient content claims and certain health messages to comply with specific requirements. The FDA is
authorized to enforce safety and labeling regulations by conducting inspections, sampling, recalls and
seizures, and by pursuing injunctions and criminal prosecutions.
Cannabis-Based Foods and Dietary Supplements
The FDA has published guidance (most recently updated in August 2017) concluding that (i) the
FD&C Act does not permit foods to which THC or CBD have been added to be sold in interstate
commerce and (ii) any product containing THC or CBD is not a dietary supplement. For this conclusion
to be legally correct, based on the FD&C Act provisions cited by the FDA, it would need to be
demonstrated that neither THC nor CBD were marketed in or as a food or as a dietary supplement
before the occurrence of certain approvals and clinical investigations of drugs that include THC (e.g.,
Marinol) or CBD (e.g., Sativex or Epidiolex). The FDA publication does not demonstrate that neither
THC nor CBD were marketed in or as a food or as a dietary supplement before such occurrences and
merely states that the FDA is “not aware of any evidence that would call into question” its conclusion.
The FDA’s conclusion has not been subject to any legal challenge, and it remains unresolved whether
certain cannabis-based products, particularly hemp-derived CBD products, might be regulated by the
FDA as foods or dietary supplements rather than as drugs.
FDA Policy and Enforcement
In December 2016, the FDA published a document titled Botanical Drug Development; Guidance for
Industry that discusses several areas in which, due to the unique nature of botanical drugs, the FDA
believes it is appropriate to apply regulatory policies that differ from those applied to nonbotanical
drugs. The guidance discusses challenges inherent to botanical drugs, including challenges related to
ensuring therapeutic consistency, and suggests certain steps to address those challenges. The guidance
was published only months after the DEA announced a new policy designed to increase the number
of DEA-registered cannabis cultivators and permit-registered cultivators to grow cannabis for privately
funded commercial drug development projects. These parallel developments indicate to some that the
federal government is opening a pathway to federal approval of cannabis-derived drugs.
The FDA has the legal authority under the FD&C Act and related regulations to significantly disrupt
the state-legal cannabis industry in the United States. The FDA has issued warning letters during
the past several years to distributors of hemp-based CBD products but has not broadly enforced federal
law against the cannabis industry. A cannabis-focused publication on the FDA website states that
in deciding whether to initiate federal enforcement, the FDA may consult with its federal and state
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partners and consider many factors, including FDA resources and threats to public health. Beyond
this statement, the FDA has not published detailed guidance about its cannabis-related enforcement
priorities.
Bank Secrecy Act and Other Federal Laws
Regarding Financial Transactions
Financial transactions in connection with cannabis-related CSA violations may implicate federal laws
other than the CSA itself, including the federal money laundering statute, the federal unlicensed money
transmitter statute and the Bank Secrecy Act (BSA).
The federal money laundering statute imposes penalties on any person who conducts or attempts
certain financial or monetary transactions involving the proceeds of a “continuing criminal enterprise”
(a term, used in the CSA, that arguably encompasses many cannabis businesses). Violations of the
federal money laundering statute may result in fines equal to twice the value of the property involved
in the transaction (or $500,000, if greater) and imprisonment for up to 20 years.
The federal unlicensed money transmitter statute makes it illegal for any person to operate or own
a money transmitter business that involves the transportation or transmission of funds known to have
been derived from or intended to promote or support criminal violations of the CSA. Violations of the
law may result in fines and imprisonment for up to 5 years.
The BSA requires banks and other financial institutions to maintain certain records and to file
certain reports deemed useful in criminal, tax or regulatory proceedings or in government intelligence
and counterterrorism activities. Federal regulations under the BSA require financial institutions to
file with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of
the Treasury charged with administering the BSA, a suspicious activity report (SAR) if the financial
institution knows, suspects or has reason to suspect that a transaction conducted or attempted by, at or
through the financial institution involves or is an attempt to disguise funds derived from illegal activity,
is designed to evade BSA regulations or lacks an apparent lawful purpose. Financial institutions and
their principals are subject to civil and criminal penalties for violations of the BSA.
U.S. Treasury Department: The FinCEN Memo
In coordination with the February 2014 Cole Memo update, FinCEN published a memorandum
(FinCEN Memo) outlining how banks and other financial institutions can, consistent with their BSA
obligations, provide services to marijuana-related businesses. The FinCEN Memo directs each financial
institution to consider its own business objectives and the risks associated with offering a particular
product or service when considering whether to commence or continue a customer relationship with
a marijuana-related business. The memorandum emphasizes the importance of due diligence and outlines
a procedure for filing SARs for such businesses.
The FinCEN Memo guides financial institutions to conduct a due diligence review of a customer’s
business that includes an evaluation of whether the customer relationship implicates (or would implicate)
any Cole Memo priority and also includes the following investigations:
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1. Verifying with the appropriate state authorities whether the business is duly licensed and
registered.
2. Reviewing the license application (and related documentation) submitted by the business for
obtaining a state license to operate its marijuana-related business.
3. Requesting from state licensing and enforcement authorities available information about the
business and related parties.
4. Developing an understanding of the normal and expected activity for the business, including
the types of products to be sold and the type of customers to be served (for example, medical
versus recreational customers).
5. Ongoing monitoring of publicly available sources for adverse information about the business
and related parties.
6. Ongoing monitoring for suspicious activity, including for certain red flags described in the
FinCEN Memo.
7. Refreshing information obtained as part of customer due diligence on a periodic basis and
commensurate with the risk.
The FinCEN Memo also guides financial institutions to file various SARs with FinCEN regarding
customers engaged in marijuana-related businesses. According to the memorandum, an institution
should file (i) a “Marijuana Limited” SAR for each customer it believes does not violate state law or
implicate any Cole Memo priority, (ii) a “Marijuana Priority” SAR for each customer it believes violates
state law or implicates any Cole Memo priority, and (iii) a “Marijuana Termination” SAR if the
institution decides to terminate a customer relationship in order to maintain an effective anti–money
laundering compliance program. The FinCEN Memo outlines certain “red flags” that tend to indicate
which type of SAR filing is appropriate; red flags include the inability of a customer to demonstrate
compliance with state law or deposits of amounts of cash inconsistent with its tax returns.
FinCEN periodically publishes information about marijuana-related SAR filings made by depository
institutions. From the February 2014 FinCEN Memo publication through June 30, 2017,
FinCEN received a total of 33,692 marijuana-related SAR filings from a total of 390 banks and credit
unions. The following graphs based on FinCEN data show the number of monthly Marijuana Limited,
Marijuana Priority and Marijuana Termination SAR filings for this period and the number of banks
and credit unions making such filings.
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Monthly Marijuana-Related SAR Filings
1600
1400
1200
1000
800
600
400
200
0
Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017
Limited Priority Termination
Depository Institutions Making Marijuana-Related SAR Filings
350
300
250
200
150
100
50
0
Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017
Banks
Credit Unions
Source: Financial Crimes Enforcement Network
The upward trend in the frequency of marijuana-related SAR filings, as well as the growing number
of depository institutions making such filings, indicate cannabis businesses increasingly are accessing
the federal banking system despite federal law.
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The California State Treasurer’s Cannabis Banking Working Group—a panel convened by California
State Treasurer John Chiang that includes representatives from the cannabis industry and financial
institutions, and government tax collection, law enforcement and regulatory agencies—issued a report
in November 2017 on the cannabis industry’s banking challenges. In the report, the State Treasurer’s
Office stated that the cannabis industry’s lack of access to banking services is one of the biggest threats
to the success of the state’s recreational cannabis law, which is scheduled for implementation starting
in January 2018. Based on the working group’s findings, the State Treasurer’s Office recommended the
following four actions:
1. Implementation of safer, more effective, and scalable ways to handle the payment of taxes and
fees in cash that minimize risks to stakeholders.
2. Development by the State of California and local governments of a data portal of compliance
and regulatory data to be made available to financial institutions that bank cannabis businesses.
3. Conduct a feasibility study of a public bank or other state-backed financial institution that
provides banking services to the cannabis industry.
4. Establish a multistate consortium of state government representatives and other stakeholders
to pursue changes to federal law in order to remove the barriers to cannabis banking.
The State Treasurer’s Office also stated it was apparent that a definitive solution to the cannabis
banking quandary will remain elusive until the federal government removes cannabis from its official
list of dangerous drugs or the U.S. Congress approves safe harbor legislation protecting financial institutions
that serve cannabis businesses from federal penalties.
Federal Securities Law
The U.S. securities markets and industry participants are regulated principally under two federal laws:
the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act).
The Securities Act regulates the offer and sale of securities by issuers, and the Exchange Act regulates
securities firms, stock exchanges, reporting by publicly traded companies and investing and trading
practices of investors. The Exchange Act also establishes the Securities and Exchange Commission
(SEC), a federal agency charged with enforcing federal securities laws.
Federal securities laws are intended to facilitate capital formation, maintain fair and efficient markets,
and protect investors. The laws are based on a philosophy of disclosure: issuers of securities
generally are obligated to completely and truthfully disclose material information to investors and
the market, and failure to satisfy that obligation may result in civil or criminal penalties. Information
generally required to be disclosed includes audited financial statements, discussions of risks applicable
to the issuer and investors in its securities, and details of conflicts of interest faced by the issuer’s officers
and directors.
Federal securities laws related to private offerings provide fewer investor protections than laws
related to public offerings and generally assume investors in private offerings can “fend for themselves.”
An issuer of securities in a private offering is not subject to the same extensive reporting requirements
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as publicly traded companies, but ordinarily will market its securities using a private placement memorandum
(PPM) that includes information similar to some of the information required to be disclosed
by publicly traded companies. An issuer in a private placement is subject to liability under federal securities
laws for misrepresentation or fraudulent statements made in a PPM or otherwise in connection
with the private offering.
By all indications, federal securities laws do not prohibit companies engaged in federally illegal
cannabis activities from raising capital through the issuance of securities, nor do they prohibit industry
participants like stock exchanges and investment banks from performing their ordinary market functions
in connection with such companies. The SEC has allowed the registration and sale of securities
offered by companies engaged in federally illegal cannabis activities and the trading of those securities
on multiple U.S. stock markets. Although the SEC has on occasion suspended trading in some of
these securities, those suspensions generally have been due to alleged violations of securities regulations
rather than unlawful cannabis activities.
A cannabis company offering or selling securities must comply with federal securities laws—like
any other issuer—by making required notice or registration filings and by providing truthful material
information to investors. Any discussion of risks delivered to investors, whether required by securities
laws or volunteered by the issuer as part of a private offering, should include a thorough discussion of
the unique risks posed by operating a cannabis business engaged in federally illegal conduct. For an
example of some of these risks, refer to Chapter IX, Cannabis Industry Risk Factors.
Federal Bankruptcy Law
Bankruptcy is a legal proceeding by which a debtor resolves its debt obligations and creditors are
afforded certain rights in the debtor’s assets in full or partial satisfaction of the debts owed to them. In
the United States, bankruptcy is governed primarily by the Bankruptcy Reform Act of 1978 (Bankruptcy
Code). Bankruptcy proceedings are conducted primarily by federal bankruptcy courts and generally
involve administration of a debtor’s assets either by a court-appointed trustee or by the debtor
with approval and oversight of the court. Bankruptcy can be voluntary (initiated by the debtor) or
involuntary (initiated by creditors). Bankruptcy provides certain rights and protections to the debtor
and the creditors and is intended to fairly and finally resolve debts so the parties can pursue other
affairs.
Debtors whose assets relate to federally illegal cannabis activity, as well as their creditors, generally
are not eligible for bankruptcy protection for two reasons: First, federal courts refuse to appoint
trustees to administer or take control of unlawful assets or business operations. Second, pursuant to
an equitable doctrine known as “unclean hands,” federal courts typically decline to honor creditor
claims that arise from knowingly transacting with a debtor in furtherance of unlawful activity. A federal
bankruptcy court in Arizona invoked both these reasons in its 2015 decision in In Re Medpoint Management,
LLC; details of this case follow.
Medpoint Management, LLC (Medpoint) managed the cultivation and business operations of a
state-legal Arizona medical cannabis dispensary. Medpoint defaulted under various loan and consulting
agreements directly related to its dispensary activities, and the four creditors under those agreements
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filed a petition for involuntary bankruptcy. The bankruptcy court dismissed the petition, stating it
would not assign a trustee “to administer drug tainted assets for the benefit of creditors who assumed
the risk of doing business with an enterprise engaged in violations of federal law.” Federal courts in
California, Oregon, Colorado and Michigan have applied the same rationale to dismiss bankruptcy
proceedings involving illegal cannabis-related assets.
State law alternatives to federal bankruptcy that may be available to cannabis businesses and their
creditors include an assignment for the benefit of creditors (ABC) and receivership. An ABC is a statelaw
process for the orderly and controlled liquidation of a debtor’s assets through a neutral, third party
administrator. Receivership is a remedy whereby a court appoints a receiver to take possession of and
protect property for the benefit of all concerned parties. In the state of Washington, for example, at
least one medical cannabis business is reported to have successfully concluded a receivership process.
Internal Revenue Code
The Internal Revenue Code (IRC) defines gross income to include “all income from whatever source
derived”; this definition has been interpreted by the Internal Revenue Service (IRS) and the U.S.
Supreme Court to include income derived from unlawful activities. Consequently, cannabis businesses
that violate the CSA and other federal laws related to cannabis nonetheless must file federal income tax
returns and pay federal income tax.
A business generally computes its taxable income in two steps. First, the business computes its gross
income by subtracting from its gross receipts the cost of goods sold (COGS), which includes the cost of
acquiring, constructing or extracting a physical product that is to be sold. The subtraction of COGS to
compute gross income is premised on constitutional grounds and cannot be changed by federal statutes
or IRS regulations. Second, the IRC “allows” a business to deduct from gross income all ordinary and
necessary business expenses, which generally include all business expenses other than COGS, such as
employee salaries, payments to contractors, marketing costs, insurance premiums, and the cost of rent
and utilities. But there are exceptions to this “allowed” deduction. One such exception is provided by
IRC section 280E (Section 280E).
Section 280E disallows any deduction or credit for any amount paid or incurred in carrying on
a “trade or business” that consists of unlawful “trafficking” in a Schedule I or Schedule II controlled
substance. Although Section 280E does not prevent a cannabis business from subtracting COGS to
compute gross income, it may prevent the deduction of all other business expenses for purposes of
computing taxable income. As a result of Section 280E, businesses in the cannabis industry may have
effective tax rates significantly higher than other businesses subject to federal income tax.
The scope of Section 280E, as it applies to U.S. cannabis businesses, is the subject of recent and
ongoing federal court cases. The U.S. Tax Court has adopted the view (a view endorsed by the U.S.
Supreme Court) that a “trade or business” is any activity entered into with the dominant hope and
intent of realizing a profit, and it has indicated in multiple rulings that dispensing or buying and selling
marijuana involves unlawful “trafficking” in a Schedule I controlled substance.
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A trade or business that consists of unlawful cannabis trafficking may comprise a separate division
of a single taxpayer, as was found by the U.S. Tax Court in its 2007 decision in Californians Helping
to Alleviate Medical Problems, Inc. v. Commissioner, in which case Section 280E does not prevent the
taxpayer from deducting business expenses attributable to other lawful trades or businesses it conducts.
Or, all of a taxpayer’s activities may constitute a single trade or business subject to 280E even though
the taxpayer conducts some lawful business transactions not involving cannabis, as was found by the
U.S. Court of Appeals for the Ninth Circuit in its 2017 decision in Canna Care, Inc. v. Commissioner.
Patent Act
Title 35 of the U.S. Code (Patent Act) is the federal statute that governs patents in the United States.
A patent issued under the Patent Act is the right to exclude others in the United States from making,
using, importing, offering for sale or selling an “invention or discovery” and, if the invention or
discovery is a process, products made by that process. U.S. patents are issued by the U.S. Patent and
Trademark Office (USPTO), a federal agency established by the Patent Act. A U.S. patent lasts from
the date of issuance until 20 years after the date on which the application for the patent was filed with
the USPTO. Patent Act remedies available to the holder of an infringed U.S. patent include damages,
recovery of lost profits and recovery of legal fees.
“Inventions and discoveries” eligible for a patent under the Patent Act generally include any
machine, manufacture, composition of matter, process, art or method, or any improvement thereto
that is novel, useful and non-obvious. Newly developed plants, plant varieties, seeds, plant parts, plant
genes or plant production processes are generally recognized as inventions or discoveries eligible for a
U.S. patent if they satisfy certain criteria. The Patent Act also provides specifically for a “plant patent”
that precludes others from asexually reproducing, selling or using a distinct and new variety of plant
(other than a tuber) that has been invented or discovered and asexually reproduced.
The Patent Act does not expressly prohibit the issuance of U.S. patents for inventions or discoveries
that are unlawful or designed to serve an unlawful purpose, and the USPTO has issued a range of
cannabis-related patents. Cannabis-related inventions or discoveries for which the USPTO has issued
a patent include a cannabis strain named “Ecuadorean Sativa” (U.S. Plant Patent 27,475), cannabis
cultivation and processing methods (U.S. Patent 9,095,554), a vaporizer (U.S. Patent 9,220,294),
THC-infused shea butter for topical application (U.S. Patent 8,425,954), a THC extraction method
(U.S. Patent 6,365,416) and equipment and methods for biosynthetic production of cannabinoids
(U.S. Patent 9,587,212). U.K.-based GW Pharmaceuticals holds multiple cannabis-related U.S. patents.
And despite the federal government’s position for purposes of the CSA that marijuana has no
currently accepted medical use in treatment in the United States, the U.S. federal government itself
holds a patent for methods of treating certain diseases with cannabinoids (U.S. Patent 6,630,507).
Plant Variety Protection Act
The Plant Variety Protection Act (PVPA) establishes certain legal protections (or “breeders’ rights”) for
the breeder of a sexually reproduced or tuber-propagated plant variety that is new, distinct, uniform
and stable within the meaning of the PVPA. A breeder who so develops such a plant variety and satis-
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fies other PVPA requirements may apply for and receive a certificate of plant variety protection issued
by the U.S. Department of Agriculture (USDA). Such a certificate establishes a breeder’s right, for a
period of time and subject to certain exceptions, to exclude others from selling the variety, offering it
for sale, reproducing it, importing or exporting it, or using it in producing a hybrid or different variety.
A breeder’s rights under the certificate last for 20 years (25 years in the case of a protected tree or vine)
from the certificate’s issue date.
It is not clear whether the USDA has issued any certificate of plant variety protection for a cannabis
variety. The USDA website provides a searchable database of certificates issued since February
2013, as well as a schedule of crop categories for which certificates have been issued. A search of these
USDA materials indicated that no certificates for varieties of cannabis, marijuana or hemp have been
issued. The PVPA defines “variety” as “a plant grouping within a single botanical taxon of the lowest
known rank” with certain defining and distinguishing features. Given the disagreement among botanists
regarding cannabis taxonomy noted in Chapter II, Cannabis Science 101, it may be challenging
to demonstrate that a cannabis variety satisfies PVPA criteria for protection.
Trademark Act
A trademark is a word, name, symbol or device used by a person to identify and distinguish the person’s
goods or services from the goods and services of others and to indicate the source of the goods or services.
Trademarks take many forms, including logos, slogans, symbols, colors and sounds. Under common
law and through registration under state and federal statutes, a trademark owner can be afforded
certain legal protections against unauthorized use of the trademark by others.
Trademark protection under federal law is provided primarily by the Trademark Act, also known
as the Lanham Act, which provides for registration of trademarks with the USPTO. The holder of a
federally registered trademark receives certain rights and protections under federal law, including the
right to use the “®” symbol, evidence and nationwide notice of a claim of ownership, access to federal
courts for dispute resolution, the ability to prevent importation of foreign goods that infringe on the
trademark, and the right to recover certain statutory damages and attorneys’ fees. Generally, federal
registration is the most comprehensive trademark protection available in the United States.
Federal trademark registration requires “lawful” use of the trademark in commerce. Thus, trademarks
used to identify, distinguish or indicate the source of cannabis or related products or services
that are illegal under federal law are not eligible for federal registration. However, federal registration is
available for trademarks used in connection with federally legal cannabis-related products or services,
such as a recipe for food intended to be infused with cannabis or a cannabis-related clothing line.
Alternatives to federal trademark registration include protections available under common law and
through registration under state trademark statutes. Common law protections vary across jurisdictions
and generally extend only to geographical regions where a trademark has first been used in commerce.
State trademark registration generally provides protection within the entire state but, like federal registration,
may not be available for trademarks used in connection with unlawful subject matter.
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n The Path to Federal Legalization
We believe that cannabis will eventually become federally legal for recreational enjoyment by adults
and for use in a broad range of safe drugs and therapeutic products. A wide gulf currently separates
federal policy from state legalization initiatives. Both federal and state regulators lack experience with
science-based regulation that allows cannabis access, but they approach this lack of experience differently.
Current federal policy is slow-turning and bureaucratic; it requires rigorous scientific evidence
that cannabis is safe and effective but largely prohibits the industry from developing that evidence.
State legalization initiatives are experimental: they start by legalizing the cannabis industry, then task
state regulators with implementing rules and safeguards as the industry builds its scientific foundation
and its markets.
We believe that federal policy will move (and may already be moving) in a new direction which
allows for federally approved cannabis-derived drugs. If that happens, and if several cannabis-derived
drugs are federally approved, we expect the FDA and the DEA will have developed data and protocols
that facilitate more rapid approval of medical cannabis products. And if that happens, these federal
agencies should be able to combine their science-based regulatory practices with the best practices of
state regulators to develop a comprehensive federal approach to medical and recreational cannabis.
DEA and FDA Policy Direction
The path to federal legalization begins with understanding that current federal law, in theory, allows for
the production, distribution and prescription of medical cannabis products in the United States. The
DEA can register manufacturers to produce medical cannabis products in accordance with the CSA.
The FDA can approve medical cannabis products for distribution in accordance with the FD&C Act.
The DEA (an agency of the DOJ) and the FDA (an agency of the DHHS) together can cause medical
cannabis products to be rescheduled under the CSA so that doctors legally can prescribe them. None
of these regulatory actions requires a change in law. Technically, cannabis is not entirely prohibited by
federal law.
But in any practical sense, cannabis is federally prohibited. For nearly 50 years, the DEA has registered
only one cannabis manufacturer. The FDA has never approved a cannabis-derived drug. Because
marijuana remains a Schedule I controlled substance, the lone DEA-registered cannabis manufacturer
can produce cannabis only for strictly controlled research, and doctors cannot prescribe any marijuana
compound or derivative as medicine. A duo of federal regulatory agencies—not federal law—prohibits
lawful access to medical cannabis products; this may be changing. The DEA and the FDA appear to be
exploring policies and practices that could result in the actual production, distribution and prescription
of cannabis-derived drugs.
In August 2016, the DEA announced a new policy designed to increase (beyond one) the number
of DEA-registered cannabis cultivators and permit-registered cultivators to grow cannabis for privately
funded commercial drug development projects. The DEA has since accepted at least 25 applications for
registration but has not issued any new registrations. Some observers believe the new policy initiative
has stalled under the leadership of the DOJ, currently run by U.S. Attorney General Sessions. How-
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ever, that the DEA recognized and responded to the demand for expanded registration is a significant
development on its own, and one that we believe may signal an important redirection of DEA policy.
In October 2017, the FDA accepted GW Pharmaceuticals’ New Drug Application (NDA) for the
cannabis-derived drug Epidiolex. The steps required to file an NDA for any drug involve extensive
coordination and data sharing between the FDA and the applicant; submission of the Epidiolex NDA
is an important milestone toward FDA approval. Many observers expect that Epidiolex will be the first
cannabis-derived drug approved by the FDA.
Additionally, the FDA published industry guidance on botanical drug development in December
2016, several months after the DEA announced its new registration policy. The FDA guidance discusses
challenges inherent to botanical drugs, including challenges related to ensuring therapeutic consistency,
and suggests certain steps to address those challenges. The FDA guidance updates and replaces
similar guidance last issued in June 2004, and we believe that the timing of this update may relate to
other cannabis-related developments at the FDA and the DEA.
Federal Legalization: Predicted Developments
We predict six developments on the path to federal legalization: (1) the FDA will begin approving individual
pharmaceutical-grade drugs derived from cannabis; (2) more states will adopt medical cannabis
laws; (3) more states will adopt recreational laws; (4) the FDA will adopt routine approval procedures
for drugs with extracts of low-THC/high-CBD cannabis varieties; (5) the FDA will adopt routine
approval procedures for drugs with extracts of high-THC cannabis varieties; and (6) cannabis parts
and derivatives will be removed from the CSA schedules (either incrementally, starting with CBD, or
all at once) and will be fully legal for medical and
Path to Federal Legalization recreational purposes.
1. The U.S. Food and Drug Administration will
begin approving individual pharmaceuticalgrade
drugs derived from cannabis.
2. More states will adopt medical cannabis
laws.
3. More states will adopt recreational laws.
4. The FDA will adopt routine approval
procedures for drugs with extracts of
low-THC/high-CBD cannabis varieties.
5. The FDA will adopt routine approval
procedures for drugs with extracts of
high-THC cannabis varieties.
6. Cannabis parts and derivatives will be
removed from the CSA schedules and will
be fully legal for medical and recreational
purposes.
We do not predict that these developments
necessarily will occur in the order presented. We
do expect some of them to develop in parallel, and
none of them depends fundamentally on any other.
The manner in which federal cannabis legalization
actually proceeds, and the timing of any related
developments, are not known to us or anyone else.
Almost certainly, our predictions will prove inaccurate
in some respects. States may reverse their legalization
efforts. The medical efficacy of cannabis
may not be proved to be significant. Cannabis may
never be legalized federally. However, we believe
these developments will likely be among others
that lead to the federal legalization of cannabis. We
expand on each of these developments in the following
discussion.
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(1) FDA Approves Cannabis-Derived Pharmaceuticals
The FDA will approve pharmaceutical-grade drugs derived from cannabis through the NDA process.
FDA approval will require manufacturers to use cannabis varieties with particular chemical profiles and
to demonstrate the ability to control the chemical consistency of those varieties during manufacturing.
The DEA will place a narrow characterization of each FDA-approved drug on CSA Schedule II, III, IV
or V, and will issue one or more registrations to manufacture the drug and the cannabis variety used to
produce the drug. The FDA will improve and refine its botanical-drug review process in general and,
in particular, as it relates to cannabis-derived drugs. The FDA, the DEA and DEA-registered cannabis
researchers and manufacturers will cooperate to create a federal database of (i) each cannabis variety
approved for use in producing an FDA-approved drug and (ii) the manufacturing controls required by
the DEA and the FDA to cultivate chemically consistent plants of the variety in accordance with the
CSA and the FDA’s drug approval. We refer to each cannabis variety in this database, together with
its required manufacturing controls, as an “FDA-registered chemovar” (a chemovar is a plant variety
characterized by its chemical content).
(2) More States Adopt Medical Cannabis Laws
More states will adopt medical cannabis laws, and the number and nature of qualifying medical conditions
included in such laws will expand. Scientific research will improve the ability of the state-legal
medical cannabis industry to develop products that target specific medical conditions. Companies will
increasingly seek to differentiate such medical product offerings from recreational cannabis products.
State regulators and industry leaders will seek to standardize testing, labeling and quality control procedures
particular to medical cannabis products and adopt cannabis-variety recognition and manufacturing
practices consistent with those for FDA-registered chemovars.
(3) More States Adopt Recreational Laws
More states will adopt recreational laws, typically after medical cannabis has been legalized for some
period of time. States will establish agencies to comprehensively regulate both recreational and medical
cannabis; some regulatory standards will apply across both categories but, increasingly, regulations will
develop specific to each category. State regulators will learn from the recreational cannabis experience
of other states and will seek to standardize regulations that allow adults to responsibly enjoy cannabis
while protecting the health and safety of the general public. Recreational cannabis regulations will
resemble federal and state alcohol and tobacco regulations, addressing issues such as product potency
and warning labels, and restrictions on advertising and packaging that appeal to minors.
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(4) FDA Routinely Approves CBD Drugs
The FDA will adopt procedures for the routine approval of drugs that contain extracts of certain
low-THC/high-CBD FDA-registered chemovars. The new procedures will involve development of
a low-THC cannabis drug monograph that resembles in some ways the FDA monographs for overthe-counter
drugs. The monograph will address formulation, dosing and labeling requirements. The
FDA-registered chemovars included in the monograph will be rescheduled by the DEA to Schedule II,
III, IV or V in order to relax DEA registration requirements for manufacturing; however, the chemovars
themselves (particularly their flowers) will not be approved for use by the FDA, and only drugs
produced from extracts in accordance with the monograph will receive routine FDA approval.
(5) FDA Routinely Approves THC Drugs
Relying on experience with the low-THC cannabis drug monograph and a growing database of FDAregistered
chemovars, the FDA will adopt procedures for the routine approval of drugs that contain
extracts of certain high-THC FDA-registered chemovars. The procedures will parallel in many ways
those used in the low-THC monograph procedure, and likely will incorporate additional safeguards
related to THC content. The FDA-registered chemovars included in the high-THC monograph will be
rescheduled by the DEA, but cannabis flower from those rescheduled chemovars will not be approved
for use by the FDA.
(6) Federal Government Legalizes Cannabis
Parts and derivatives of the cannabis plant will be removed from the CSA schedules. This could occur
incrementally, starting with CBD (which could be removed by amending the definition of marijuana
to exclude CBD) and followed later by the rest of the plant (including THC). Or all parts and derivatives
of the plant could be de-scheduled at the same time. There will be three general categories of
legal cannabis products: (i) FDA-approved drugs, which will continue to be developed and approved
through the NDA and other processes; (ii) “therapeutic” cannabis products, which may be limited
to CBD concentrates and infused products if CBD is de-scheduled first, but which eventually will
include smokable flower (including high-THC flower) and most forms of cannabis, and which will
be permitted to make limited health-related claims but will not be approved by the FDA as safe and
effective for treating any specified medical condition; and (iii) recreational products, which also may
be limited to CBD products initially, but which eventually will include a broad range of high-THC
flower, concentrates and infused products. The DEA will still require registration of cannabis and CBD
manufacturers if CBD is de-scheduled first, but once the entire cannabis plant is de-scheduled, a new
federal cannabis agency will be established to regulate medical and recreational cannabis in cooperation
with the FDA and state regulators. The new agency will adopt the DEA’s institutional framework
for controlling the manufacture of chemovars used in FDA-approved drugs and the most successful
state strategies for regulating recreational cannabis, such as potency limits, labeling requirements and
restrictions on marketing to minors.
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Outlook
Development (1) does not require any change in federal law or radical departure from prior federal
policy, but merely requires a redirection of FDA and DEA policies and practices. Developments (2)
and (3) also do not require a fundamental change in federal law. In this sense, developments (1)–(3)
largely reflect incremental developments within the existing legal environment. For example, eight
state legislatures are expected in 2018 to introduce ballot measures or explore regulatory frameworks
for recreational cannabis (Arizona, Delaware, Florida, Michigan, New Jersey, Ohio, Rhode Island and
Vermont). Three other states (Missouri, Oklahoma and Wyoming) are expected to enact medical cannabis
laws in 2018. And as discussed previously, many observers expect that in 2018, the FDA will
approve a cannabis-derived pharmaceutical for the first time.
Developments (4)–(6) require more fundamental changes in federal laws and policies. We do not
expect developments (4), (5) or (6) to occur during the current presidential term, but we believe that
there is a reasonable chance development (4) could begin within the next five years and development
(5) could occur within two years thereafter. In total, we believe it could take up to 10 years or more
before the federal legalization process reaches development (6) and cannabis becomes fully legal under
federal law.
We believe that cannabis will become federally legal when American voters demand it. Developments
(1)–(5) are not required precursors to federal legalization, and either the U.S. Congress or the
DEA could initiate development (6) at any time. We believe that either the Congress or the DEA is
more likely to take such a step in an environment where developments (1)–(5) have progressed, but
there are signs that pressure from American voters may be mounting for the federal government to act
more quickly.
According to Gallup, the percentage of Americans who support legalization of cannabis use has
increased significantly over the past two decades, and 64% of Americans today believe cannabis use
should be legal. We expect that, eventually, federal policy will align with the attitudes of a majority
of American voters. The following graph shows the percentage of Americans who answered “Yes” to
Gallup when asked whether use of marijuana should be made legal.
U.S. Public Support for Legalizing Cannabis Use
70%
60%
50%
40%
30%
20%
10%
1996 2000 2001 2003 2005 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Gallup. Data is shown for each year that such data was provided by Gallup since 1995.
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n Global Cannabis Legalization Momentum
Cannabis legalization is gaining momentum around the world, offering global opportunities for cannabis
companies and related businesses. This momentum is driven primarily by the increasing recognition
that cannabis may have a range of legitimate medicinal benefits and therapeutic applications.
At least 20 countries now have medical laws that facilitate patient access to cannabis or concentrates
for treating specified medical conditions. Notable countries with such medical laws include Australia,
Canada, Colombia and Germany; countries without such laws include China, Japan, Russia and the
United States. (Contrary to U.S. federal law, 29 states, encompassing 62% of the U.S. population,
permit the production and possession of cannabis or concentrates for use in treating a broad range of
qualifying medical conditions.) While the merits of medical cannabis are currently driving legalization,
we believe that—like Uruguay and numerous U.S. states—other countries will ultimately enact legislation
permitting the production, sale and use of recreational cannabis. (Canada is widely expected to
do so in mid-2018.)
The following world map illustrates select countries that (i) have enacted medical laws that facilitate
patient access to cannabis or concentrates for treating specified medical conditions, (ii) have enacted
recreational laws that permit the commercial production and sale of cannabis to adults for recreational
and other uses, or (iii) include a state or province that has a cannabis law or policy in conflict with
federal law.
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Select Countries with Legalized Cannabis Access (January 2018)
Medical Law
Argentina
Australia
Brazil
Chile
Colombia
Croatia
Czech Republic
Germany
Greece
Israel
Italy
Jamaica
Lesotho
Macedonia
Mexico
Netherlands
Peru
Poland
Switzerland
Turkey
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Recreational Law
Canada 1
Uruguay 2
State/Province Conflict with Federal Law
India
Spain
United States
1
Canada currently has a medical law. Assumes Canada enacts a proposed recreational law in mid-2018.
2
Uruguay has both a medical law and a recreational law.
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International partnerships and business plans are being formed as countries increasingly allow
importation and exportation of cannabis products and more companies recognize the global potential
of the cannabis industry. Canadian companies are cultivating cannabis in South America and supplying
markets in Europe, Australian companies are forming research partnerships with producers in
Israel, and European companies are securing cannabis-related patents in the United States. And, as
discussed in more detail in Chapter VII, Capital Markets for Cannabis Companies, more cross-border
investment activity is taking place as industry participants position for the expected further opening of
global cannabis markets.
Despite the growing recognition of the potential medical value of cannabis, the current legalization
momentum and the increasingly international scope of cannabis business, the movement of products
and flow of capital required for a truly global industry continue to be inhibited by incongruous laws,
regulations and international treaties. For example, concerns about violating U.S. federal banking and
anti–money laundering regulations have caused certain U.S. banks to refuse to be connected to the
cannabis industry, avoiding even indirect association with cannabis activity that is legal where conducted.
In one instance, a number of U.S. banks threatened to cease business with certain Uruguayan
banks that serviced pharmacies legally distributing recreational cannabis within Uruguay. In turn, those
Uruguayan banks effectively forced the pharmacies to stop participating in Uruguay’s cannabis market.
(In a similar way, lack of access to the U.S. federal banking system continues to inhibit growth of the
domestic cannabis industry.) Until the largest economies in the world more fully embrace cannabis, we
must stop short of calling cannabis a truly global industry. However, we believe that the legalization
momentum will continue worldwide.
n United Nations Conventions
International regulation of cannabis, cannabis derivatives and many other narcotic, psychotropic and
similar substances is addressed primarily by three international treaties (Conventions) adopted through
the United Nations (UN) between 1961 and 1988.
The Single Convention on Narcotic Drugs of 1961 (1961 Convention) addresses regulation of
the cannabis plant, the coca flower and the opium poppy; certain of their derivatives (such as hashish,
cocaine and heroin, respectively); and any other substance found in accordance with the 1961
Convention to be “liable to similar abuse and productive of similar ill effects.” The 1961 Convention
establishes four schedules of substances subject to increasingly strict controls in the following order:
Schedule III, Schedule II, Schedule I and Schedule IV. Schedule IV substances (the most strictly controlled)
are those Schedule I substances found to be particularly liable to abuse and to produce ill effects
and for which such liability is not offset by substantial therapeutic advantages. Cannabis, cannabis
resin, and extracts and tinctures of cannabis are included on Schedule I; cannabis and cannabis resin
are also included on Schedule IV.
The Convention on Psychotropic Substances of 1971 (1971 Convention) addresses regulation of
certain “psychotropic” substances, which the Convention recognizes generally as substances that may
stimulate or depress the central nervous system causing “hallucinations or disturbances in motor func-
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tion or thinking or behaviour [sic] or perception or mood,” that may produce “a state of dependence”
and that are subject to abuse “so as to constitute a public health and social problem warranting the
placing of the substance under international control.” Substances addressed by the 1971 Convention
include THC, barbiturates, amphetamines and psychedelics such as LSD. The 1971 Convention
establishes four schedules of substances subject to increasingly strict controls in the following
order: Schedule IV, Schedule III, Schedule II and Schedule I. Schedule I includes THC and certain
of its isomers and stereochemical variants. Schedule II includes dronabinol (a synthetic THC) and its
stereochemical variants.
The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
of 1988 (Traffic Convention) establishes additional tools for enforcing provisions of the 1961
and 1971 Conventions. The Traffic Convention provides for international cooperation in arresting
and prosecuting illicit traffickers of substances scheduled under the 1961 and 1971 Conventions and
in disrupting their financial and distribution networks through extradition, anti–money laundering
practices, asset forfeiture and other methods.
Generally, the Conventions contemplate that the manufacture, export, import, distribution, use and
possession of scheduled substances should be allowed only for medical and scientific purposes under
legal authority and that penalties, including criminal penalties, should apply to those who engage in
such activities for other purposes or outside legal authority. Countries participating in the Conventions
are generally required to enact laws and regulations that carry out the provisions of the Conventions,
which may require them to establish dedicated regulatory agencies, track and report physical inventories
as well as production and revenue data, implement and enforce labeling requirements and quality
control procedures, restrict use of substances to those holding medical prescriptions and impose criminal
penalties for violations. Currently, more than 180 countries are party to each Convention.
Amending schedules under the 1961 and 1971 Conventions generally involves participation of
three UN-related bodies: (1) the Economic and Social Council (ECOSOC), one of the six main organs
of the UN established under the UN charter in 1945; (2) the Commission on Narcotic Drugs (CND),
itself a subsidiary body of the ECOSOC that assists the ECOSOC in supervising the application of
international drug control treaties; and (3) the World Health Organization (WHO), an autonomous
intergovernmental organization that collaborates with the UN and other organizations on global health
matters. A schedule amendment may be initiated by the WHO or by any country participating in the
applicable Convention, and generally requires approval of the CND, which approval may be subject
to further review and approval by the ECOSOC. Notably, because regulations applicable to cannabis
and certain derivatives are included in the body of the 1961 Convention (and not just in its schedules),
merely removing cannabis and its derivatives from the schedules under the 1961 Convention would
not entirely remove cannabis from that Convention’s regulatory framework.
Recent Developments Related to the UN Conventions
Global support for the prohibitionist policies of the Conventions is waning, and a growing chorus of
world leaders is calling for new policies for cannabis and other substances to be based on public health
concerns rather than criminalization.
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In 2012, the presidents of Colombia, Guatemala and Mexico requested the UN to focus its next
special session on drugs on policy reform rather than on a mere progress review and continuation
of the same policies. In 2014, the Global Commission on Drug Policy—represented by former UN
Secretary-General Kofi Annan and the former presidents of Brazil, Chile, Colombia, Mexico, Poland,
Portugal and Switzerland—called for an end to the criminalization of drug use and possession and for
the responsible legal regulation of psychoactive substances.
A UN General Assembly Special Session (UNGASS) on drugs was originally scheduled for 2019,
but was accelerated to April 2016 as a result of a proposal sponsored by Mexico and cosponsored by
95 other countries. The general assembly is the primary policy body of the United Nations, and one
in which all UN member states have equal representation. Given this broad representation and the
growing support for decriminalization, many expected the 2016 UNGASS on drugs to result in significant
changes in policy. In an open letter delivered to UN Secretary-General Ban Ki-moon on the eve
of the session, former presidents or prime ministers of Brazil, Cape Verde, Chile, Colombia, Greece,
Hungary, Mexico, the Netherlands, Nigeria, Poland and Switzerland joined with high-profile scholars,
celebrities, clergy, business leaders, elected officials and others in pressing the Secretary-General to call
for reform of prohibitionist drug control policies. Those supporting reform were disappointed when
the UN General Assembly adopted a resolution reaffirming its “commitment to the goals and objectives”
of the three Conventions.
Despite the lack of an immediate and fundamental shift away from the prohibitionist policies of
the Conventions, other steps are being taken that may result in relaxed cannabis controls within the
existing Conventions framework. A committee of the WHO tasked with making drug control recommendations
to the CND on behalf of the WHO—the Expert Committee on Drug Dependence
(ECDD)—recognized an increase in medical cannabis use and the emergence of cannabis-related pharmaceuticals,
and in November 2016 requested that the WHO prepare “pre-review” materials for cannabis,
for the specific cannabis derivatives scheduled under the 1961 and 1971 Conventions, and for
cannabidiol, or CBD. These pre-review materials are preliminary analyses considered by the ECDD to
determine if more in-depth “critical reviews” should be undertaken by the ECDD.
The WHO presented the requested CBD pre-review materials at a November 2017 ECDD meeting.
The CBD materials indicate that CBD exhibits no effects indicative of any abuse or dependence
potential in humans, and that there is no evidence of any public health–related problems associated
with the use of pure CBD. The outstanding pre-reviews related to cannabis and specific derivatives
are expected in early 2018. The ECDD recommended that the pre-review materials be evaluated at
a specific cannabis-focused ECDD meeting to be held no later than June 2018. The requested prereviews
represent the first ever scientific guidance on cannabis to be issued within the framework of
the Conventions. If the pre-reviews lead to critical reviews, such reviews could ultimately result in a
WHO-initiated rescheduling of substances under the 1961 and 1971 Conventions.
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n Global Legal Developments
Nations around the world have recently passed or are considering enacting an array of measures decriminalizing
cannabis, legalizing it for medical use or, in a few cases, legalizing it for recreational use in contravention
of the UN Conventions. The following discussion summarizes recent legal developments
related to cannabis across different regions.
United States
Despite marijuana and THC being Schedule I controlled substances under the CSA—which, practically
speaking, makes almost all manufacture, distribution, dispensing and possession of cannabis in
the United States a federal crime—29 U.S. states and the District of Columbia have enacted medical
cannabis laws that permit the production and possession of cannabis or concentrates for use in treating
a broad range of qualifying medical conditions, and 8 of those same states have enacted recreational
laws that permit the commercial production and sale of cannabis to adults for recreational and other
uses. And 19 U.S. states (including 2 with medical cannabis laws) have passed narrow CBD/limited
laws that permit possession of small amounts of low-THC/high-CBD cannabis concentrates for use in
treating a few serious medical conditions—in particular, severe forms of childhood epilepsy. A majority
of Americans now live in states that permit the production and possession of cannabis or concentrates
for use in treating a broad range of qualifying medical conditions, and polls show that a majority
of Americans believe cannabis use should be legal. For a more thorough discussion of U.S. state and
federal law, see Chapter IV, U.S. Legal Landscape.
Canada
Canada’s Controlled Drugs and Substances Act (CDSA) was enacted in 1996 and currently serves
as the country’s implementing legislation under the UN Conventions. The CDSA establishes eight
schedules of “controlled substances” and imposes civil and criminal penalties for production, trafficking,
importing, exporting and possession of those controlled substances in violation of the CDSA.
Cannabis, cannabis preparations and derivatives, and certain cannabinoids, including THC and CBD,
are Schedule II substances under the CDSA. Those who commit CDSA violations related to Schedule
II substances are subject to fines and imprisonment.
In a 2000 decision by the Court of Appeal for Ontario, the court held that certain criminal prohibitions
under the CDSA related to cannabis were unconstitutional because they did not include a constitutionally
acceptable medical exemption. Following this constitutional holding and acting within
the framework of the CDSA, which allows for the issuance of regulations and exemptions thereunder,
Canada issued a sequence of three medical marijuana regulations discussed below.
The Marihuana [sic] Medical Access Regulations (MMAR), issued in 2001, permitted individuals
with the authorization of their health care practitioners to grow their own cannabis plants for medical
purposes, to designate someone to grow cannabis for them or to purchase dry cannabis flower from
Health Canada (the government agency charged with administering Canada’s medical cannabis regulations).
The MMAR was successfully challenged on constitutional grounds and eventually replaced
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in 2013 by the Marihuana [sic] Medical Program Regulations (MMPR). The MMPR created a regulatory
framework under which individuals with a medical need could obtain dry cannabis flower from
licensed commercial producers. Like the MMAR before it, the MMPR was held unconstitutional and
was eventually replaced, this time in August 2016, by the currently effective Access to Cannabis for
Medical Purposes Regulations (ACMPR).
The ACMPR permits businesses licensed by Health Canada to commercially produce and distribute
cannabis flower, cannabis oil and cannabis starter materials, such as plants and seeds, to individuals
with a medical recommendation from an authorized health care practitioner. The ACMPR also allows
such individuals to produce a limited amount of cannabis for their own medical purposes, or to designate
another person (which may include Health Canada) to produce it for them. The ACMPR sets
forth a comprehensive licensing and regulatory regime that addresses security of licensed production
facilities, import and export permits, quality control measures and labeling requirements, and imposes
limits on the amount of cannabis that can be produced and possessed by an individual.
In April 2017, a proposed recreational law was introduced in the Canadian parliament; this legislation
would allow adults to purchase cannabis from federally licensed producers and to possess and
share cannabis with other adults. The proposed Cannabis Act would authorize the Canadian government
to issue regulations for the administration and enforcement of the act and to issue licenses and
permits authorizing the importation, exportation, production, testing, packaging, labeling, sending,
delivery, transportation, sale, possession or disposal of cannabis and cannabis products. The Cannabis
Act would authorize Canadian provinces and territories to regulate the distribution and retail sale of
cannabis within their jurisdictions, and all individuals and entities, including federally licensed businesses,
would be required to comply with those local regulations as well as federal laws.
Unlike the ACMPR, which is a set of medical cannabis regulations issued within the framework of
Canada’s CDSA, the Cannabis Act would amend the CDSA and related criminal and other statutes to
facilitate the recreational law in Canada. The proposed Cannabis Act is widely expected to be approved
in some form by the Canadian parliament by mid-2018. If approved, Canada would be the largest
country in the world to legalize recreational cannabis on a national level.
Latin America and the Caribbean
During the past five years, Latin American and Caribbean nations (and Puerto Rico, a U.S. territory)
have taken significant legal measures that increase access to cannabis for medical purposes, permit
recreational cannabis use and relax criminal prohibitions.
In 2013, Uruguay became the first nation in the world to legalize and regulate the commercial production
and sale of cannabis to adults for recreational and other uses. The Uruguayan law authorizes
licensed producers to grow cannabis for sale, through licensed pharmacies, to Uruguayan citizens and
permanent residents who have registered with the government; the law also permits individuals to
grow up to six cannabis plants per year and to form small clubs that may grow up to 99 plants per year.
Cannabis sales through licensed pharmacies commenced in 2017.
In 2015, Colombia approved a legal framework for the cultivation, processing and sale of cannabis
extracts and related products for scientific and medical purposes. The Colombian framework provides
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for the issuance of separate licenses for cultivation and processing. It also contemplates that permits will
be available under Colombia’s export laws for the export of lawful cannabis products to jurisdictions
where importation is legal. Colombia issued the first processing license in 2016 and the first cultivation
license in 2017.
In 2017, Argentina enacted regulations permitting the use of cannabis oil and other derivatives
either by qualifying patients or for scientific and medical research. Under the new legislation, the government
will oversee cultivation and production of cannabis and its derivatives for research purposes
and for patient consumption, establish a national registry of qualifying patients and make cannabis
products available to those patients, free of charge. The government expects to import cannabis supplies
until they can be produced domestically.
Other Latin American nations that have taken recent steps to increase medical cannabis access
include Chile, Brazil, Mexico and Peru. In 2015, Chile changed its laws to allow medical cannabis use
by patients and to authorize the sale of cannabis-based medicines through pharmacies. In 2016, Brazil
approved a resolution authorizing the prescription and importation of cannabis products, including
THC and CBD, for use in treating certain qualifying medical conditions. In June 2017, Mexico
enacted a law directing its Ministry of Health to prepare regulations for the research, production and
medicinal use of “pharmacological derivatives” of cannabis. In November 2017, Peru adopted a bill
legalizing the production, commercialization and importation of cannabis oil to be used for medical
purposes.
In the Caribbean region, Puerto Rico, the Cayman Islands and Jamaica have taken measures to
decriminalize cannabis or increase access for medical use. In 2015, the governor of Puerto Rico signed
an executive order that legalized use of cannabis derivatives (but not cannabis flower) for medical
purposes. Jamaica passed a law in 2015 that decriminalizes possession of small amounts of cannabis,
permits an individual to cultivate no more than five cannabis plants, establishes a medical cannabis
regulatory agency and allows tourists with foreign medical cannabis prescriptions to purchase small
amounts of cannabis. A 2016 law enacted in the Cayman Islands legalized the use of cannabis extracts
for medical purposes and authorized the creation of import regulations and the sale through licensed
pharmacies.
Australia and New Zealand
Australia amended its Narcotic Drugs Act in 2016 to authorize a regulated medical cannabis industry
in the country. The amendment establishes licenses to cultivate cannabis, produce cannabis resin and
other products for medicinal purposes, manufacture medicinal cannabis products and conduct cannabis
research. A license-holder is required to secure a permit that places conditions on the license and
identifies specific activities allowed within the scope of the license. Cannabis products for medicinal
use that are either legally manufactured in Australia or legally imported can be prescribed to qualifying
medical patients. The amendment defines medicinal cannabis products broadly as a product that
includes, or is produced from, any part of the cannabis plant and is intended for the purpose of “curing,
or alleviating the symptoms of a disease, ailment or injury.”
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New Zealand’s Misuse of Drugs Act generally makes the importation, cultivation, distribution, possession
and use of cannabis illegal. However, in September 2017, New Zealand’s Health Ministry lifted
certain restrictions so that doctors may now prescribe approved CBD products. (Previously, patients
in need of CBD products were required to apply directly to the Health Ministry, and approval was
granted on a case-by-case basis.) In December 2017, New Zealand introduced legislation for a medical
law that would amend the Misuse of Drugs Act to permit domestic production of medical cannabis
products and their use by people with terminal illness or chronic pain.
Europe
The European Union provides no coordinated legal framework for cannabis and, historically, European
countries generally have prohibited its production and sale, but have also decriminalized or tolerated
possession of small amounts.
In some European countries, personal use exceptions to criminal prosecution have been used to
carve out visible distribution models. In the Netherlands, for example, Amsterdam is famous for its
coffee-shop cannabis sales, even though the suppliers of cannabis to those coffee shops generally operate
illegally. And in Spain, despite a federal prohibition on the sale of cannabis, court decisions and
laws permitting cultivation for personal consumption have served to justify the country’s hundreds of
private cannabis clubs.
To date, no European country has implemented a recreational law comparable to those in Uruguay
and some U.S. states and expected in Canada. However, starting with the Netherlands in 2003, a
number of European countries have enacted medical laws that facilitate patient access to cannabis or
concentrates, through importation or domestic production, for treating specified medical conditions.
Italy has allowed medical cannabis use since 2013 under a law that requires cannabis to be sold
through authorized pharmacies to patients with a valid prescription.
Croatia legalized the limited use of medical cannabis products in 2015. Under the law, doctors may
prescribe cannabis ointments, teas and other extracts to patients with a qualifying health condition,
including tumors, AIDS, multiple sclerosis and child epilepsy. Smoking or vaporizing cannabis flower
is not allowed under the law. In 2016, Croatia received a shipment of medical cannabis products from
a Canadian producer, marking the first time a North American company legally shipped cannabis
products containing THC and CBD into the European Union.
A German law that took effect in 2017 legalizes the use of medical cannabis products prescribed for
patients with serious illnesses, including multiple sclerosis, chronic pain, epilepsy and chemotherapyinduced
nausea and lack of appetite. The law provides a framework for the regulation of suppliers
under which the government has already issued import licenses to Canadian and Dutch firms and is
finalizing an approval process for the issuance of domestic production licenses.
A 2017 Polish law permits patients to obtain medical cannabis products, including flower, extracts
and tinctures, through pharmacies if they have both a physician’s medical authorization and permission
from a regional pharmaceutical inspector. The qualifying conditions eligible for medical cannabis
include chronic pain, chemotherapy-induced nausea, multiple sclerosis, spasticity and treatmentresistant
epilepsy. Cannabis products must be imported into Poland because the law does not permit
cannabis cultivation within the country.
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Greece announced in 2017 that the use of cannabis extracts would be permitted for patients who
obtain a doctor’s recommendation and are diagnosed with chronic pain, neuropathic pain, chemotherapy-induced
nausea, certain eating disorders and cancer.
In the United Kingdom, the Misuse of Drugs Act 1971 (Drugs Act) generally prohibits the manufacture,
supply and possession of any “controlled drug,” including cannabis and cannabis resin, without
a license issued by the Home Office, a ministerial department of the U.K. government. There is
no exception to this general Drugs Act prohibition that would facilitate patient access to cannabis or
concentrates for treating specified medical conditions. However, within the Drugs Act framework, the
Home Office has issued to U.K.-based GW Pharmaceuticals licenses to cultivate, possess and supply
cannabis for medical research and for commercial purposes. GW Pharmaceuticals produces Sativex,
a mouth spray that contains cannabis-derived THC and CBD and is used for treatment of spasticity
caused by multiple sclerosis. Sativex is generally recognized as the first prescription drug in the world
to include plant-based cannabinoids. It was first approved for use in the U.K. in 2010 and has been
approved for use in at least 30 countries (but not in the United States).
Middle East, Asia and Africa
Throughout the Middle East, Asia and Africa, cannabis cultivation, sale and possession generally
remain prohibited and punishable as criminal offenses. Only a handful of countries from these regions
have enacted laws that decriminalize possession of small amounts of cannabis for personal use or facilitate
patient access to cannabis or concentrates for treating specified medical conditions.
In 2017, particular sections of South Africa’s Drugs and Drug Trafficking Act, which prohibit cultivation,
possession and personal use of cannabis on private property, were declared unconstitutional.
During the same year, Lesotho (an enclave surrounded entirely by South Africa) granted a license to
a pharmaceutical company to grow, process and sell cannabis for medicinal use or scientific purposes.
In Israel, the country’s Dangerous Drug Ordinance generally criminalizes the manufacture, possession
and use of cannabis. However, medical cannabis in smokable and other forms has been legal since
the 1990s for patients with a range of serious medical conditions, including multiple sclerosis, Crohn’s
disease, cancer and post-traumatic stress disorder, and the country is widely recognized as a global
leader in medical cannabis research and cultivation. Under Israel’s medical cannabis rules, the Ministry
of Health can issue permits for the production, distribution and use of medical cannabis products.
Patients must first obtain a doctor’s recommendation and submit it to the ministry in order to receive a
medical cannabis use permit. In August 2017, the Israeli Ministries of Health and Finance announced
that licensed producers and distributors of medical cannabis would become eligible, for the first time,
for permits to export medical cannabis to jurisdictions where it is legal to import.
100 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER V
Global Cannabis Regulation
n Global Outlook
While the medical potential of cannabis is driving an initial wave of legalization, we believe countries
will eventually legalize the commercial production and sale of cannabis to adults for recreational use.
In this regard, 2018 will be an important year, with the expected approval of the recreational Cannabis
Act in Canada and the implementation of California’s new recreational law. In Canada, we may observe
for the first time the implementation of a large-scale national recreational law. Similarly, as the most
populous U.S. state and one of the world’s largest economies, California’s recreational cannabis rollout
will be a bellwether for the global cannabis industry. The successes, failures and lessons learned in Canada
and California will have significant impacts on the cannabis industry worldwide.
In our view, the course taken by the U.S. federal government will impact the global cannabis industry
more than any other factor. If the U.S. federal government were to change its current practice and
aggressively enforce existing federal cannabis laws, we would expect a corresponding dampening of
the industry worldwide. If the status quo were to continue in the United States, we would expect the
current global legalization trend to continue, particularly in Europe, South America and Africa. And
if federal prohibition in the United States ends, we expect a surge in cannabis legalization worldwide.
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CHAPTER VI
U.S. and International
Cannabis Market Estimates
n Global Market Overview
Cannabis is the most widely cultivated, produced, trafficked and consumed drug worldwide, according
to the United Nations Office on Drugs and Crime (UNODC). In 2003, the UNODC estimated
that the global illegal cannabis market was $113 billion, with 160 million consumers. The UNODC
continues to estimate the number of cannabis users worldwide and recently estimated that 183 million
people globally between the ages of 15 and 64, or more than 4% of this age group, consumed cannabis
in 2015.
In 2010, the RAND Corporation (RAND) estimated that the U.S. illegal cannabis market was
$40 billion. Adjusting this estimate solely for inflation and population growth, the U.S. illegal market
would now be approximately $48 billion.
Both the UNODC and RAND acknowledge the challenges inherent in studying an illegal consumer
market, and both allow significant room for error in their estimates. However approximate,
their estimates make clear that there is significant global demand for cannabis. Less clear is how quickly
illegal markets will transition to legal markets, as well as the extent to which legalization may increase
overall demand.
The Legal Cannabis Market: Key Growth Drivers
We believe that numerous factors will increase consumer penetration rates and the overall size of the
legal cannabis market. Such factors include the following.
U.S. Federal Legalization. We believe it is a question of when, not if, cannabis becomes federally
legal. We predict six developments on the path to federal legalization: (1) the FDA will begin approving
individual pharmaceutical-grade drugs derived from cannabis; (2) more states will adopt medical
cannabis laws; (3) more states will adopt recreational laws; (4) the FDA will adopt routine approval
procedures for drugs with extracts of low-THC/high-CBD cannabis varieties; (5) the FDA will adopt
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routine approval procedures for drugs with extracts of high-THC cannabis varieties; and (6) cannabis
parts and derivatives will be removed from the CSA schedules (either incrementally, starting with
CBD, or all at once) and will be fully legal for medical and recreational purposes. (We expand on these
predicted developments in Chapter IV, U.S. Legal Landscape.) We believe that federal legalization will
trigger rapid growth in the U.S. market, propelled by interstate commerce, access to the federal banking
system and acceleration of the cannabis-derived pharmaceuticals market. A change in the federal
status of cannabis in the United States will not only drive U.S. market growth, but should provide a
significant catalyst to the market worldwide.
Increasing Awareness of the Medical Efficacy of Cannabis. In aggregate, across all U.S. state laws,
cannabis is legally recognized as a form of therapy or medicine for more than 50 medical conditions.
In addition, at least 20 countries have medical laws that facilitate patient access to cannabis or concentrates
for treating specified medical conditions. We believe that countries and U.S. states will continue
to adopt and enhance legal frameworks for the medicinal use of cannabis products. In addition, we
believe that many more cannabis consumers will emerge as research on cannabis increasingly demonstrates
its medical efficacy and as more therapeutic products are developed and brought to market.
Increasing Recreational Legalization. Most laws facilitating access to cannabis, both in U.S. states
and abroad, are medical laws. However, Uruguay and eight U.S. states have enacted recreational laws
permitting the commercial production and sale of cannabis to adults for recreational and other uses
(and Canada is widely expected to do so in mid-2018). In the handful of jurisdictions that started
with medical laws and later adopted recreational laws—particularly in Colorado, Washington and
Oregon—adoption of recreational laws has led to significant growth in overall market size and a rapid
increase in the percentage of the market represented by recreational consumers. We expect 2018 will be
a watershed year for the recreational market, with the implementation of California’s new recreational
law and the expected approval and implementation of Canada’s recreational law. If these laws stimulate
demand, as expected, and are otherwise viewed as successful, we expect more U.S. states and additional
countries to follow suit with similar laws.
Broadening Range of Cannabis Consumer Products. Product innovation and advancements in cannabis
varieties, concentrates, infused products, vaporizing technology and cannabis-derived pharmaceutical
products will drive consumer adoption and spending. Cannabis consumer product companies
will seek to differentiate their products through marketing, distribution, packaging, selection, quality
and pricing. We believe that product differentiation and availability will be more prevalent in legal
cannabis markets and will drive consumer transition from illegal to legal markets.
Declining Prices in U.S. State-Legal Cannabis Markets. The supply of cannabis has increased considerably
with expanded state legalization in the United States. This increase has started to dampen
retail and wholesale prices in various markets. As prices decline, we are starting to see closer price parity
between state-legal and illegal markets (in the United States, cannabis is generally priced lower in
illegal markets than in state-legal markets). Lower retail prices in state-legal markets should accelerate
consumer transition from illegal to state-legal markets and drive increased overall penetration rates.
However, state and local taxes will continue to impact pricing for cannabis products in state-legal cannabis
markets.
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n U.S. State-Legal Cannabis Market
More than 97% of the U.S. population lives in a state or district (District of Columbia) with at least
one law that permits the manufacturing, distribution, dispensing or possession of cannabis or concentrates.
As described in more detail in Chapter IV, U.S. Legal Landscape, most of these laws are
medical laws, and only eight states have enacted recreational laws. While the overall state-legal market
has grown significantly, the addressable market has been constrained due to the lack of access to purely
recreational consumers and the sometimes-narrow scope of medical conditions that qualify a patient
to access medical cannabis.
We estimate that the 2017 U.S. state-legal cannabis market was $8.0 billion, with more than four
million consumers. The breakdown of this estimate by state is shown in the following chart.
2017 U.S. State-Legal Cannabis 4 Market Estimate
Other States
$1.9 B
$8.0B
California
$3.2 B
Colorado
$1.5 B
Oregon
$470 M
Washington
$929 M
Source: Ackrell Capital
Recreational Sales as a Key Market Driver
Of the eight states that have enacted recreational laws, all had previously implemented medical laws.
As shown in the following graphs for the three largest states to implement recreational laws, implementation
of a recreational law significantly expanded the overall size of the legalized cannabis market,
doubling the size of the market in each of these states in the first full calendar year after implementation.
In addition, the percentage of the total market attributable to recreational consumers increased
quickly. This indicates significant, pent-up consumer demand for legal cannabis in the United States,
and we expect a significant increase in the size of the overall state-legal market as more states implement
recreational laws.
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Colorado
Colorado implemented a medical law in 2000 and a recreational law in 2014. The following graph
shows the impact of Colorado’s recreational law on the overall market in the state.
State-Legal Cannabis Market: Colorado
$1,600
$1,511
$1,400
Medical
Recreational
$1,313
($ millions)
$1,200
$1,000
$800
$600
$400
$353
93%
$680
$963
$200
$0
2013 2014 2015 2016 2017E
Source: Ackrell Capital
Washington
Washington implemented a medical law in 1998 and a recreational law in July 2014, and folded its
medical law into its recreational law in 2017. The following graph shows the impact of these laws on
the overall market in the state.
State-Legal Cannabis Market: Washington
$1,000
$929
$900
$800
Medical
Recreational
$768
($ millions)
$700
$600
$500
$400
$300
$235
18%
$278
108%
$577
$200
$100
$0
2013 2014 2015 2016 2017E
Source: Ackrell Capital
106 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
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U.S. and International Cannabis Market Estimates
Oregon
Oregon implemented a medical law in 1998 and a recreational law in 2015. The following graph shows
the impact of Oregon’s recreational law on the overall market in the state.
State-Legal Cannabis Market: Oregon
$500
$470
$450
$400
$350
Medical
Recreational
$365
($ millions)
$300
$250
$200
$150
$100
$75
$126
101%
$255
$50
$0
2013 2014 2015 2016 2017E
Source: Ackrell Capital
California
In 1996, California became the first U.S. state to implement a medical law. In November 2016, the
state enacted a recrea tional law, the implementation of which is scheduled to begin in January 2018.
The following graph shows the impact that California’s recreational law is expected to have on the
overall market in the state.
State-Legal Cannabis Market: California
$7,000
$6,491
$6,000
$5,000
Medical
Recreational
101%
($ millions)
$4,000
$3,000
$2,563
$3,227
$2,000
$1,000
$0
2016 2017E 2018E
Source: Ackrell Capital
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n U.S. Legalized Cannabis Market Forecast
Forecast Methodology
The cannabis industry is driven by consumers, similar to other highly regulated industries such as alcohol,
tobacco and pharmaceuticals. Consequently, our methodology for forecasting the U.S. legalized
cannabis market is based primarily on the following factors: (i) the number of eligible U.S. consumers,
grouped by age; (ii) the penetration rate for each consumer age group; and (iii) the average monthly
spending for each consumer age group.
We believe that the variable which will most impact the future size of the U.S. legalized cannabis
market is the federal legalization process. How and when federal legalization occurs will impact other
primary drivers of the market, including the number of eligible consumers, penetration rates and consumer
spending. We predict six developments relating to federal legalization: (1) the FDA will begin
approving individual pharmaceutical-grade drugs derived from cannabis; (2) more states will adopt
medical cannabis laws; (3) more states will adopt recreational laws; (4) the FDA will adopt routine
approval procedures for drugs with extracts of low-THC/high-CBD cannabis varieties; (5) the FDA
will adopt routine approval procedures for drugs with extracts of high-THC cannabis varieties; and
(6) cannabis parts and derivatives will be removed from the CSA schedules (either incrementally, starting
with CBD, or all at once) and will be fully legal for medical and recreational purposes. (We expand
on these predicted developments in Chapter IV, U.S. Legal Landscape.)
We do not predict that these developments necessarily will occur in the order presented. We do
expect some of them to develop in parallel, and none of them depends fundamentally on any other.
For example, Congress could cause development (6) at any time by passing legislation that removes
cannabis from the CSA schedules and establishes a national framework for recreational and medical
cannabis regulation. Developments (1) through (3) largely reflect incremental developments within the
existing legal environment. We do not expect developments (4), (5) or (6) to occur during the current
presidential term, but we believe that there is a reasonable chance development (4) could begin within
the next five years and development (5) could occur within two years thereafter. In total, we believe that
it could take up to 10 years or more before the federal legalization process reaches development (6) and
cannabis becomes fully legal under federal law. For our analysis, we assume (i) development (4) begins
in 2023, (ii) development (5) follows two years thereafter and (iii) development (6) occurs by 2027 and
cannabis becomes fully legal in the United States. (The reader is cautioned that cannabis may never be
legalized federally in the United States.)
Eligible U.S. Consumers
We used U.S. Census data to identify the number of people in the United States aged 21 years or
older. While some therapeutic applications of cannabis are targeted at people under 21 years of age, we
excluded this group of consumers from our estimates. We assumed a nominal annual growth rate for
the U.S. population. With more than 97% of the U.S. population currently living in a state or district
with at least one law that permits the manufacturing, distribution, dispensing or possession of cannabis
or concentrates, we view the potential pool of eligible consumers to be virtually the entire U.S. adult
population.
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U.S. and International Cannabis Market Estimates
Consumer Penetration Rates
We assigned current and prospective consumer penetration rates to each state based on our assessment
of whether legal consumer access to cannabis in the state should be characterized as “limited,” “moderate”
or “broad.” This assessment was based in part on (i) the nature of the cannabis laws in each state
and (ii) the extent of the cannabis dispensary network in each state. We assigned a specific penetration
rate to each age group, with the 21–29 age group having the highest and the 70+ age group having the
lowest.
Consumer penetration rates are significantly affected by the available channels for legal access to
cannabis. States that have only medical laws typically have lower penetration rates than states having
both medical and recreational laws because the qualifying-condition requirement of medical laws
precludes many potential consumers. Similarly, penetration rates are impacted by the widely varying
number and nature of qualifying medical conditions designated by medical laws. States that designate
many conditions or highly subjective conditions such as “chronic pain” tend to have higher penetration
rates than states that designate relatively few or highly specific conditions.
Penetration rates also are affected by the reach of a state’s cannabis dispensary network. Some states
have extensive dispensary networks that provide convenient access to cannabis for most consumers.
Other states have a limited number of dispensaries or networks that reach only urban areas; restricted
networks can be the result of factors such as the amount of time a state has permitted legal cannabis
access and the prevalence of county and municipal laws restricting (or in some cases, completely banning)
dispensary operations.
Prior to federal legalization, we expect U.S. penetration rates to increase as states implement new
medical and recreational laws and expand the scope of qualifying medical conditions under existing
medical laws, and as the FDA begins approving pharmaceutical-grade drugs derived from cannabis.
Although we believe penetration rates in states with recreational laws and robust dispensary networks
may fairly represent penetration rates after federal legalization, penetration rates may increase further
as the medical efficacy of cannabis becomes better understood and negative perceptions of cannabis
diminish. Following federal legalization, we believe penetration rates may ultimately be as high as (or
higher than) those in other consumer-driven industries, such as alcohol, tobacco and pharmaceuticals.
The consumer penetration rates used in our analysis are as follows.
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U.S. Legalized Cannabis Market: Consumer Penetration Rate
25%
Path to Federal Legalization
FDA Approves Cannabis-Derived Pharmaceuticals
20%
More States Adopt Medical Cannabis Laws
More States Adopt Recreational Laws
15%
FDA Routinely Approves CBD Drugs
FDA Routinely Approves THC Drugs
10%
Federal Government Legalizes Cannabis
5%
0%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: Ackrell Capital
Monthly Cannabis Spending
We estimated average monthly spending on cannabis using data provided by dispensaries in states with
recreational laws. We then assigned spending levels (low, moderate and heavy) to each age group of
eligible consumers by state. The resulting weighted averages of monthly consumer spending used in
our analysis are as follows.
$190
U.S. Legalized Cannabis Market: Weighted Average Monthly Consumer Spending
$170
$150
$130
$110
$90
$70
$50
Path to Federal Legalization
-
FDA Approves Cannabis-Derived Pharmaceuticals
More States Adopt Medical Cannabis Laws
More States Adopt Recreational Laws
FDA Routinely Approves CBD Drugs
FDA Routinely Approves THC Drugs
Federal Government Legalizes Cannabis
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: Ackrell Capital
110 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
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U.S. and International Cannabis Market Estimates
U.S. Legalized Cannabis Market Estimates
Based on our assumptions and methodology, we believe that the U.S. legalized cannabis market will
ultimately exceed $100 billion annually, with more than 50 million consumers. As shown in the following
graph, we believe these levels will be reached after the federal government legalizes cannabis.
U.S. Legalized Cannabis Market
$140,000
Path to Federal Legalization
70 M
($ millions)
$120,000
$100,000
$80,000
$60,000
$40,000
FDA Approves Cannabis-Derived Pharmaceuticals
More States Adopt Medical Cannabis Laws
More States Adopt Recreational Laws
FDA Routinely Approves CBD Drugs
FDA Routinely Approves THC Drugs
Federal Government Legalizes Cannabis
60 M
50 M
40 M
30 M
20 M
Number of Consumers
$20,000
10 M
$0
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
0 M
Legalized Cannabis Market Size
Consumers
Source: Ackrell Capital. Assumes cannabis will be legalized federally by 2027. Cannabis may never be legalized federally in the United States.
Because penetration rate and average monthly spending assumptions significantly affect our forecast,
we illustrate this impact with the following sensitivity analysis, which shows the estimated market
size in 2030 using a range of penetration rates and monthly spending averages.
2030 U.S. Legalized Cannabis Market Size: Sensitivity Analysis
($ millions)
Adult
Population
Penetration
Rate
Average Monthly Consumer Spending
- $100 $125 $150 $175 $200
5% $13,954 $17,442 $20,930 $24,419 $27,907
10% 27,907 34,884 41,861 48,838 55,814
15% 41,861 52,326 62,791 73,256 83,722
20% 55,814 69,768 83,722 97,675 111,629
25% 69,768 87,210 104,652 122,094 139,536
30% 83,722 104,652 125,582 146,513 167,443
35% 97,675 122,094 146,513 170,932 195,350
Source: Ackrell Capital
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Methodology and Estimates: Industry Comparisons
To evaluate our methodology and results, we compare estimated values from our model with values
for the same parameters in markets for certain other stimulants and pharmaceuticals. We believe that
this comparison is useful because cannabis is used recreationally in much the same way alcohol, coffee
and tobacco are used, and because cannabis may be an alternative to pharmaceuticals currently used
to treat a range of medical conditions. The following table compares the estimated penetration rate,
average monthly consumer spending and U.S. retail market size for a number of common stimulants
and pharmaceutical categories.
Comparison between Cannabis and Common Stimulants and Substances
Alcohol Coffee Tobacco Painkillers
Antidepressants
Cannabis
(Future)
Primary Usage Recreational Recreational Recreational Medicinal Medicinal
Recreational
/ Medicinal
Adult
Penetration %
Monthly
Consumer
Spending
U.S. Retail
Market Size
50% 50% 17% 40% 25% 20%
$45 to $200 $80 to $100 $40 to $80 $50 to $200 $50 to $100 $50 to $500
$200B $35B $100B $300B $60B $100B
Source: Ackrell Capital
This comparison demonstrates that our U.S. legalized cannabis market estimates are in line with
U.S. retail markets for alcohol, coffee, tobacco, and pharmaceutical painkillers and antidepressants.
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U.S. and International Cannabis Market Estimates
n International Legal Cannabis Market Forecast
As previously discussed, cannabis is the most widely consumed drug worldwide: an estimated 183 million
people between the ages of 15 and 64 consumed cannabis in 2017. Cannabis legalization is gaining
momentum around the world. At least 20 countries now have medical laws that facilitate patient
access to cannabis or concentrates for treating specified medical conditions. Select countries with such
laws include Australia, Canada, Colombia and Germany; countries without such laws include China,
Japan, Russia and the United States. While the merits of medical cannabis are currently driving legalization,
we believe that—like Uruguay and numerous U.S. states—other countries will ultimately
enact and implement recreational laws.
Canada’s legal cannabis market (presently limited to medical cannabis) is currently the largest federally
legal cannabis market in the world, estimated at $1.5 billion in 2017. We anticipate that Canada
will enact and implement its proposed recreational Cannabis Act in mid-2018 and that implementation
will significantly expand the size of Canada’s overall market.
International Market Size Estimate Methodology
Similar to the methodology for our U.S. estimates, the primary factors for our international legal cannabis
market estimates are the estimated number of eligible consumers, penetration rates and monthly
spending. Of course, these and other factors affecting market size vary considerably across continents
and regions because each country has its own unique market characteristics, including laws, culture,
religions, consumer preferences and disposable income.
We do not attempt to estimate the timing of legal changes that affect consumer penetration rates.
Rather, we estimate the size of potential international markets at maturity when penetration rates have
stabilized. The time required for markets in particular countries to reach maturity will vary widely and,
like the U.S. market, could be 10 years or more.
To estimate average monthly consumer spending, we analyzed a country’s per capita average
monthly income and assumed a certain percentage was spent on cannabis products. The resulting
estimates of monthly spending in developed countries differs vastly from that in developing countries.
International Market Size Estimates
Our estimates for the international legal cannabis market include estimates for select countries with
medical or recreational laws and certain countries we believe may develop into legal markets for cannabis
in the foreseeable future. The following table lists each identified country, ranked by Gross
Domestic Product (GDP), with its estimated adult population, monthly cannabis consumer spending
and potential market value.
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Emerging and Anticipated International Legal Cannabis Markets
Country
GDP Rank
2017 Estimated
Adult Population
(in millions)
Projected
Monthly Consumer
Spending ($)
Potential
Market Value
($ millions)
Select Countries with Medical or Recreational Laws
Germany 4 59.0 $78 – $155
$16,518
Brazil 8 150.5 16 – 31
8,524
Italy 9 42.5 56 – 112
8,599
Canada 10 26.6 78 – 155
7,453
Australia 13 12.2 97 – 194
4,268
Mexico 16 92.9 16 – 32
5,380
Turkey 17 58.3 20 – 40
4,178
Netherlands 18 12.2 82 – 165
3,632
Switzerland 20 5.8 145 – 289
2,999
Argentina 21 23.0 21 – 43
1,766
Poland 24 27.4 23 – 45
2,223
Israel 32 5.8 64 – 129
1,336
Colombia 37 35.3 11 – 22
1,429
Chile 44 13.0 24 – 48
1,124
Peru 48 23.0 11 – 21
878
Czech Republic 51 7.9 31 – 62
890
Greece 52 7.9 34 – 67
962
Uruguay 78 2.2 27 – 54
211
Croatia 84 2.9 22 – 43
223
Jamaica 120 2.2 8 – 17
65
Macedonia 132 1.4 9 – 18
46
Lesotho 163 1.4 2 – 4
11
Certain Additional Countries
United Kingdom 5 47.5 75 – 151
12,908
India 6 964.1 3 – 6
10,379
France
Spain
7
14
48.2
33.1
69 – 139
49 – 98
12,040
5,841
Sweden 23 7.2 97 – 194
2,520
South Africa 35 40.3 10 – 20
1,416
Portugal 49 7.2 35 – 71
916
Midpoint Weighted Average $28
Total $118,735
Source: Ackrell Capital
The projected market value for each country shown in the preceding table is calculated assuming a
20% penetration rate and the midpoint of the projected average monthly spending range. Because each
country’s penetration rate and monthly spending will vary considerably and are difficult to predict, we
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CHAPTER VI
U.S. and International Cannabis Market Estimates
illustrate the impact of varying these factors with the following sensitivity analysis, which shows the
estimated market size at maturity using a range of penetration rates and monthly spending weighted
averages.
International Legal Cannabis Market Size: Sensitivity Analysis
($ millions)
Adult
Population
Penetration
Rate
5%
10%
15%
20%
25%
30%
35%
Weighted Average Monthly Consumer Spending
$10 $20 $30 $40 $50
$ 10,606 $ 21,211 $ 31,817 $ 42,422 $ 53,028
21,211 42,422 63,634 84,845 106,056
31,817 63,634 95,450 127,267 159,084
42,422 84,845 127,267 169,690 212,112
53,028 106,056 159,084 212,112 265,140
63,634 127,267 190,901 254,534 318,168
74,239 148,478 222,718 296,957 371,196
Source: Ackrell Capital
Based on the preceding assumptions and methodology, we believe that the international legal cannabis
market for select countries with medical or recreational laws and certain countries we believe
may develop into legal markets for cannabis has the potential to exceed $200 billion within the next
10 to 15 years. And as discussed earlier in this chapter, we forecast the U.S. legal cannabis market to
reach more than $100 billion in this same period. Together, these two forecasts indicate a global legal
cannabis market in the foreseeable future of more than $300 billion.
In our view, most countries located in Asia will take the longest to enact and implement cannabis
access laws; therefore, we have not included the markets in countries such as China, with a population
of 1.4 billion people, or Japan, with the third highest GDP in the world, in our global market estimate.
If cannabis legalization continues in the United States and the rest of the world as we anticipate, we
believe that many countries in Asia will ultimately follow suit. If and when that occurs, the size of the
global legal cannabis market will increase significantly and, we believe, may ultimately exceed $500
billion annually.
As discussed on page 175, readers are cautioned to not place undue reliance on our opinions, predictions
or estimates. Almost certainly, our opinions, predictions and estimates will prove inaccurate in
some respects. A number of factors could cause actual results or events to differ materially from those
indicated by our opinions, predictions and estimates. U.S. states and countries abroad may reverse
their cannabis legalization efforts. The medical efficacy of cannabis may not prove to be significant.
Cannabis may never be legalized federally in the United States. Certain factors affecting the cannabis
industry are discussed in more detail in Chapter IX, Cannabis Industry Risk Factors.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 115

CHAPTER VII
Capital Markets for
Cannabis Companies
n Capital Markets Overview
Hundreds, if not thousands, of cannabis-related companies are seeking to raise capital—thus presenting
investment opportunities for sophisticated investors who want to participate in the cannabis
industry. Investors have their choice of investing in the more than 300 publicly traded cannabis-related
companies, or in the significant number of private companies raising capital. Investors may also choose
among stock markets (both within the United States and internationally), type of security (equity
versus debt) and type of company (companies across all segments of the industry are raising capital).
It is important to note, however, that most of the cannabis-related companies that are raising capital—even
publicly traded companies—are in early stages of development, have de minimis revenue
and are not profitable. More than 85% of the publicly traded cannabis-related companies have annual
revenue of less than $5 million, and less than 5% have annual revenue greater than $25 million.
Most investors in the cannabis industry today are retail or individual investors. While an increasing
number of family office and strategic investors are now participating in the cannabis industry,
we believe that many institutional investors (most notably the traditional venture capital and private
equity communities) will not invest in the industry until more companies in the industry mature and
the legal environment becomes more favorable.
Cannabis-related companies raised more than $2.0 billion in the public and private markets in
2017; however, except for a few transactions of notable size, many of the financings were small (less
than $5 million), which provides further evidence that the capital markets are being driven primarily
by retail investors. Without traditional institutional investor support, a funding gap exists in the industry:
companies are seeking to raise more capital than investors are willing or able to provide. We believe
that this is especially true in the private markets, where many companies struggle to raise financing.
We share the belief held by many that, ultimately, established companies from analogous industries—alcohol,
pharmaceutical, tobacco and consumer products—will enter the cannabis industry
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 117
Cannabis Investment Report | December 2017
through minority investment, by acquisition or otherwise. Examples of the emergence of such strategic
investors include Constellation Brands, Inc.’s (NYSE: STZ) approximately $190 million investment
in Canopy Growth Corporation (TSX: WEED) and the more than $400 million spent by The Scotts
Miracle-Gro Company (NYSE: SMG) to acquire soil, fertilizer, hydroponic equipment and lighting
companies that are supplying the cannabis industry. These types of transactions help support the valuation
levels in the industry and, to an extent, validate investors’ enthusiasm for the industry.
The stock price performance and valuations of cannabis-related companies continue to be robust,
irrespective of the aforementioned funding gap. In general, we believe that valuations in both the
public and private markets are being driven more by investors’ expectations for the future growth of
the cannabis industry than by individual company fundamentals. Similarly, especially in the over-thecounter
stock market in the United States—where most of the public cannabis-related companies are
traded—stock price fluctuations and valuations tend to be heavily influenced by the illiquidity in most
stocks and the trading strategies of those involved. Overall, we believe that the capital markets for the
cannabis industry will become more efficient and rational over time as we expect increased partici pation
from institutional and strategic investors.
n Public Capital Markets
More than 300 cannabis-related companies are traded on one or more stock markets in the United
States, Canada and other international locations. Although these companies are publicly traded, most
are in early stages of development, have de minimis revenue and are not profitable. We use the term
“cannabis-related” to include companies that participate solely in the cannabis industry and those that
participate in the cannabis industry in addition to other industries or markets.
The ability of companies to access capital markets is dependent largely on the legal landscape
for cannabis in a particular country. For example, the capital markets in countries such as Canada,
Australia, Germany and Israel (countries that have a more permissive legal framework for can nabis)
have been receptive to cannabis-related companies, while the reception by capital markets in the United
States has been more varied.
In evaluating publicly traded companies, an investor should be cognizant of where the company is
traded, as there are significant differences across the various exchanges and markets with respect to listing
requirements, liquidity, independent research and types of investors. Many cannabis-related companies
are traded on more than one market in order to attract additional investors and facilitate trading
in multiple jurisdictions. However, we believe that it is instructive to evaluate a company based on the
primary market on which it trades (We determine a company’s primary market based on a number of
factors, including stock price history, trading volume and availability of estimates.)
In the United States, a limited number of cannabis-related companies are traded on the Nasdaq
Stock Market (Nasdaq), the New York Stock Exchange (NYSE) and the NYSE American (NYSE
American), the NYSE’s market for small to mid-size capitalization companies. In addition, more than
200 cannabis-related companies are traded on the over-the-counter stock market (OTC). Nasdaq and
118 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
the NYSE are two of the largest and most recognized stock exchanges in the world, with stringent
listing, trading and corporate governance requirements. Conversely, the OTC has much less stringent
requirements; as a result, most publicly traded cannabis-related companies are traded on the OTC.
In Canada, cannabis-related companies are traded on the Toronto Stock Exchange (TSX), the TSX
Venture Exchange (TSXV), which is an affiliate of the TSX, and the Canadian Securities Exchange
(CSE). The TSX is one of the world’s largest stock exchanges and, similar to Nasdaq and the NYSE,
has stringent listing, trading and corporate governance requirements. The TSXV focuses on companies
with small market capitalization and has less stringent listing requirements than the TSX. The CSE is
focused on micro capitalization and emerging growth companies, and it has the least stringent listing
requirements of the primary Canadian exchanges. In order to be listed on either the TSX or the TSXV,
a company is required to be in compliance with Canada’s Access to Cannabis for Medical Purposes
Regulations (ACMPR) and all applicable laws in jurisdictions within which it operates. (Operations
of listed companies are restricted in jurisdictions, such as the United States, where cannabis is federally
prohibited.) Unlike the TSX and TSXV, the CSE has allowed companies listed on its exchange to invest
in, acquire and otherwise operate cannabis-related businesses in the United States.
The following table provides a summary of the cannabis-related companies traded on U.S., Canadian
and Australian stock markets. As stated previously, many cannabis-related companies are traded
on more than one market to attract additional investors and facilitate trading in multiple jurisdictions.
For example, most companies traded on the Canadian markets are also traded on the OTC.
Summary of Publicly Traded Cannabis-Related Companies
(As of November 30, 2017)
Average ($U.S. millions)
Number of Market Enterprise LTM LTM
Companies Value Value Cash Debt Revenue EBITDA
Nasdaq 4 $1,033.6 $884.5 $153.6 $4.5 $44.0 –$81.1
NYSE 1 63.5 41.3 22.2 0.0 4.6 –1.2
NYSE American 2 152.1 145.7 7.8 1.4 7.3 –6.5
OTC 212 46.3 65.5 5.7 25.0 14.0 0.2
United States 219 $65.5 $81.2 $8.5 $24.3 $14.5 –$1.4
Toronto Stock Exchange (TSX) 6 $1,361.5 $1,311.4 $71.0 $20.8 $26.6 $0.8
TSX Venture Exchange (TSXV) 20 131.5 123.9 10.8 3.3 1.2 –3.5
Canadian Securities Exchange (CSE) 41 72.6 72.0 2.0 1.4 1.8 –2.8
Canada 67 $210.6 $203.3 $11.1 $3.8 $4.0 –$2.2
Australian Securities Exchange (ASX) 14 $85.3 $80.1 $5.9 $0.7 $0.9 –$2.1
Australia 14 $85.3 $80.1 $5.9 $0.7 $0.9 –$2.1
Source: S&P Global Market Intelligence. Companies that are traded on more than one market are included in their primary market as determined
by S&P Global Market Intelligence, based on stock price history, trading volume and availability of estimates. Enterprise Value is defined as
Market Value plus Debt minus Cash and Cash Equivalents. LTM is Last Twelve Months. EBITDA is defined as Earnings Before Interest, Taxes,
Depreciation and Amortization.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 119
Cannabis Investment Report | December 2017
Stock Price Performance of Publicly Traded Cannabis-Related Companies
The following chart shows the stock price performance of publicly traded cannabis-related companies
since September 30, 2016. As shown in the chart, the stock price performance of cannabisrelated
companies trading on Canadian markets received a boost from the announcement of the proposed
recreational cannabis legislation in Canada by Prime Minister Justin Trudeau and, more recently,
from Constellation Brands’ investment in Canopy Growth. Similarly, the continuing positive price performance
of cannabis-related companies trading on U.S. markets has not been slowed by the election of
Donald Trump as President and the selection of Jeff Sessions as Attorney General of the United States
(two events that were viewed by many as potentially having a negative impact on the U.S. cannabis
industry).
Global Cannabis Stock Price Performance
1500%
1300%
1100%
900%
700%
500%
Trump
elected as
U.S. President
Sessions confirmed
as U.S. Attorney
General
Canadian Prime Minister
announces plans to
legalize recreational
cannabis
Constellation Brands’
investment in
Canopy Growth
300%
100%
–100%
Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17
S&P 500
TSX/TSXV Cannabis Index
Nasdaq/NYSE Cannabis Index
CSE Cannabis Index
OTC Cannabis Index
ASX Cannabis Index
Source: S&P Global Market Intelligence
Capital Raised by Publicly Traded Cannabis-Related Companies
The following table shows the amount of capital (equity and debt) raised by cannabis-related companies
traded on the U.S., Canadian and Australian stock markets in the twelve months ended Septem -
ber 30, 2017. While more than $1.3 billion was raised, the data indicates that relatively few companies
were able to raise capital, given the aggregate number of publicly traded cannabis-related companies,
and the amount raised per transaction was small, supporting the assertion that the market is still driven
primarily by retail investors.
120 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
Capital Raised by Publicly Traded Cannabis-Related Companies (LTM ended September 30, 2017)
$1600
$1400
$1200
($U.S. millions)
$1000
$800
$600
$400
$200
$0
Canada United States Australia Total
Amount Raised
$1056
$268
$26
$1350
Number of Deals
60
15
3
78
Average Deal Size
$18
$18
$9
$17
Source: S&P Global Market Intelligence. In December 2017, a $317 million financing was completed by GW Pharmaceuticals (Nasdaq: GWPH),
but the transaction occurred outside the date range of the analysis. Due to the size of the transaction, it is worth noting here.
n Public Capital Markets: United States
As of November 30, 2017, four cannabis-related companies were trading on Nasdaq (all in the pharmaceutical
industry and focused on receiving FDA approval for selected cannabinoid applications),
one was trading on the NYSE (a real estate investment trust, or REIT, focused on the acquisition and
management of properties leased to state-licensed operators for their regulated medical-use cannabis
facilities), two were trading on the NYSE American (both in the pharmaceutical industry) and more
than 200 cannabis-related companies were trading on the OTC.
Most of the companies trading on the OTC (i) are “penny” stocks that trade at less than $5.00 per
share, (ii) have limited trading volume and liquidity, (iii) have significant price volatility, and (iv) have
little or no institutional investor support. The U.S. Securities and Exchange Commission (SEC) and
the Financial Industry Regulatory Authority (FINRA) have historically expressed concerns regarding
the “penny” stock industry in general and both have issued alerts to warn investors about potential
scams associated with purported cannabis-related stocks. In addition, the SEC has initiated actions
against numerous purported cannabis-related companies and executives for fraud, insider trading,
stock manipulation and other activities.
The following table provides a summary of cannabis-related companies traded on the U.S. stock
markets.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 121
Cannabis Investment Report | December 2017
Summary of U.S. Publicly Traded Cannabis-Related Companies
(As of November 30, 2017)
Average ($U.S. millions)
Number of Market Enterprise LTM LTM
Companies Value Value Cash Debt Revenue EBITDA
Nasdaq 4 $1,033.6 $884.5 $153.6 $4.5 $44.0 –$81.1
NYSE 1 63.5 41.3 22.2 0.0 4.6 –1.2
NYSE American 2 152.1 145.7 7.8 1.4 7.3 –6.5
OTC 212 46.3 65.5 5.7 25.0 14.0 0.2
United States 219 $65.5 $81.2 $8.5 $24.3 $14.5 –$1.4
Source: S&P Global Market Intelligence. Companies that are traded on more than one market are included in their primary market as determined
by S&P Global Market Intelligence, based on stock price history, trading volume and availability of estimates. Enterprise Value is defined as
Market Value plus Debt minus Cash and Cash Equivalents. LTM is Last Twelve Months. EBITDA is defined as Earnings Before Interest, Taxes,
Depreciation and Amortization.
Stock Price Performance of U.S. Publicly Traded
Cannabis-Related Companies
The following chart shows the stock price performance of selected publicly traded cannabis-related
companies in the United States since September 30, 2016. As shown in this chart, the election of
Donald Trump as President and the selection of Jeff Sessions as Attorney General of the United States
have not slowed the continuing positive price performance of cannabis-related companies trading on
U.S. markets.
800%
U.S. Cannabis Stock Price Performance
700%
600%
500%
400%
300%
Trump
elected as
U.S. President
Sessions confirmed
as U.S. Attorney
General
200%
100%
0%
–100%
Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17
S&P 500 Nasdaq/NYSE Cannabis Index OTC Cannabis Index
Source: S&P Global Market Intelligence
122 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
Capital Raised by U.S. Publicly Traded Cannabis-Related Companies
The following table shows the amount of capital (equity and debt) raised by cannabis-related companies
traded on U.S. stock markets in the twelve months ended September 30, 2017. Although more
than 200 cannabis-related companies were traded on the OTC during this period, the data indicates
that very few raised meaningful capital.
Capital Raised by U.S. Publicly Traded Cannabis-Related Companies (LTM ended September 30, 2017)
$300
$250
($U.S. millions)
$200
$150
$100
$50
$0
Nasdaq NYSE/NYSE American OTC Total
Amount Raised
$130
$82
$56
$268
Number of Deals
2
2
11
15
Average Deal Size
$65
$41
$5
$18
Source: S&P Global Market Intelligence. In December 2017, a $317 million financing was completed by GW Pharmaceuticals (Nasdaq: GWPH),
but the transaction occurred outside the date range of the analysis. Due to the size of the transaction, it is worth noting here.
Financial Data and Trading Multiples of
U.S. Publicly Traded Cannabis-Related Companies
The following tables show selected financial and trading information of cannabis-related companies
that are publicly traded on U.S. markets. As the tables indicate, with few exceptions, these companies
have little to no revenue and are not profitable. Consequently, most trading multiples are not meaningful
and the companies tend to trade more on expectations for the overall cannabis industry than on
specific company fundamentals (especially for those companies traded on the OTC).
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 123
Cannabis Investment Report | December 2017
Nasdaq
($U.S. millions, except stock price)
LTM
Forward Forward
EV
Revenue EBITDA
Stock % Below
Multiples
Multiples Multiples
Price 52-Week Market Enterprise LTM LTM
Company Ticker 11/30/17 High Value Value (EV) Revenue EBITDA Revenue EBITDA 2018 2019 2018 2019
Cara Therapeutics, Inc. NasdaqGM:CARA $12.45 56.3% $406.0 $303.0 $0.9 –$65.8 NM NM NM 86.1x NM NM
GW Pharmaceuticals plc NasdaqGM:GWPH 124.49 9.1% 3,153.2 2,847.7 11.0 –191.6 NM NM NM 11.4 NM NM
INSYS Therapeutics, Inc. NasdaqGM:INSY 5.30 64.7% 388.6 266.9 164.1 –35.6 1.6x NM 1.7x 1.4 NM 6.4x
Zynerba Pharmaceuticals, Inc. NasdaqGM:ZYNE 13.77 46.9% 186.6 120.4 0.0 –31.2 NM NM NM NM NM NM
Median 51.6% $397.3 $285.0 $6.0 –$50.7 1.6x NM 1.7x 11.4x NM 6.4x
($U.S. millions, except stock price)
LTM
Forward Forward
EV
Revenue EBITDA
Stock % Below
Multiples
Multiples Multiples
Price 52-Week Market Enterprise LTM LTM
Company Ticker 11/30/17 High Value Value (EV) Revenue EBITDA Revenue EBITDA 2018 2019 2018 2019
22nd Century Group, Inc. AMEX:XXII $2.33 33.4% $287.9 $273.2 $14.0 –$11.3 19.5x NM 12.7x 10.7x NM NM
India Globalization Capital, Inc. AMEX:IGC 0.58 27.6% 16.3 18.2 0.6 –1.6 28.8 NM NA NA NA NA
Innovative Industrial
Properties, Inc.
New York Stock Exchange and NYSE American
NYSE:IIPR 18.15 11.5% 63.5 41.3 4.6 –1.2 9.0 NM 2.4 1.3 3.7x 1.6x
Median 27.6% $63.5 $41.3 $4.6 –$1.6 19.5x NM 7.6x 6.0x 3.7x 1.6x
Ancillary
Constellation Brands, Inc. NYSE:STZ $217.59 4.2% $42,572.2 $51,393.3 $7,458.5 $2,709.3 6.9x 19.0x 6.7x 6.3x 18.3x 16.6x
The Scotts Miracle-Gro
Company
NYSE:SMG 98.90 3.5% 5,689.7 6,969.0 2,642.1 500.0 2.6 13.9 2.5 2.4 12.9 12.0
Median 3.9% $24,131.0 $29,181.2 $5,050.3 $1,604.7 4.8x 16.5x 4.6x 4.3x 15.6x 14.3x
Source: S&P Global Market Intelligence. Not Meaningful (NM) used for negative multiples, and for revenue multiples greater than 100.0x and
EBITDA multiples greater than 50.0x. Not Available (NA) used for information that is not available. Enterprise Value is defined as Market Value
plus Debt minus Cash and Cash Equivalents. LTM is Last Twelve Months. EBITDA is defined as Earnings Before Interest, Taxes, Depreciation
and Amortization.
124 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
Over The Counter (Market Value Greater than $25 million)
LTM
($U.S. millions, except stock price) Stock % Below
EV Multiples
Price 52-Week Market Enterprise LTM LTM
Company Ticker 11/30/17 High Value Value (EV) Revenue EBITDA Revenue EBITDA
Abattis Bioceuticals Corp. OTCQB:ATTBF $0.22 20.2% $39.5 $38.8 $0.0 –$3.6 NM NM
American Cannabis Company, Inc. OTCQB:AMMJ 0.75 40.5% 38.6 36.7 2.9 0.3 12.7x NM
AmeriCann, Inc. OTCQB:ACAN 2.03 63.1% 39.3 42.4 0.0 –1.8 NM NM
Amfil Technologies, Inc. OTCPK:AMFE 0.15 36.1% 99.7 99.9 0.2 NA NM NM
AXIM Biotechnologies, Inc. OTCQB:AXIM 7.02 64.6% 382.8 387.5 0.0 –2.9 NM NM
Cannabics Pharmaceuticals Inc. OTCQB:CNBX 1.02 86.6% 120.7 117.3 0.0 –1.8 NM NM
Cannabis Leaf, Inc. OTCPK:PCFP 0.97 61.2% 48.8 48.9 0.0 NA NM NM
Cannabis Sativa, Inc. OTCQB:CBDS 3.95 58.4% 83.8 83.5 0.1 –6.4 NM NM
Cannabis Science, Inc. OTCPK:CBIS 0.06 56.3% 155.4 158.1 0.0 –9.6 NM NM
Cannabix Technologies Inc. OTCPK:BLOZ.F 1.19 37.4% 103.0 100.5 0.0 NA NM NM
CannaGrow Holdings, Inc OTCPK:CGRW 0.99 57.0% 100.3 102.7 1.7 –1.4 62.0 NM
Corix Bioscience, Inc. OTCQB:CXBS 1.19 45.9% 29.6 29.6 0.0 NA NM NM
Earth Science Tech, Inc. OTCPK:ETST 0.81 79.5% 32.0 31.9 0.4 NA 74.1 NM
Evergreen-Agra Global
OTCQB:EGRN 1.00 85.7% 26.4 26.4 0.0 –0.4 NM NM
GB Sciences, Inc. OTCQB:GBLX 0.24 56.4% 31.3 37.0 0.2 –10.3 NM NM
General Cannabis Corp. OTCQB:CANN 1.65 51.6% 37.1 39.5 0.1 –7.4 NM NM
Green Spirit Industries Inc. OTCPK:GSRX 5.75 77.0% 172.6 172.6 0.0 NA NM NM
GrowGeneration Corp. OTCQX:GRWG 2.50 13.8% 41.1 39.3 13.1 –1.2 3.0 NM
Helix TCS, Inc. OTCPK:HLIX 3.00 76.9% 85.9 86.7 3.5 –3.0 24.9 NM
HempTech Corporation OTCPK:HTCO 1.82 83.9% 100.7 101.7 0.0 –0.5 NM NM
iAnthus Capital Holdings, Inc. OTCQB:ITHU.F 1.64 39.1% 61.7 74.3 0.1 NA NM NM
Kush Bottles, Inc. OTCQB:KSHB 2.84 20.2% 170.4 170.2 18.8 0.8 9.1 NM
Leafbuyer Technologies, Inc. OTCPK:LBUY 1.04 72.8% 39.9 39.8 0.9 NA 42.5 NM
Lexaria Bioscience Corp. OTCQB:LXRP 0.82 18.8% 56.9 54.4 0.1 –1.8 NM NM
Lifestyle Delivery Systems Inc OTCQB:LDSY.F 0.50 25.6% 46.0 44.6 0.7 –5.1 65.3 NM
Marijuana Company of America OTCPK:MCOA 0.03 76.8% 54.6 55.0 0.0 –21.9 NM NM
MariMed Inc. OTCQB:MRMD 0.70 16.3% 119.8 119.8 0.0 NA NM NM
mCig, Inc. OTCQB:MCIG 0.17 66.1% 68.5 67.0 7.7 1.2 8.7 NM
Medical Marijuana, Inc. OTCPK:MJNA 0.10 55.1% 307.1 317.7 8.0 –3.9 39.7 NM
Medicine Man Technologies, Inc. OTCQB:MDCL 1.79 43.2% 39.2 39.0 2.4 –5.5 16.2 NM
OWC Pharmaceutical Research OTCQB:OWCP 0.48 85.2% 70.1 69.0 0.1 –4.7 NM NM
PharmaCyte Biotech, Inc. OTCQB:PMCB 0.05 71.6% 46.7 42.4 0.0 NA NM NM
Player's Network, Inc. OTCQB:PNTV 0.08 66.1% 45.0 45.9 0.2 –4.7 NM NM
Praetorian Property, Inc. OTCPK:PRRE 0.52 75.8% 81.1 93.5 14.1 NA 6.6 NM
SanSal Wellness Holdings, Inc. OTCPK:SSWH 0.95 29.6% 55.9 57.4 0.6 –1.5 NM NM
Stony Hill Corp. OTCPK:STNY 2.50 50.0% 39.0 38.8 0.2 NA NM NM
Surna Inc. OTCQB:SRNA 0.15 35.5% 29.6 28.3 6.9 –3.3 4.1 NM
Terra Tech Corp. OTCQX:TRTC 0.20 42.1% 178.2 173.6 31.9 –18.6 5.4 NM
THC Therapeutics, Inc. OTCPK:THCT 0.34 60.6% 39.7 39.7 0.0 0.0 NM NM
The Tinley Beverage Company OTCPK:QRSR.F 0.56 15.2% 41.4 38.8 0.1 NA NM NM
United Cannabis Corporation OTCQB:CNAB 0.78 69.0% 46.7 46.0 0.5 NA 99.2 NM
Vitality Biopharma, Inc. OTCQB:VBIO 1.85 56.4% 42.7 41.9 0.1 –4.3 NM NM
WEED, Inc.
OTCPK:BUDZ 2.79 44.8% 279.0 278.5 0.0 –5.2 NM NM
WOWI, Inc.
OTCPK:WOWU 1.65 67.0% 53.6 54.7 0.0 –26.0 NM NM
Median 56.4% $54.1 $54.5 $0.1 –$3.4 16.2x NM
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 125
Cannabis Investment Report | December 2017
Comparison of U.S. Stock Markets
U.S. stock markets vary significantly in terms of their financial, liquidity and corporate governance
requirements. Most U.S. publicly traded cannabis-related companies trade on the OTC due to its less
stringent requirements, as compared to Nasdaq and the NYSE. The following chart provides a comparison
of Nasdaq, the NYSE and the OTC.
U.S. Stock Market Comparison
Nasdaq
NYSE
Nasdaq OTC
Market Tiers
Nasdaq Global Select Market
Nasdaq Global Market
Nasdaq Capital Market
NYSE
NYSE American
OTCQX
OTCQB
OTCPink
Number of
Listed
Companies
Total
Cannabisrelated
3,200+
4
2,800+
3
10,300+
212
Market
Value 1
Total
Median
$11.3 trillion $29.6 trillion $247.7 billion
$334.0 million $1.5 billion $0.5 million
Listing or
Trading
Requirements
Must meet financial and liquidity
criteria under at least one category
of Standards. Criteria include:
Stockholders’ Equity, Market
Capitalization, Operating History,
Net Income, Amount of Publicly
Held Shares and Number of
Shareholders.
Must meet financial and liquidity
criteria under at least one category
of Standards. Criteria include:
Stockholders’ Equity, Market
Capitalization, Pre-tax Income,
Amount of Publicly Held Shares
and Number of Shareholders.
OTCQX: Must meet minimum
financial and liquidity
criteria
OTCQB and OTCPink:
No financial and liquidity
criteria
Minimum
Share
Price
Nasdaq Global Select
Market: $4.00
Nasdaq Global Market: $4.00
Nasdaq Capital Market: $2.00
NYSE: $4.00
NYSE American: $2.00
OTCQX: $0.10
OTCQB: $0.01
OTCPink: None
Corporate
Governance
Requirements
• Annual audit
• Audit committee and
compensation committee
• Majority of independent
directors
• Annual audit
• Audit committee and
compensation committee
• Majority of independent
directors
OTCQX and OTCQB:
• Annual audit
• Audit committee
• Two independent directors
OTCPink: No requirements
Reporting
Requirements
Required to file quarterly
and annual reports
Required to file quarterly
and annual reports
Not required to make
regular filings
Registration
Requirements
Required to register
with the SEC
Required to register
with the SEC
Not required to register
with the SEC
1 Source: S&P Global Market Intelligence
126 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
n Public Capital Markets: Canada
As of November 30, 2017, six cannabis-related companies were trading on the TSX, 20 were trading
on the TSXV and 41 were trading on the CSE. Most of the publicly traded cannabis-related companies
in Canada are licensed producers under Canada’s Access to Cannabis for Medical Purposes Regulations,
which allow a company to produce and sell medical cannabis products in Canada. A number of
companies traded on the CSE also have cannabis-related operations in the United States. The following
table provides a summary of cannabis-related companies traded on Canadian stock markets.
Summary of Canadian Publicly Traded Cannabis-Related Companies
(As of November 30, 2017)
Average ($U.S. millions)
Number of Market Enterprise LTM LTM
Companies Value Value Cash Debt Revenue EBITDA
Toronto Stock Exchange (TSX) 6 $1,361.5 $1,311.4 $71.0 $20.8 $26.6 $0.8
TSX Venture Exchange (TSXV) 20 131.5 123.9 10.8 3.3 1.2 –3.5
Canadian Securities Exchange (CSE) 41 72.6 72.0 2.0 1.4 1.8 –2.8
Canada 67 $210.6 $203.3 $11.1 $3.8 $4.0 –$2.2
Source: S&P Global Market Intelligence. Companies that are traded on more than one market are included in their primary market as determined by
S&P Global Market Intelligence, based on stock price history, trading volume and availability of estimates. Enterprise Value is defined as Market
Value plus Debt minus Cash and Cash Equivalents. LTM is Last Twelve Months. EBITDA is defined as Earnings Before Interest, Taxes, Depreciation
and Amortization.
Stock Price Performance of Canadian
Publicly Traded Cannabis-Related Companies
The following chart shows the stock price performance of selected publicly traded cannabis-related
companies in Canada since September 30, 2016. The chart indicates that the stock price performance
of cannabis-related companies trading on Canadian markets received a boost from the announcement
of the proposed recreational cannabis legislation in Canada by Prime Minister Justin Trudeau and,
more recently, from Constellation Brands’ investment in Canopy Growth.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 127
Cannabis Investment Report | December 2017
Canadian Cannabis Stock Price Performance
1500%
1300%
1100%
900%
700%
500%
Canadian Prime Minister
announces plans to
legalize recreational
cannabis
Constellation Brands’
investment in
Canopy Growth
300%
100%
–100%
Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17
S&P/TSX Index
Source: S&P Global Market Intelligence
TSX/TSXV Cannabis Index
CSE Cannabis Index
Capital Raised by Canadian Publicly Traded
Cannabis-Related Companies
The following table shows the amount of capital (equity and debt) raised by cannabis-related companies
traded on Canadian stock markets in the twelve months ended September 30, 2017.
128 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
Capital Raised by Canadian Publicly Traded Cannabis-Related Companies (LTM ended September 30, 2017)
$1200
$1000
($U.S. millions)
$800
$600
$400
$200
$0
TSX TSXV CSE Total
Amount Raised
$403
$334
$319
$1056
Number of Deals
11
21
28
60
Average Deal Size
$37
$16
$11
$18
Source: S&P Global Market Intelligence
Financial Data and Trading Multiples of Canadian
Publicly Traded Cannabis-Related Companies
The following tables show selected financial and trading information of cannabis-related companies
that are publicly traded on Canadian markets.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 129
Cannabis Investment Report | December 2017
Toronto Stock Exchange
($U.S. millions, except stock price)
LTM
Forward Forward
EV
Revenue EBITDA
Stock % Below
Multiples
Multiples Multiples
Price 52-Week Market Enterprise LTM LTM
Company Ticker 11/30/17 High Value Value (EV) Revenue EBITDA Revenue EBITDA 2018 2019 2018 2019
Aphria Inc. TSX:APH $8.91
9.9%
$1,350.2
$1,281.7
$17.7
$3.8
72.4x
NM
37.7x
9.9x
NM
27.5x
Aurora Cannabis Inc. TSX:ACB 6.21
7.6%
2,483.5
2,406.8
18.6
–4.7
NM
NM
48.6
13.6
NM
30.4
CanniMed Therapeutics Inc. TSX:CMED 15.15
10.9%
347.8
315.8
12.0
2.0
26.3
NM
10.6
5.4
48.5x
13.3
Canopy Growth Corporation TSX:WEED 14.30
15.1%
2,720.6
2,641.7
46.3
1.9
57.1
NM
39.7
11.7
NM
NM
MedReleaf Corp. TSX:LEAF 12.66
13.7%
1,146.2
1,094.8
32.9
9.7
33.3
NM
30.8
9.4
NM
27.0
Neptune Technologies &
Bioressources Inc.
TSX:NEPT 1.54
15.0%
120.8
127.4
32.4
3.7
3.9
NM
6.0
4.3
NM
NM
Median 12.3% $1,248.2
$1,188.3
$25.5
–$0.1
33.3x
NM
34.2x
9.6x
48.5x
27.3x
TSX Venture Exchange
($U.S. millions, except stock price)
Stock
Price
% Below
52-Week Market Enterprise LTM LTM
LTM
EV
Multiples
Forward
Revenue
Multiples
Forward
EBITDA
Multiples
Company Ticker 11/30/17 High Value Value (EV) Revenue EBITDA Revenue EBITDA 2018 2019 2018 2019
ABcann Global Corporation TSXV:ABCN $1.13 19.9% $152.7 $129.7 $0.7 –$8.7 NM NM 11.2x 2.6x NM 9.2x
Cannabis Wheaton Income TSXV:CBW 0.68 56.5% 157.2 157.0 0.1 –6.2 NM NM NA NA NA NA
Cronos Group Inc. TSXV:MJN 3.38 9.0% 503.2 494.0 2.3 2.5 NM NM 16.1 5.8 NM 17.6
Delta 9 Cannabis Inc. TSXV:NINE 2.37 23.8% 143.9 145.5 0.4 –1.7 NM NM NA NA NA NA
Emblem Corp. TSXV:EMC 1.26 64.6% 117.1 108.0 1.8 –7.5 59.4x NM 10.5 2.0 NA 5.6
Emerald Health Therapeutics TSXV:EMH 2.27 4.6% 213.8 195.6 0.6 –4.3 NM NM 46.6 NA NA NA
Harvest One Cannabis Inc. TSXV:HVST 0.71 18.6% 63.7 54.1 0.2 –4.5 NM NM 17.0 1.8 NA 9.2
Hempco Food and Fiber Inc. TSXV:HEMP 1.66 31.6% 77.5 77.4 4.7 –1.3 16.5 NM NA NA NA NA
ICC International Cannabis TSXV:ICC 0.76 44.3% 104.6 102.5 0.1 –4.5 NM NM 6.4 1.1 NM 4.0
Invictus MD Strategies Corp. TSXV:IMH 1.12 33.6% 89.6 66.7 1.8 –10.3 37.6 NM 27.3 3.6 NM 13.3
LGC Capital Ltd. TSXV:LG 0.29 24.0% 79.6 76.6 0.0 –1.7 NM NM NA NA NA NA
Maple Leaf Green World Inc. TSXV:MGW 0.46 24.4% 67.3 64.2 0.4 –1.1 NM NM NA NA NA NA
National Access Clinic Corp. TSXV:NAC 0.40 30.1% 24.0 25.0 0.7 –2.4 36.7 NM NA NA NA NA
Naturally Splendid Enter. TSXV:NSP 0.21 45.0% 20.4 20.9 1.9 –4.3 10.9 NM NA NA NA NA
Newstrike Resources Ltd. TSXV:HIP 0.39 16.7% 151.1 152.1 0.0 –0.3 NM NM NA NA NA NA
OrganiGram Holdings Inc. TSXV:OGI 2.61 15.7% 277.4 244.2 4.0 –5.2 60.7 NM 9.7 3.4 46.5x 12.6
Tetra Bio-Pharma Inc. TSXV:TBP 0.54 14.8% 63.6 62.0 0.0 –3.9 NM NM NA NA NA NA
The Hydropothecary Corp. TSXV:THCX 1.92 17.7% 149.8 133.3 3.3 –0.6 40.7 NM 15.8 3.6 NM 29.8
Viridium Pacific Group Ltd. TSXV:VIR 1.09 15.2% 49.5 48.6 0.0 –0.1 NM NM NA NA NA NA
WeedMD Inc. TSXV:WMD 1.69 12.8% 123.2 121.0 0.5 –3.1 NM NM 9.9 2.3 NM 8.6
Median 21.8% $110.8 $105.3 $0.5 –$2.0 37.6x NM 13.5x 2.6x 46.5x 9.2x
Source: S&P Global Market Intelligence. Not Meaningful (NM) used for negative multiples, and for revenue multiples greater than 100.0x and
EBITDA multiples greater than 50.0x. Not Available (NA) used for information that is not available. Enterprise Value is defined as Market Value
plus Debt minus Cash and Cash Equivalents. LTM is Last Twelve Months. EBITDA is defined as Earnings Before Interest, Taxes, Depreciation
and Amortization.
130 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
Canadian Securities Exchange
($U.S. millions, except stock price)
Company
Ticker
Stock
Price
11/30/17
% Below
52-Week
High
Market Enterprise LTM LTM
LTM
EV
Multiples
Forward
Revenue
Multiples
Forward
EBITDA
Multiples
Value Value (EV) Revenue EBITDA Revenue EBITDA 2018 2019 2018 2019
Alliance Growers Corp. CSE:ACG $0.16 20.0% $6.9 $6.8 $0.0 $0.0 NM NM 5.0x 0.3x NM 0.8x
Alternate Health Corp. CSE:AHG 1.52 78.0% 79.3 76.6 10.3 –6.4 7.4x NM NA NA NA NA
Beleave Inc. CSE:BE 1.38 37.5% 44.8 44.1 0.0 –8.8 NM NM 11.4 NA NM NA
Canada House Wellness Group Inc. CSE:CHV 0.29 43.3% 35.6 36.3 4.4 –4.1 8.2 NM NA NA NA NA
CannaRoyalty Corp. CSE:CRZ 2.28 41.2% 96.9 96.3 2.2 –8.6 44.2 NM 3.1 1.8 17.0x 8.1
CannTrust Holdings Inc. CSE:TRST 5.43 12.5% 471.8 466.3 12.6 5.2 36.9 NM 9.0 5.5 31.8 20.6
DOJA Cannabis Company Limited CSE:DOJA 1.06 8.7% 16.2 16.0 0.0 –0.1 NM NM NA NA NA NA
Eviana Health Corporation CSE:EHC 1.09 30.0% 16.7 17.2 0.0 0.0 NM NM NA NA NA NA
Friday Night Inc. CSE:TGIF 0.39 13.8% 60.3 61.2 0.8 –1.9 74.3 NM NA NA NA NA
Future Farm Technologies Inc. CSE:FFT 0.37 23.8% 37.2 37.7 0.3 –7.5 NM NM NA NA NA NA
International Cannabrands Inc. CSE:JUJU.A 0.18 20.5% 1.8 2.4 0.2 –1.2 14.8 NM NA NA NA NA
Global Cannabis Applications Corp. CSE:APP 0.26 20.9% 10.5 10.7 0.0 –1.1 NM NM NA NA NA NA
Global Hemp Group Inc. CSE:GHG 0.09 17.2% 14.3 14.4 0.0 0.0 NM NM NA NA NA NA
Golden Leaf Holdings Ltd. CSE:GLH 0.27 36.4% 110.1 115.5 7.9 –10.6 14.6 NM NA NA NA NA
HealthSpace Data Systems Ltd. CSE:HS 0.08 23.1% 8.7 9.8 1.9 –1.5 5.1 NM NA NA NA NA
High Hampton Holdings Corp. CSE:HC 0.30 22.0% 3.8 3.7 0.0 –0.3 NM NM NA NA NA NA
InMed Pharmaceuticals Inc. CSE:IN 0.52 30.2% 67.5 62.7 0.0 –4.6 NM NM NA NA NA NA
Isodiol International Inc. CSE:ISOL 1.14 18.8% 251.2 250.7 14.2 0.6 17.6 NM NA NA NA NA
Kaneh Bosm BioTechnology Inc. CSE:KBB 0.06 37.5% 0.8 0.7 0.0 0.0 NM NM NA NA NA NA
Liberty Health Sciences Inc. CSE:LHS 1.33 33.2% 377.5 377.5 0.0 0.0 NM NM NA NA NA NA
Liberty Leaf Holdings Ltd. CSE:LIB 0.21 11.5% 20.2 19.7 0.0 –1.9 NM NM NA NA NA NA
Lifestyle Delivery Systems Inc CSE: LDS 0.50 26.4% 46.0 44.6 0.7 –5.1 65.3 NM NA NA NA NA
Lotus Ventures Inc. CSE:J 0.40 16.1% 17.8 17.7 0.0 –0.5 NM NM NA NA NA NA
Marapharm Ventures Inc. CSE:MDM 0.76 44.6% 71.4 69.8 0.4 –3.6 NM NM NA NA NA NA
Maricann Group Inc. CSE:MARI 1.76 15.9% 162.7 162.2 3.1 –14.3 52.9 NM 9.8 2.0 NM 5.8
Matica Enterprises Inc. CSE:MMJ 0.25 5.8% 57.1 56.0 0.0 –1.8 NM NM NA NA NA NA
MPX Bioceutical Corporation CSE:MPX 0.39 51.5% 100.7 108.0 10.6 –3.5 10.2 NM 5.2 2.9 NM 12.3
MYM Nutraceuticals Inc. CSE:MYM 2.15 7.7% 200.8 200.4 0.3 –0.9 NM NM NA NA NA NA
Platinex Inc. CSE:PTX 0.10 28.9% 9.9 9.8 0.0 –0.7 NM NM NA NA NA NA
PUF Ventures Inc. CSE:PUF 0.79 11.3% 41.2 39.6 0.0 –1.2 NM NM NA NA NA NA
Quadron Cannatech Corporation CSE:QCC 0.19 44.4% 10.7 10.0 1.7 –0.7 6.0 NM NA NA NA NA
Quinsam Capital Corporation CSE:QCA 0.34 24.1% 15.0 12.8 0.0 0.1 NM NM NA NA NA NA
Ravenquest Biomed Inc. CSE:RVT 0.03 47.1% 1.0 1.1 0.0 –0.2 NM NM NA NA NA NA
Supreme Pharmaceuticals Inc. CSE:SL 1.06 33.2% 219.3 202.5 1.2 –13.4 NM NM 16.6 2.5 NM 7.8
TerrAscend Corp. CSE:TER 1.33 13.6% 61.9 61.0 0.0 –4.3 NM NM NA NA NA NA
THC Biomed Intl Ltd. CSE:THC 0.59 33.9% 65.4 66.8 0.0 –1.2 NM NM NA NA NA NA
True Leaf Medicine International Ltd. CSE:MJ 0.69 9.2% 46.4 45.9 0.8 –2.4 56.9 NM NA NA NA NA
Valens Groworks Corp. CSE:VGW 0.85 33.9% 52.0 51.8 0.0 –3.4 NM NM NA NA NA NA
Veritas Pharma Inc. CSE:VRT 0.69 5.3% 28.5 27.8 0.0 –2.4 NM NM NA NA NA NA
Vodis Pharmaceuticals Inc. CSE:VP 0.30 61.0% 9.2 10.7 0.0 –3.6 NM NM NA NA NA NA
Wildflower Marijuana Inc. CSE:SUN 0.52 46.0% 27.5 27.4 0.2 –0.8 NM NM NA NA NA NA
Median 24.1% $41.2 $39.6 $0.0 –$1.5 16.2x NM 9.0x 2.2x 24.4x 8.0x
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 131
Cannabis Investment Report | December 2017
Comparison of Canadian Stock Markets
Similar to stock markets in the United States, Canadian stock markets vary significantly in terms
of their financial, liquidity and corporate governance requirements. Most Canadian publicly traded
cannabis-related companies trade on the CSE due to its less stringent requirements, as compared to the
TSX and TSXV. More than 10% of the companies traded on the CSE are cannabis-related companies.
The following chart provides a comparison of the TSX, TSXV and CSE.
Canadian Stock Market Comparison
Toronto Stock Exchange
(TSX)
TSX Venture Exchange
(TSXV)
Canadian Securities Exchange
Nasdaq (CSE)
Number of
Listed
Companies
Total
Cannabisrelated
1487
6
1791
20
337
41
Market
Value 1
Total ($U.S.)
Median ($U.S.)
$2.0 trillion $33.7 billion $6.2 billion
$282.6 million $5.0 million $6.1 million
Listing or
Trading
Requirements
Must meet financial and liquidity
criteria determined by a company’s
industry.Criteria include:
Earnings, Revenue, Cash Flow,
Net Tangible Assets, Adequate
Working Capital, Cash, Market
Capitalization, Amount of Publicly
Held Shares and Number of
Shareholders.
Must meet financial and liquidity
criteria determined by a
company’s industry.Criteria
include: Net Tangible Assets,
Revenue, Adequate Working
Capital, Property, Operating
History, Amount of Publicly
Held Shares and Number of
Shareholders.
Must meet financial and liquidity
criteria determined by a
company’s industry and whether
the company is an operating
company. Criteria include:
Revenue, Assets, Amount of
Publicly Held Shares and
Number of Shareholders.
Corporate
Governance
Requirements
• Annual audit
• Audit committee
• Two independent directors
• Annual audit
• Audit committee
• Two independent directors
• Annual audit
• Audit committee
Reporting
Requirements
Required to file quarterly
and annual reports
Required to file quarterly
and annual reports
Required to file quarterly
and annual reports
1 Source: S&P Global Market Intelligence
132 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
n Private Capital Markets
The cannabis industry today is replete with early-stage private companies seeking to raise capital. This
capital, whether equity or debt, may be available from (i) “friends and family,” (ii) more formalized
groups and networks of “angel” investors, (iii) family offices, (iv) dedicated cannabis investment funds
(currently few in number, but growing), and (v) strategic investors. However, because of the legal
considerations, traditional institutional investors—most notably the venture capital and private equity
communities—continue to be mostly absent from the market.
As with most early-stage companies in other industries, many emerging cannabis-related companies
are trying to follow the typical progression of raising equity capital, as illustrated in the following chart.
Equity Financing Progression for Cannabis-Related Companies
Today
Future
Friends and
Family
Seed Series A Series B Series C
Initial Public
O�ering
Individual Investors
Institutional and Strategic Investors
The following table provides a summary of the reported capital (equity and debt) raised by private
cannabis-related companies in 2016 and year to date through November 30, 2017. While the table
indicates that significant capital is available in the private markets, we believe that the dearth of acces -
sible institutional capital makes it challenging for many companies to raise subsequent rounds of financing
after successfully securing their start-up capital. In addition, the amount raised per transaction is
small and there have been very few announced financings of meaningful size by private companies.
While we believe that the data is informative, it is challenging to get accurate and comprehensive data
for the number and dollar amount of transactions that occur in private markets within the cannabis
industry because of the number of transactions that are not reported.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 133
Cannabis Investment Report | December 2017
Total Capital Raised by Private Cannabis-Related Companies Globally
$600
$500
($U.S. millions)
$400
$300
$200
$100
$0
2016
2017 YTD
Amount Raised
Number of Deals
Average Deal Size
Source: Ackrell Capital
$256
65
$4
$483
102
$5
The following table shows the scarcity of large transactions announced by private cannabis-related
companies for the year to date through November 30, 2017.
Selected Financings by Private Cannabis-Related Companies (YTD through November 30, 2017)
($U.S. millions)
Issuer Amount Date
düber Technologies Inc. $50.0 September 2017
Eaze Solutions, Inc. 27.0 September 2017
Surterra Holdings LLC 13.4 September 2017
Teewinot Life Sciences Corporation 12.3 April 2017
Hound Labs, Inc. 8.1 May 2017
iUNU, Inc. 6.3 August 2017
Green Leaf Medical, LLC 5.9 June 2017
RX Green Solutions LLC 5.3 July 2017
River Collective 5.0 April 2017
Greene Fox Enterprises 5.0 May 2017
134 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VII
Capital Markets for Cannabis Companies
In addition, an increasing number of direct lenders are participating in the private debt markets
for cannabis-related companies. These lenders represent an important capital source for the industry,
as typical forms of debt capital, such as bank financing, remain unavailable to most companies. As in
other industries, debt financing is typically available only to those companies having meaningful cash
flow or tangible assets to secure the debt. While the number of lenders is increasing, there is still a
relative scarcity of debt capital available to the cannabis industry, which can lead to a higher debt cost
of capital of 200–500 basis points or more for cannabis-related companies, as compared to companies
in other industries.
The following chart illustrates the type of debt that may be available to cannabis-related companies,
representative terms of such debt, and the types of companies that may be able to access debt in the
private markets.
Debt Financing Alternatives for Cannabis-Related Companies
Cost of Capital
Covenants
Senior
Debt
Lease
Financing
Subordinated
Debt
Low Double Digits
Mid-teens
More Restrictive
�
Type of
Securitization
(if secured):
Land
Buildings
Equipment
A/R
Inventory
�
Type of
Borrowers:
Cultivators
Extractors
Dispensaries
Product Manufacturers
Convertible
Debt
High-teens to 20%+
Less Restrictive
n Final Thoughts
As stated previously, valuations and stock price fluctuations in the cannabis industry continue to be
driven more by expectations for the cannabis industry in general than by individual company fundamentals.
Today, in the public markets, trading volumes are too low, trading prices are too volatile and
operating histories are too limited to place any reliance on current valuation levels in the cannabis
industry. We believe that this dynamic will continue until cannabis-related companies have matured
and start to realize meaningful revenue, profitability and other financial metrics that will allow investors
to evaluate companies within the industry by more traditional methodology.
It is still too early to know how the cannabis industry or its sectors will be valued in the future. It
may come to pass that companies in the cannabis industry are valued comparably to public companies
in industries with similar characteristics, such as the alcohol, tobacco, pharmaceutical and consumer
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 135
Cannabis Investment Report | December 2017
products industries, especially as companies from those industries look to enter the cannabis industry,
through acquisition or by other means.
As demonstrated by the more than $2.0 billion raised by publicly traded and private cannabisrelated
companies in 2017, capital continues to be available to support the growth of the industry.
In the public markets, we believe that Canadian stock markets will continue to be the most receptive
globally (until more progress is made in the United States toward federal legalization of cannabis).
Overview of Canadian and U.S. Stock Markets
Canada
United States
Toronto Stock
Exchange (TSX)
TSX Venture
Exchange (TSXV)
Canadian Securities
Exchange (CSE)
Nasdaq/NYSE
OTC
Summary
Largest exchange in
Canada and one of
world’s largest
Affiliate of the TSX for
smaller capitalization
companies
Perceived as the
“OTC” of the
Canadian markets by
many investors
Largest and most
recognized stock
exchanges in the
world
Negative reputation
with many investors
and regulators
Benefits
High volume of trading
and liquidity; brand
recognition; strong
institutional support
Possible uplisting to
the TSX; better brand
than the CSE
Receptive to
companies with U.S.
cannabis operations;
very few listing
requirements
High volume of trading
and liquidity; brand
recognition; strong
institutional support
Possible uplisting to
other markets; very
few requirements to
trade
Issues
Not receptive to
companies that
violate U.S. federal
law
Not receptive to
companies that
violate U.S. federal
law; limited liquidity
for small issues
Limited trading
volume and liquidity;
significant price
fluctuations; limited
institutional support
Stringent listing
requirements
Limited trading
volume and liquidity;
significant price
fluctuations; limited
institutional support
Outlook
Expected to continue
to attract the largest
Canadian companies
in the cannabis
industry
Viable exchange for
smaller Canadian
companies with no
cannabis operations
in the United States
Viable exchange for
smaller Canadian
companies with
cannabis operations
in the United States
With few exceptions,
cannabis companies
will not be able to
list while federal
prohibition continues
Cannabis companies
will continue to trade
on the OTC despite
the limited benefits
Although capital continues to be available for select issuers in both the public and private markets,
we believe that the cannabis industry will continue to face a large funding gap for the foreseeable
future, driven by the lack of institutional investors. However, we believe a growing number of retail,
institutional and family office investors will support the industry in 2018 and beyond.
136 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VIII
Top 100
Private Cannabis Companies 2018
In this chapter, we present our current list of the Top 100 Private Cannabis Companies. Our determination
to include companies on the list is subjective, and the list is intended to be a cross-section of the
types of companies in the cannabis industry. Our list comprises privately held companies, primarily
U.S. companies, companies we believe have a strong reputation or position in their market segments
and companies pursuing a line of business we consider promising. We intend to update our list periodically,
and we expect it may change significantly over time.
Most companies on our list are in early stages of development, and many will need to raise capital to
succeed. Raising capital for early-stage companies in any industry is extremely challenging. Early-stage
cannabis companies seeking capital face the same challenges as early-stage companies in other industries
but must also address challenges unique to the cannabis industry. Although we hope the companies
on our list ultimately succeed, we expect some will go out of business for any number of reasons,
including lack of access to capital.
Inclusion in our list does not represent an investment recommendation or endorsement of any
particular company or product. We have made investments in and conducted investment banking and
other services for companies included in the Top 100 Private Cannabis Companies 2018 list, and may
do so in the future. Readers should be aware that we may have a conflict of interest that could affect the
objectivity of our decision to include a company in the list. For additional disclosures and disclaimers,
see page 175.
© 2017Ackrell Capital, LLC | Member FINRA / SIPC 137
Cannabis Investment Report | December 2017
Top 100 Private Cannabis Companies 2018
AEssenseGrows Défoncé Jetty Extracts River Collective
Ample Organics Dixie Elixirs Kikoko Rubicon Organics
Apeks Supercritical Dosist KIVA Confections S2S Development
The Apothecarium Eaze Solutions Korova SC Laboratories
Auntie Dolores Eel River Organics LeafLink Scrubbed
Baker Technologies Elemental Wellness Leafly SPARC
BAS Research Euflora Level Blends Spectrum King
BDS Analytics Evolve Therapeutics LivWell Enlightened Health Steep Hill Labs
Beboe Evoxe Laboratories Lunchbox Alchemy StickyGuide
Berkeley Patients Group Flow Kana Mary's Medicinals Strainz
BioTrackTHC Flowhub Meadow Teewinot Life Sciences
Bloom Farms FunkSac Merry Jane Tikun Olam
Brewbudz Garden State Dispensary MiNDFUL Treez
Bud and Bloom GFarmaLabs MJ Freeway Trellis
Calyx Brands Gold Coast Extracts MJardin Trulieve
Cannabis Reports Green Dot Labs MM Acquisition Co. Utopia Farms
CannaCraft Green Flower Media Native Roots VapeWorld
CannaKorp Green Rush New Vansterdam Vapexhale
Colorado Harvest Company The Green Solution Northwest Cannabis Solutions VCC Brands
Columbia Care Harborside Health Center NWT Holdings (Firefly) Vuber
Confident Cannabis Harvest Organa Brands Wana Brands
Cultivation Technologies Headset PAX Labs Web Joint
Cura Cannabis Solutions HelloMD PharmaCielo Weedguide
CW Analytical Humboldt Legends PRØHBTD Media Weedmaps
Deep Cell Incense Specialties Qind Wellness Connection of Maine
138 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VIII Top 100 Private Cannabis Companies 2018
AEssenseGrows
Sunnyvale, California
www.aessensegrows.com
AEssenseGrows is a producer of modular aeroponic
systems for cannabis cultivation. The
company develops full-scale cultivation systems
equipped with software, automation and monitoring
capabilities. Such systems enable cultivators
to deliver nutrients to the plant more
efficiently, and thus generate higher-yielding
output than conventional cultivation systems.
Ample Organics
Toronto, Ontario
www.ampleorganics.com
Ample Organics is a software developer for cannabis
cultivators. The company offers a system
to track all aspects of the cannabis cultivation
business. The company’s products enable medical
cannabis producers in Canada to comply
with Canadian law.
Apeks Supercritical
Johnstown, Ohio
www.apekssupercritical.com
Apeks Supercritical is a provider of botanical
oil extraction systems that utilize subcritical
and supercritical CO 2 gas as a solvent. The
company’s fully automated systems range from
a 1-liter benchtop system to a 40-liter production
system. These systems provide consistent
extraction results for the production of cannabis
concentrates.
The Apothecarium
San Francisco, California
www.apothecarium.com
The Apothecarium is an operator of recreational
and medicinal cannabis dispensaries. The company
offers cannabis flower, concentrates, edibles
and accessories throughout its locations in
California and Nevada.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 139
Cannabis Investment Report | December 2017
Auntie Dolores
Oakland, California
www.auntiedolores.com
Auntie Dolores is a producer of branded cannabis-infused
edibles. The company produces
a variety of edibles, including pretzels, biscuits,
brownies, cookies, corn and nuts. The company’s
products are sold directly to cannabis consumers
and through cannabis dispensaries in
California.
Baker Technologies
Denver, Colorado
www.trybaker.com
Baker Technologies provides a customer relationship
management platform for cannabis
dispensaries and brands. The company provides
messaging, loyalty programs and online ordering
features to enable cannabis dispensaries to
attract and retain cannabis consumers.
BAS Research
Berkeley, California
www.basresearch.com
BAS Research is a cannabis research and manufacturing
company. The company provides
its clients with bulk cannabis oil, cannabis-oil
extraction consulting services, contract manufacturing
and fulfillment.
BDS Analytics
Boulder, Colorado
www.bdsanalytics.com
BDS Analytics is a provider of data analytics
solutions to the cannabis industry. The company
tracks data from point-of-sale systems
to provide insight into consumer buying
patterns. The company sells its solutions to a
wide range of customers.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
Beboe
Los Angeles, California
www.beboe.com
Beboe is a producer of branded cannabis products.
The company’s cannabis oil vaporizers and
cannabis-infused edibles are available in dispensaries
throughout California.
Berkeley Patients Group
Berkeley, California
www.mybpg.com
Berkeley Patients Group is an operator of
a cannabis dispensary. The company retails a
broad variety of cannabis products, including
flower, pre-rolls, concentrates, edibles, topicals,
seeds and accessories. It also operates an online
e-commerce portal and offers a limited sameday
delivery service to patients in Berkeley,
California and the surrounding area.
BioTrackTHC
Ft. Lauderdale, Florida
www.biotrack.com
BioTrackTHC is a provider of compliance and
business management software for the retail
cannabis industry. The company’s software platform
is designed for inventory and sales management
to track the seed-to-sale process and is
used by recreational and medicinal dispensaries,
cultivators and state governments.
Bloom Farms
San Francisco, California
www.getbloomfarms.com
Bloom Farms is a producer of branded cannabis
products, including cannabis oil and flower. The
company’s products are available in dispensaries
throughout California.
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Brewbudz
San Diego, California
www.brewbudz.us
Brewbudz is a manufacturer of branded cannabis-infused
products. The company develops
cannabis-infused coffee, tea and cocoa pods that
can be used in Keurig ® systems. Its products are
available in select dispensaries in Nevada.
Bud and Bloom
Santa Ana, California
www.budandbloomoc.com
Bud and Bloom is the operator of a cannabis
dispensary. The company offers cannabis flower,
concentrates, edibles and accessories and sells
these products at its Santa Ana location.
Calyx Brands
Oakland, California
www.gocalyx.com
Calyx Brands is a cannabis distribution company.
The company engages in the distribution,
transportation and marketing of cannabis
products.
Cannabis Reports
Berkeley, California
www.cannabisreports.com
Cannabis Reports is a publisher of industry data
for cannabis users and business owners. The
company offers news, studies, product information
and dispensary information.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
CannaCraft
Santa Rosa, California
www.cannacraft.com
CannaCraft is a producer of branded strainspecific
cannabis concentrates and cannabisinfused
edibles. The company provides a range
of high-THC products, including concentrate
cartridges, oils, softgels, sprays and straws. It
focuses on providing concentrates of the most
popular cannabis flower strains. Products are
sold through cannabis dispensaries in California.
The company manufactures its products
under the AbsoluteXtracts, Care By Design and
Satori brands.
CannaKorp
Boston, Massachusetts
www.cannakorp.com
CannaKorp is a manufacturer of branded cannabis
consumer products. The company produces
the CannaCloud, a tabletop vaporizer system
utilizing single-use cannabis-infused pods.
Colorado
Harvest Company
Denver, Colorado
www.coloradoharvestcompany.com
Colorado Harvest Company is an operator of
recreational and medicinal cannabis dispensaries
and cultivation facilities. The company’s three
dispensary locations retail flower, concentrates
and edibles. It also operates an indoor hydroponic
grow facility.
Columbia Care
New York, New York
www.col-care.com
Columbia Care is an operator of medical cannabis
dispensaries and cultivation facilities. The
company operates 27 medical dispensaries across
9 states and the District of Columbia under several
brands, including Columbia Care, Curative
Health, Patriot Care and SWC Arizona.
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Confident Cannabis
Palo Alto, California
www.confidentcannabis.com
Confident Cannabis is a cannabis lab-testing
and analytics company. The company allows
users to view the results of their product testing
and analytics in an online platform. Its technology
can be integrated into dispensary websites.
Cultivation
Technologies
Coachella, CA
www.cultivationtech.com
Cultivation Technologies provides infrastructure,
genetics, technology and branding to the
legal cannabis industry. The company is building
a campus for the development of pharmaceutical-grade
cannabis products.
Cura
Cannabis Solutions
Portland, Oregon
www.curacan.com
Cura Cannabis Solutions is a provider of cannabis
concentrates. The company offers cannabis
distillates and oils to consumers and edibles
manufacturers. Its products are available in dispensaries
throughout California, Nevada and
Oregon.
CW Analytical
Oakland, California
www.cwanalytical.com
CW Analytical is a cannabis lab-testing company
that tests cannabis and cannabis-based products
for potency, pesticides and microbiology. The
company also consults with dispensaries and
edibles manufacturers to provide best practices
for product handling and product labeling.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
Deep Cell
Seattle, Washington
www.deepcell.industries
Deep Cell is a synthetic biology and cannabis
intellectual property holding company. The
company provides licenses to companies who
wish to produce Deep Cell’s cannabis-infused
sugar. Its products are available from Deep Cell
licensees.
Défoncé
Oakland, California
www.defonce.com
Défoncé is a producer of branded cannabisinfused
products, primarily focusing on chocolate-based
edibles. The company offers a wide
range of chocolate-bar flavors that are available
in dispensaries located throughout California.
Dixie Elixirs
Denver, Colorado
www.dixieelixirs.com
Dixie Elixirs is a producer of branded cannabis-infused
edibles. The company produces
a wide range of products, including chocolate-based
edibles, beverages, capsules, mints,
energy shots, topicals and disposable vaporizer
pens. The company’s products are sold in
many dispensaries throughout California and
Colorado.
Dosist
Los Angeles, California
www.dosist.com
Dosist is a producer of cannabis vapor izers.
The company develops pre-filled cannabis vaporizers
that are designed to provide consumers
with a specific mood. The company’s products
are available in dispensaries located throughout
California.
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Eaze Solutions
San Francisco, California
www.eaze.com
Eaze Solutions is a developer and provider of
an on-demand cannabis delivery-service application
that enables consumers to order cannabis
products via mobile devices. The company’s
mobile application allows users to access a daily
menu of cannabis products for purchase and
direct-to-consumer delivery.
Eel River Organics
Sacramento, California
www.eelriverfamilyfarm.com
Eel River Organics is a producer of branded
cannabis products from Humboldt County,
California. The company offers can nabis flower,
concentrates, vaporizer cartridges and cultivation
equipment. Its products are available in
select California dispensaries.
Elemental
Wellness
San Jose, California
www.elementalwellnesscenter.com
Elemental Wellness is an operator of a cannabis
dispensary and wellness center in San Jose, California.
The company offers a range of cannabis
flower, concentrates and edibles, as well as delivery
services and a range of wellness classes.
Euflora
Denver, Colorado
www.eufloracolorado.com
Euflora is an operator of four recreational cannabis
dispensaries in Colorado. The company’s
locations sell flower, pre-rolls, concentrates, topicals,
seeds, vaporitzers and branded accssories.
The company also cultivates numerous cannabis
strains in its own grow facility.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
Evolve
Therapeutics
San Francisco, California
www.evolvetherapeutics.com
Evolve Therapeutics is a biopharmaceutical
company focused on the research and manufacture
of cannabinoid-based medications. The
company produces a variety of cannabis products
that are available in dispensaries located
throughout California.
Evoxe
Laboratories
Oakland, California
www.evoxelabs.com
Evoxe Laboratories is a producer of cannabis
vaporizers. The company develops pre-filled
cannabis vaporizers that are designed to provide
consumers with a specific mood. The company’s
products are available in dispensaries throughout
California.
Flow Kana
San Francisco, California
www.flowkana.com
Flow Kana is a producer of cannabis flower. The
company owns property in Mendocino County,
where it plans to partner with small cultivators
to create an institute for cannabis manufacturing,
education and leisure.
Flowhub
Denver, Colorado
www.flowhub.co
Flowhub is a provider of inventory management
software for the cannabis industry. The company
provides software to aid cultivators and
dispensary operators in tracking their business
from seed to sale. The software is designed to aid
customers in compliance.
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FunkSac
Denver, Colorado
www.funksac.com
FunkSac is a provider of compliant packaging
solutions for the medicinal and recreational
cannabis industry. The company has a comprehensive
product line manufactured with
FDA-approved material and eco-friendly cannabis
packaging solutions that are highly secure.
FunkSac retails its products to cultivators,
dispensaries and edibles manufacturers.
Garden State Dispensary
Woodbridge, New Jersey
www.gardenstatedispensary.com
Garden State Dispensary is a medicinal cannabis
dispensary located in New Jersey. The company
produces its own medical cannabis and offers a
patient research and counseling program.
GFarmaLabs
Anaheim, California
www.gfarmalabs.com
GFarmaLabs is a producer of branded cannabis,
cannabis-infused edibles, cannabis concentrates
and vaporizer accessories. The company
produces pre-rolls, beverages, chocolate-based
edibles, honey, concentrate cartridges and injectors.
GFarmaLabs sells its products through
dispensaries in California and Washington. Its
products are marketed as being produced from
“100% indoor flower.”
Gold Coast
Extracts
Los Angeles, California
www.goldcoastusa.com
Gold Coast Extracts is an extraction consultant
and producer of branded cannabis concentrates.
The company provides extraction consulting
services to cultivators and concentrates producers.
It also produces an award-winning line
of branded cannabis concentrates in shatter and
wax form. The company’s products are sold in
dispensaries throughout California.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
Green Dot Labs
Boulder, Colorado
www.greendotlabs.com
Green Dot Labs is a cultivation and extrac tion
company that provides branded concentrates
to consumers. The company operates an indoor
hydrocarbon extraction facility and utilizes
proprietary cannabis-flower genetics to produce
whole-plant extracts. The company’s products
are available in dispensaries throughout
Colorado.
Green Flower
Media
Ventura, California
www.learngreenflower.com
Green Flower Media is a digital media company
operating a website that offers cannabis
industry information. The company offers
on line classes to customers who are interested in
learning about all things cannabis-related. The
com pany’s website also offers informational live
streams from industry professionals.
Green Rush
San Mateo, California
www.greenrush.com
Green Rush provides an online medical cannabis
delivery service. The company offers a
range of cannabis flower, concentrates, edibles,
tinctures and accessories. It has partnered with
hundreds of cannabis dispensaries in California,
Colorado, Nevada, New York and Michigan.
The Green Solution
Denver, Colorado
www.tgscolorado.com
The Green Solution is an operator of medicinal
and recreational cannabis dispensaries. The
company’s 15 locations retail flower, pre-rolls,
concentrates, edibles, topicals, seeds, vaporizers
and branded accessories. The company also produces
its own line of branded concentrates and
edibles.
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Harborside Health Center
Oakland, California
www.shopharborside.com
Harborside Health Center operates cannabis
dispensaries. The company’s two locations retail
flower, pre-rolls, concentrates, edibles, seeds,
topicals and accessories. The company sources
cannabis-flower products from local cultivators.
Harvest
San Francisco, California
www.harvestshop.com
Harvest is an operator of cannabis dispensaries.
In addition to offering a full range of cannabis
products, the company’s dispensaries also serve
as smoking lounges. The company has two locations
in San Francisco.
Headset
Seattle, Washington
www.headset.io
Headset is a data analytics company for businesses
within the cannabis industry. The company
offers a SaaS product that tracks market
data, business intelligence and retailer-direct
data with clients located in states where cannabis
has been legalized.
HelloMD
San Francisco, California
www.hellomd.com
HelloMD provides a digital healthcare platform.
The company provides prescriptions for
medicinal-cannabis patients via online, live
video consultations. The company also provides
a dispensary locator and cannabis product
reviews.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
Humboldt
Legends
Trinidad, California
www.humboldtlegends.com
Humboldt Legends is a producer of cannabis
flower products sourced from Humboldt
County, California. The company offers cannabis
flower in eighths and pre-rolls. The company’s
products are available in dispensaries
throughout California.
Incense
Specialties
Lake Worth, Florida
www.thisthingrips.com
Incense Specialties is a producer of cannabis
vaporizers. The company designs and manufactures
a line of vaporizer pens under the brand
name “This Thing Rips.” The company’s products
are available in more than 4,000 points of
sale across the United States and Canada.
Jetty Extracts
Oakland, California
www.jettyextracts.com
Jetty Extracts is a producer of cannabis vaporizers
and cannabis concentrates. The company
develops pre-filled cannabis vaporizers, cartridges
and wax that offer the consumer formulations
of both THC and CBD. The company’s
products are available in dispensaries throughout
California.
Kikoko
San Francisco, California
www.kikoko.com
Kikoko is a producer of branded cannabisinfused
teas. The company offers a range of
THC and CBD teas. Kikoko products are available
in select California dispensaries.
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KIVA
Confections
San Leandro, California
www.kivaconfections.com
KIVA Confections is a producer of branded
cannabis-infused edibles. The company’s awardwinning
products are sold through cannabis
dispensaries in California and Colorado.
Korova
Oakland, California
www.korovaedibles.com
Korova is a producer of branded cannabisinfused
edibles. The company offers a selection
of cannabis-infused cookies and brownies at
varying potencies. The company’s products are
available in dispensaries located in California,
Arizona and Nevada.
LeafLink
New York, New York
www.leaflink.com
LeafLink provides a software platform to facilitate
e-commerce B2B sales, CRM and order
fulfillment tracking of products for cannabis
brands and dispensaries.
Leafly
Seattle, Washington
www.leafly.com
Leafly is a digital media company. Its online
directory and content platform for cannabis
consumers provides information about locations
of dispensaries, news pertaining to the cannabis
industry and the effects of different cannabis
strains.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
Level Blends
San Francisco, California
www.levelblends.com
Level Blends is a producer of branded cannabis
concentrates. The company utilizes a proprietary
extraction process to produce a line of
branded concentrates for use in vaporizers. The
company’s products are available in dispensaries
throughout California.
LivWell
Enlightened Health
Denver, Colorado
www.livwell.com
LivWell Enlightened Health is an operator of
medicinal and recreational cannabis dispensaries
and cultivation facilities. The company
operates 15 retail locations in Colorado and
Oregon and sells flower, pre-rolls, concentrates,
edibles, topicals and branded accessories.
It also operates an indoor cultivation facility
and is recognized as the largest cannabissector
employer in Colorado.
Lunchbox
Alchemy
Bend, Oregon
www.lunchboxalchemy.com
Lunchbox Alchemy is a producer of branded
cannabis-infused edibles and cannabis concentrates.
The company produces cannabis-infused
candies and macaroons, concentrate cartridges
and ethanol tinctures. Its products are available
in dispensaries throughout Oregon.
Mary’s Medicinals
Denver, CO
www.marysmedicinals.com
Mary’s Medicinals is a producer of branded
cannabis concentrates. The company provides
a range of transdermal patches and pens, topicals
and powders featuring cannabinoid-based
concentrates. The company’s award-winning
products deliver cannabinoids, including THC
and CBD as well as THCA, CBN and CBC.
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Meadow
San Francisco, California
www.getmeadow.com
Meadow is a developer and provider of an on-demand
cannabis delivery-service application for
dispensaries. The company markets online and
mobile-ordering applications for dispensaries.
The web and mobile applications allow users
to access a menu of can nabis products for purchase
and direct-to-consumer delivery through
dispensaries.
Merry Jane
Los Angeles, California
www.merryjane.com
Merry Jane is a digital media company focused
on the cannabis industry. The company’s website
provides commentary on recent events, pop
culture, business, politics and health-related
news. The company provides strain reviews and
information, as well as a dispensary locator.
MiNDFUL
Denver, Colorado
www.bemindful.today
MiNDFUL is an operator of recreational and
medicinal cannabis dispensaries. The company
operates five retail locations in Colorado
and a single location in Illinois. The company
sells flower, concentrates, edibles, topicals and
branded accessories.
MJ Freeway
Denver, Colorado
www.mjfreeway.com
MJ Freeway is a provider of enterprise management
software for the cannabis industry.
The company’s core solution is a software platform
for inventory and sales management to
track the seed-to-sale process in compliance
with state requirements. The software is used
by recreational and medicinal dispensaries,
infused-product manufacturers and cultivators.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
MJardin
Denver, Colorado
www.mjardin.com
MJardin is a provider of cannabis cultivation
management services. The company offers facility
design, inventory tracking, and management
and operational consulting services. The company’s
services are available in states having medical
or recreational laws.
MM Acquisition Co.
Los Angeles, California
MM Acquisition Co. is a provider of turnkey
real estate services and business services to cannabis
cultivators and dispensary operators in
California. The company operates in three business
segments: Property Leasing Business, Services
Business and Other Related Businesses.
Native Roots
Denver, Colorado
www.nativeroots303.com
Native Roots is an operator of medicinal and
recreational cannabis dispensaries and cultivation
facilities. The company operates 21 dispensaries
and retails flower, pre-rolls, concentrates,
edibles and vaporizer accessories. The
company also sells a line of branded hash-oil
concentrates under the “Native Roots Extracts”
brand. It operates an indoor cultivation facility
and has won numerous industry awards for the
operation.
New Vansterdam
Vancouver, Washington
www.newvansterdam.com
New Vansterdam is an operator of a cannabis
dispensary in Washington. The company
offers a selection of cannabis flower, concentrates,
edibles and topicals. It also offers online
ordering.
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Northwest
Cannabis Solutions
Olympia, Washington
www.nwcs425.com
Northwest Cannabis Solutions is a manufacturer
of white-label cannabis products. The
company offers cannabis flower cultivation,
extraction and infused edibles. It supplies dispensaries
throughout Washington.
NWT Holdings (Firefly)
San Francisco, California
www.thefirefly.com
NWT Holdings is a vaporizer technology company.
The company designs and manufactures
branded convective-heating vaporizers under
the “Firefly” brand. Its portable vaporizer is
designed for use with concentrates and flower.
Organa Brands
Denver, Colorado
www.organabrands.com
Organa Brands is a manufacturer and distributor
of cannabis products and vaporizers. The
company manufactures and retails its products
under the Organa Labs, O.penVAPE, Bakked,
Magic Buzz and District Edibles brands. The
company’s products are distributed through
1,200 dispensaries across ten states.
PAX Labs
San Francisco, California
www.paxvapor.com
PAX Labs is a vaporizer technology company
that designs and manufactures branded vaporizers
that use conductive heating. The company’s
portable vaporizers are designed for use with
concentrates and flower.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
PharmaCielo
Rionegro, Colombia
www.pharmacielo.com
PharmaCielo is an emerging global supplier of
naturally grown and processed, standardized
medicinal-grade cannabis extracts. The company
holds the first cannabis-processing license
issued under the legal framework of Colombia’s
cannabis laws and has one of the largest cultivation
platforms in the cannabis industry, with
more than 14.6 million square feet of companyowned
or contracted open-air greenhouses in
Colombia, South America.
PRØHBTD Media
Los Angeles, California
www.prohbtd.com
PRØHBTD Media is a vertically integrated
digital media company. The company provides
digital agency services to cannabis brands, maintains
a cannabis-related art, music, video, fashion,
travel and lifestyle website and develops
original media content focused on the cannabis
industry.
Qind
San Francisco, California
www.qind.com
Qind is a producer and distributor of branded
cannabis products, including flower, concentrates,
edibles and other infused products. The
company sells directly to consumers through
in-home events, e-commerce and next-day
home delivery. The company also provides educational
materials and content to its customers
through its social network.
River Collective
Sacramento, California
www.rvrdc.com
River Collective is a distribution company for
branded cannabis products. The company partners
with businesses throughout California
that produce cannabis flower, concentrates and
edibles.
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Rubicon Organics
Bellingham, Washington
www.rubiconorganics.com
Rubicon Organics is a licensed cannabis cultivator
specializing in the growing, processing,
packaging and marketing of cannabis. The company
is developing greenhouses in Washington
and California.
S2S Development
San Francisco, California
www.s2s-inc.com
S2S Development is a contract manufacturer
and distributor of cannabis products. The
company provides manufacturing, co-packing,
testing and distribution services to cannabis
companies.
SC Laboratories
Santa Cruz, California
www.sclabs.com
SC Laboratories is a cannabis lab-testing company.
The company tests cannabis and cannabisbased
products for potency, pesticides and
microbiology, adhering to FDA and other
guidelines in its testing. The company also provides
consulting services to cultivators, dispensaries
and producers of cannabis-infused edibles
to implement industry best practices.
Scrubbed
San Francisco, California
www.scrubbed.net
Scrubbed is an outsourced bookkeeping,
accounting and tax firm serving the cannabis
industry. The company has a dedicated cannabis
practice that provides clients with comprehensive
turnkey accounting and tax solutions.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
SPARC
San Francisco, California
www.sparcsf.com
SPARC operates three cannabis dispensaries. It
also provides lab-testing services. In addition to
the company’s dispensary locations, the company
provides a direct-to-consumer delivery service
for flower, pre-rolls, concentrates, edibles,
seeds and accessories. The company performs
in-house testing of its products and operates its
own cultivation facility.
Spectrum King
Canoga Park, California
www.spectrumkingled.com
Spectrum King is a producer of cannabis grow
lights and accessories. The company offers a
range of full-spectrum LED grow lights and
grow tents. Its products are available through a
network of international distributors.
Steep Hill Labs
Berkeley, California
www.steephill.com
Steep Hill Labs is a cannabis lab-testing
company that tests cannabis and cannabisbased
products for potency, pesticides and
microbiology. The company has developed
QuantaCann2™, an in-field cannabis-testing
technology system; GenKit™, a male cannabisplant
identification system; and Strain Fingerprint™,
a graphical depiction of a strain’s most
common cannabinoids. The company has locations
or licensees nationwide.
StickyGuide
Los Angeles, California
www.stickyguide.com
StickyGuide is a digital media company
that operates an online content and directory
site focused on cannabis consumers. The
company’s website provides detailed cannabis-strain
information as well as reviews. The
company also provides a dispensary locator.
The website maintains an active member base
and an online user-generated content forum.
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Strainz
Las Vegas, Nevada
www.strainz.com
Strainz is a cannabis-brand management company.
The company partners with producers to
create cannabis oil cartridges and tinctures. Its
products are available in dispensaries located in
Colorado, Nevada and Washington.
Teewinot
Life Sciences
Tampa, Florida
www.tlscorp.com
Teewinot Life Sciences is a pharmaceutical company
focused on the biosynthetic production of
cannabinoids. The company has developed processes
for cannabinoid formulations intended
for cannabinoid-based human therapies.
Tikun Olam
Safed, Israel
www.tikun-olam.info
Tikun Olam produces and supplies cannabis in
Israel. The company cultivates medical cannabis
strains, conducts research and educates patients
on the use of medical cannabis. It conducts business
in Israel, Canada, Australia and the United
States.
Treez
Fremont, California
www.treez.io
Treez is a software company that has developed
an enterprise resource-management platform
for cannabis dispensaries. The company provides
software and services to support all aspects
of operations in dispensaries located throughout
a number of states.
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CHAPTER VIII Top 100 Private Cannabis Companies 2018
Trellis
Oakland, California
www.trellisgrows.com
Trellis provides inventory-management software
for the cannabis industry. The company provides
software to aid cultivators, producers and
dispensary operators in tracking their business
from seed to sale. The software is designed to aid
customers in compliance.
Trulieve
Quincy, Florida
www.trulieve.com
Trulieve is an operator of medical cannabis
dispensaries in Florida, offering a selection of
concentrates in the form of capsules, syringes,
tinctures and vaporizers. The company also
maintains its own cannabis cultivation facility.
Utopia Farms
Santa Cruz, California
www.utopiafarms.org
Utopia Farms is a producer of branded cannabis
products. The company produces
cannabis flower, concentrates and cannabisinfused
macaroons that are available in dispensaries
throughout California.
VapeWorld
Boca Raton, Florida
www.vapeworld.com
VapeWorld operates an online e-commerce website
dedicated to cannabis accessories. Vaporizers
from leading manufacturers, as well as parts
and accessories, are available on its website. The
company also provides consumers with online
content about vaping.
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Vapexhale
San Francisco, California
www.vapexhale.com
Vapexhale is a vaporizer technology company
that designs and manufactures branded vaporizers
that use conductive heating. The company
develops tabletop and portable vaporizers
that are designed for use with concentrates and
flower.
VCC Brands
Los Angeles, California
www.vccbrands.com
VCC Brands is a manufacturer of branded cannabis-infused
products. The company offers
cannabis-infused beverages, cookies, chocolates,
teas, honeys, cooking oils and tinctures.
Its products are available in dispensaries located
throughout California and Washington.
Vuber
Seattle, Washington
www.vubervaporizers.com
Vuber is a manufacturer of cannabis vaporizers.
The company designs and markets cannabis
vaporizers and vaporizer accessories that
are available in retail stores and dispensaries in
Washington and Oregon. The company’s products
are also available online.
Wana Brands
Boulder, Colorado
www.wanabrands.com
Wana Brands is a producer of cannabis-infused
products, including cannabis-infused candies
and capsules. Its products are available in dispensaries
in Colorado, Oregon and Nevada.
162 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER VIII Top 100 Private Cannabis Companies 2018
Web Joint
Los Angeles, California
www.webjoint.com
Web Joint is an online technology softwareas-a-service
company. The company provides
software for dispensaries to manage point-ofsale
transactions, online ordering and delivery
management. The software integrates with a
dispensary’s website for a white-labeled software
solution.
Weedguide
San Diego, California
www.weedguide.com
Weedguide is a digital media company that
operates a cannabis-centric search engine and
an informational website about recreational and
medical cannabis. The site offers a collection of
articles, videos, products, dispensary locations,
recipes and strain information.
Weedmaps
Orange County, California
www.weedmaps.com
Weedmaps is a digital media company that
operates an online networking and content
directory site. The company allows users to
locate and view reviews of local cannabis dispensaries,
as well as user-generated strain reviews.
Wellness
Connection of Maine
Portland, Maine
www.mainewellness.org
Wellness Connection of Maine is an operator
of medical cannabis dispensaries in Maine. The
company offers a selection of cannabis flower,
concentrates, edibles and recipes.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 163

CHAPTER IX
Cannabis Industry Risk Factors
Companies in the cannabis industry are subject to many risks. The realization of one or more of these
risks could have a material adverse effect on the business and results of operations of a company and
on its lenders, investors and principals. The following discussion highlights some, but not all, of these
risks.
Risks Related to U.S. Federal Law
• The manufacture, distribution, dispensing and possession of cannabis are strictly controlled
under the Controlled Substances Act (CSA), irrespective of whether such activities comply with
applicable state law. Financial transactions in connection with cannabis-related violations of
the CSA may violate other federal laws. Individuals and businesses—including the principals,
employees, directors, agents, lenders and investors of such businesses—that violate the CSA or
such other laws are subject to fines, asset seizure and imprisonment under federal law.
• Federal statutes and policies that currently restrict or deprioritize enforcement of certain CSA
violations related to cannabis are subject to expiration, rescission and other changes. There can
be no assurance that in the future the federal government will not strictly and aggressively enforce
cannabis-related CSA provisions.
• If CSA controls applicable to cannabis are relaxed or repealed in the future, other federal laws
and regulations governing the production, distribution and marketing of products for human
consumption, such as the Federal Food, Drug, and Cosmetic Act, may be more strictly enforced
by the federal government in relation to the cannabis industry.
• CSA controls and federal enforcement priorities applicable to cannabis both preclude interstate
commerce in cannabis and cannabis products. As a result, it can be costly or impractical for
companies in the cannabis industry to operate in multiple states and to gain economies of scale
through centralized operations.
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• Federal income tax law precludes a business that “consists of trafficking in” cannabis or cannabis
products from deducting certain operating expenses in determining its federal income tax. As a
result, businesses in the cannabis industry may have effective tax rates significantly higher than
other businesses subject to federal income tax, may owe tax on taxable income that is not actual
economic income generated by the business and may have tax liabilities in amounts that exceed
cash reserves.
• Because of CSA controls on cannabis and federal laws applicable to banks and other financial
institutions, companies in the cannabis industry may not be able to open or maintain bank
accounts or access products and services of traditional financial institutions, such as credit facilities,
payment processing and insurance coverage. A lack of access to banking and other traditional
financial products and services increases the time, effort and expense related to ongoing
operations and increases risks associated with cash transactions and the use of alternative products
and services.
• Trademarks used by companies to identify, distinguish or indicate the source of cannabis or
related products or services that are illegal under federal law are not eligible for registration under
federal trademark law, which is generally recognized as the most comprehensive trademark protection
available in the United States. Alternative means of protecting such trademarks may not
be available or may provide protections inferior to the protection provided by federal registration.
• Protections afforded under federal bankruptcy law generally are not available to companies whose
assets consist of federally illegal cannabis products or proceeds therefrom or to the creditors of
such companies.
• The federal government may pursue legal action against a state related to the state’s cannabis
laws, which may result in significant changes to the state’s legal landscape as it relates to cannabis
and may materially and adversely affect cannabis businesses in the state.
• Cannabis companies outside the United States whose business plans anticipate eventual access
to U.S. markets face uncertainty as to the timing or nature of changes in federal law that would
allow importation of cannabis products into the country.
Risks Related to U.S. State and Local Laws
• State laws and regulations that legalize or decriminalize cannabis and related activities are relatively
new and may change significantly or be reversed. The extent and nature of any such changes
are not foreseeable and may force cannabis companies to materially alter their business models,
suffer material losses or cease operations entirely.
• State and local laws may limit the number of cannabis businesses in the state or in a particular
locality, restrict the nature of such businesses (for example, by prohibiting for-profit cannabis
businesses) or place restrictions on the persons permitted to own or operate such businesses.
• Many state and local jurisdictions support legalizing or decriminalizing cannabis activities primarily
for the potential to generate tax revenue, and there is significant public pressure to impose
a heavy tax burden on those participating in the cannabis industry. State and local governments
may impose significant taxes on commercial cannabis activity and may do so unpredictably.
166 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER IX
Cannabis Industry Risk Factors
• There is currently a lack of broad interstate reciprocity with respect to cannabis laws.
• Even in states where cannabis is legal under state law, local jurisdictions may impose bans or
restrictions that materially interfere with or effectively prevent the operation of cannabis businesses
within their boundaries.
Risks Related to the Manufacture and Sale of Cannabis Products
• Cannabis companies are exposed to various product liability claims associated with human consumption
of cannabis products, including claims that products cause injury, illness, possible side
effects or interactions with other substances, or that products include inadequate instructions for
use or warnings concerning health risks.
• Cannabis companies may be subject to product recalls for a variety of reasons, including product
defects, such as contamination. Such recalls may result in financial burdens and reputational
harm and may subject cannabis companies to increased regulatory scrutiny.
• Consumer perception of cannabis products can be significantly influenced by scientific research
or findings, regulatory investigations, litigation, media attention and other publicity regarding
the consumption of cannabis. Any unfavorable developments in these areas could have a material
adverse effect on the demand for cannabis products in general or on the products or prospects of
a particular company.
Risks Related to Early-Stage Cannabis Companies
• Most cannabis companies are in early stages of development and have limited operational history,
so it is difficult to accurately predict and forecast their business operations. Many cannabis
companies will fail.
• The success of many early-stage cannabis companies is premised on receiving and maintaining
the licenses, permits and regulatory approvals required for their proposed cannabis activities.
Many of such companies will not receive or maintain such licenses, permits and approvals or may
be able to do so only at significant expense.
• Cannabis companies’ access to the capital required to grow and to finance ongoing operations
involves challenges particular to the industry’s uncertain and rapidly evolving legal landscape.
Many early-stage companies in the cannabis industry will not be able to obtain the requisite
capital or will run out of capital prior to reaching profitability.
• Early-stage cannabis companies may experience unexpected problems in the areas of product
development and quality, manufacturing, marketing and general management, which, in some
cases, cannot be adequately solved. Companies may also be subject to product pricing and cost
pressures and to claims of intellectual property infringement.
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Other Risks to Companies in the Cannabis Industry
• The cannabis industry is extremely competitive in most segments, with certain companies having
unique competitive advantages such as greater capital resources, first-mover advantage, more
scalable business models and greater brand recognition.
• To date, the research conducted on cannabinoid-derived pharmaceuticals and other cannabisbased
therapies is limited. There is no assurance that cannabinoid-derived pharmaceuticals or
other medi cal products will prove effective in treating medical conditions or achieve broad market
acceptance.
• Given the emerging nature of the cannabis industry, there is a scarcity of qualified personnel with
deep industry experience and significant competition for such qualified personnel. Many cannabis
companies may not be successful in attracting, training, integrating, motivating or retaining
qualified management teams and other personnel.
• Cannabis is an agricultural product. The occurrence of diseases, insects, pests, mold and other
infestations and severe adverse environmental conditions, such as fire, drought, hail, flood or
frost, is unpredictable, may have a potentially devastating impact on agricultural production of
cannabis and may otherwise adversely affect the supply of cannabis.
• The cannabis industry is particularly vulnerable to rapidly changing technology, government
regu lation and relatively high risks of obsolescence caused by scientific and technological
advances. The success of cannabis companies will depend in part on their ability to anticipate
market, legal, technological and other trends in the industry. Many cannabis companies will fail
to accurately identify or predict industry trends.
• Cannabis laws and regulations in jurisdictions outside the United States vary widely and, in
some cases, are as complex, contradictory and rapidly changing as those within the United States.
Cannabis companies operating outside the country’s borders are subject to risks related to the
unsettled legal environment applicable to cannabis.
• Due to federal controls on cannabis within the United States and similar restrictions in many
jurisdictions outside the country, there is a significant black market for cannabis products.
Government-regulated cannabis businesses face competition from black market partici pants and
are subject to different market forces than those of the black market.
168 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER X
Glossary of Terms
Ackrell Capital, LLC a leading independent investment bank focused on the cannabis industry
ACMPR Canada’s Access to Cannabis for Medical Purposes Regulations
Aeroponics a method of growing plants whereby the roots hang suspended in a nutritional aerosol
solution
Bankruptcy Code Bankruptcy Reform Act of 1978
BHO Butane hash oil. See Hash oil
Bong a device used to smoke cannabis flower via a water chamber through which the smoke passes
prior to inhalation; commonly made of glass or plastic
BSA Bank Secrecy Act
Bud a slang term for cannabis flower
Cannabichromene (CBC) a nonpsychoactive cannabinoid believed to have several medicinal benefits,
including analgesic, antibacterial, anticancer, antidepressant, antifungal, anti-inflammatory and
anti-insomnia
Cannabidiol (CBD) a nonpsychoactive cannabinoid believed to have wide-ranging medicinal benefits
and therapeutic applications; the second most abundant cannabinoid in cannabis
Cannabidiolic acid (CBDA) a nonpsychoactive cannabinoid believed to have several medicinal benefits,
including anticancer, antiemetic and anti-inflammatory; the precursor to cannabidiol (CBD)
Cannabigerol (CBG) a nonpsychoactive cannabinoid believed to have several medicinal benefits and
therapeutic applications; may partially counteract the psychoactive effect of THC and decrease
anxiety and muscle tension
Cannabigerolic acid (CBGA) a nonpsychoactive cannabinoid that is a precursor to all other
cannabinoids, including THC, CBD, CBC and CBG
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Cannabinoid a class of chemical compounds present in cannabis that act on cannabinoid receptors in
cells in the human nervous and immune systems
Cannabinol (CBN) a cannabinoid derived from THC degradation; shown to produce some psychoactive
effects and believed to have several medicinal benefits, including analgesic, antibacterial,
anticonvulsive, anti-inflammatory and anti-insomnia
Cannabis a genus of flowering plant consumed for therapeutic, medicinal, social or spiritual purposes
and used to produce goods such as rope, paper, clothing and soap; includes three principal cannabis
species: Cannabis sativa, Cannabis indica and Cannabis ruderalis
CBC See Cannabichromene
CBD See Cannabidiol
CBDA See Cannabidiolic acid
CBG See Cannabigerol
CBGA See Cannabigerolic acid
CBN See Cannabinol
CDSA Canada’s Controlled Drugs and Substances Act
Chemovar a plant variety characterized by its chemical content
Clone an asexually reproduced cannabis plant genetically identical to the plant from which it was
produced
CND Commission on Narcotic Drugs, a subsidiary body of the United Nation’s ECOSOC that
assists the ECOSOC in supervising the application of international drug control treaties
Cole Memo a memorandum published by the DOJ that provides guidance to DOJ attorneys and
federal law enforcement about prosecuting cannabis-related federal offenses
Concentrates a category of consumer cannabis products; any number of concentrated forms of the
active compounds in cannabis; typically an oil or waxlike substance
Conventions three international treaties adopted through the United Nations between 1961 and
1988 that address international regulation of cannabis, cannabis derivatives and many other narcotic,
psychotropic and similar substances (The Single Convention on Narcotic Drugs of 1961; The
Convention on Psychotropic Substances of 1971; and The United Nations Convention Against
Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988)
Crumble a form of wax concentrate
CSA Controlled Substances Act
CSE Canadian Securities Exchange
Curing a phase of the cannabis cultivation process during which dried cannabis flower undergoes
controlled fermentation to develop the flower’s aroma, taste and cannabinoid composition
Dab a potent concentrated form of the psychoactive cannabinoid THC
170 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER X
Glossary of Terms
DEA U.S. Drug Enforcement Agency, an agency of the U.S. Department of Justice
Delta-9-Tetrahydrocannabinolic acid (THCA) a nonpsychoactive cannabinoid found abundantly in
raw flower; precursor to THC; decarboxylates into THC through the application of intense heat
DHHS U.S. Department of Health and Human Services
DOJ U.S. Department of Justice
DOT U.S. Department of the Treasury
Dronabinol a form of chemically synthesized THC included in certain FDA-approved pharmaceuticals;
a Schedule II or Schedule III controlled substance under the CSA, depending on its
preparation
Drying a part of the harvesting phase of cannabis cultivation during which plants are dried; typically
occurs at room temperature in a dark space
ECDD Expert Committee on Drug Dependence; a committee of the World Health Organization
(WHO) tasked with making drug control recommendations to the CND on behalf of the WHO
ECOSOC Economic and Social Council, one of the six main organs of the United Nations established
under the United Nations charter in 1945
Edible a food- or drink-based infused product intended for oral consumption; commonly baked
goods, flavored drinks or candies
Endocannabinoid cannabinoids created naturally by the human body
Exchange Act Securities Exchange Act of 1934
Extraction a process for extracting active compounds from the cannabis plant; extraction techniques
fall into two general categories, solvent-based extraction and solvent-free extraction
Farm Bill Agricultural Act of 2014
FDA U.S. Food and Drug Administration, an agency of the DHHS
FD&C Act Federal Food, Drug, and Cosmetic Act
FinCEN Financial Crimes Enforcement Network, a bureau of the DOT
FinCEN Memo a memorandum published by FinCEN outlining how banks and other financial
institutions can, consistent with their BSA obligations, provide services to marijuana-related
businesses
Flower the flower of the cannabis plant, also known as “bud”; the highest concentration of active
compounds present in cannabis are found in the flowers of unpollinated female cannabis plants;
smoking flower is the most popular method of cannabis consumption
Ganja a popular name for cannabis
Germination the process by which a dormant seed begins to sprout and grow into a seedling
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 171
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Hash oil a concentrate prepared through extraction using a butane solvent; also known as hashish oil,
butane hash or honey oil (BHO), cannabis oil or liquid cannabis
Hashish (hash) a concentrate made up of compressed or purified trichomes
Hemp the fiber produced from the stalks of the cannabis plant, which can be used to produce goods
such as rope, paper and clothing; also refers to varieties of cannabis cultivated to produce industrial
hemp products
HID lamp a high-intensity discharge lamp; a category of lamp used for indoor cannabis cultivation
Hit a slang term for one inhalation from a cannabis smoking device or vaporizer
Homeostasis a process by which biological systems tend to maintain internal stability, or balance
Human endocannabinoid system a system of nervous and immune system receptors involved in
regulating health and physiological functions within the human body
Hybrid a cannabis variety that is a genetic cross of two or more different cannabis species or varieties
produced through sexual reproduction
Hydroponics a method of growing plants whereby the roots grow in a nutrient-rich sand, gravel or
liquid growth medium
Indica one of three principal cannabis species; indica plants tend to be short and bushy
Infused products a category of consumer cannabis products; ingestible products that have been
infused with cannabinoids and other active compounds from the cannabis plant
IRC Internal Revenue Code
IRS Internal Revenue Service
Joint a hand-rolled cannabis cigarette
Kief a concentrate composed of trichomes that are separated from the cannabis flower by sifting the
flower with specialized filtering screens
LED a light-emitting diode; a category of lamp used for indoor cannabis cultivation
Marijuana a slang term for dried cannabis flower; a legal term for certain parts and derivatives of the
cannabis plant defined in the CSA
MAUCRSA California’s Medicinal and Adult Use Cannabis Regulation and Safety Act
Nabilone a form of chemically synthesized cannabinoid similar to THC included in an
FDA-approved pharmaceutical; a Schedule II controlled substance under the CSA
Nasdaq Nasdaq Stock Market
NDA New Drug Application; an application submitted by a drug manufacturer to the FDA for
approval of a drug
NYSE New York Stock Exchange
172 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
CHAPTER X
Glossary of Terms
Oil a category of viscous cannabis concentrates
OTC over-the-counter stock market
Pipe a device used to smoke cannabis flower; commonly made of glass, wood or metal
PPM a private placement memorandum; used by issuers of securities in private offerings to market
securities
PVPA Plant Variety Protection Act
Ruderalis one of three principal cannabis species; ruderalis plants are shaggy and the shortest of the
three species
SAR Suspicious Activity Report; required to be filed by financial institutions with FinCEN regarding
customers engaged in marijuana-related businesses
Sativa one of three principal cannabis species; sativa plants are generally tall, thin and wispy
SEC U.S. Securities and Exchange Commission
Section 280E Internal Revenue Code section 280E
Securities Act Securities Act of 1933
Shatter a concentrate prepared through solvent-based extraction; typically has an amber-glass
transparency
Strain another term for a cannabis plant variety
Terpene a class of organic compounds present in cannabis and many other plants; responsible for a
plant’s aroma and flavor; believed to have wide-ranging therapeutic applications
Tetrahydrocannabinol (THC) delta-9-tetrahydrocannabinol and certain chemical variants, including
delta-8-tetrahydrocannabinol; the psychoactive compound in cannabis primarily responsible for the
euphoric feeling of being “high”; the most abundant cannabinoid in cannabis; believed to have
wide-ranging medicinal benefits and therapeutic applications
THC See Tetrahydrocannabinol
THCA See Delta-9-Tetrahydrocannabinolic acid
Tincture a concentrate suspended in an alcohol solution; usually placed under the tongue using a
dropper (sublingual application)
Topical an infused product intended for topical application; typically a lotion, balm, cream, lubricant
or transdermal patch
Trichome a crystalline or hairlike component that secretes cannabinoids, terpenes and other
compounds; generally occur all over the cannabis plant, but found in highest concentration on the
flower
TSX Toronto Stock Exchange
TSXV TSX Venture Exchange
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UN United Nations
UNGASS United Nations General Assembly Special Session
UNODC United Nations Office on Drugs and Crime
USDA U.S. Department of Agriculture
USPTO U.S. Patent and Trademark Office
Vaporizer a device that heats cannabis flower or concentrate to a temperature at which its active
compounds boil and can be inhaled as vapor
Variety a plant grouping within a single botanical taxon of the lowest known rank (species) with
defining characteristics that distinguish it from any other plant grouping within such rank
Wax a category of cannabis concentrates; refers to the softer, opaque oils that have lost their
transparency after extraction
Weed a slang term for dried cannabis flower
WHO World Health Organization, an autonomous intergovernmental organization that collaborates
with the United Nations and other organizations on global health matters
174 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
Cannabis Investment Report | December 2017
Disclosures, Disclaimers, Sources and Use
This report has been compiled for informational purposes only and is not a research report. This report is not
and should not be construed as an offer to sell securities or a solicitation of an offer to buy securities. Readers
should not rely on this report in making any investment decision. Readers should not assume that this report
is complete and should conduct their own analysis and investigation of the cannabis industry and consult with
their own financial, legal, tax and other business advisors before making any investment decision related to the
cannabis industry or any company participating therein.
The information in this report is of a general nature, and this report should not be construed, relied upon or
acted upon as investment, legal, medical, health or tax advice. Readers should obtain advice applying to their circumstances
from a qualified attorney or other investment, medical or tax professional before acting or not acting.
Ackrell Capital, LLC and its affiliates and their respective directors, officers, employees, agents, representatives,
consultants, attorneys, independent contractors and controlling persons (Ackrell Capital, we, us, our) expressly
disclaim liability in respect of any action taken or not taken based on information in this report.
Any tax-related information contained in this report is not intended as a thoroughgoing analysis and is not
to be relied on for any purpose. It may fail to analyze various facts and laws important to any complete, particularized
analysis. Readers are urged to consult with their own tax advisors to determine the tax consequences of
any planned course of action or nonaction.
None of the companies referenced in the report, including those companies referenced in the Top 100 Private
Cannabis Companies 2018 and The Green Field 2018, have seen this report prior to publication; the contents
of this report (including a company’s inclusion in the Top 100 Private Cannabis Companies 2018 or The Green
Field 2018) are not endorsed by any company referenced herein. Some companies referenced in this report may
object to being referenced in a document discussing the cannabis industry. Any display of any company’s logo
included in this report is intended solely as an efficient method of identifying the company so referenced.
Ackrell Capital has made investments in and conducted investment banking and other services for companies
referenced in this report and may do so in the future. Readers should be aware that Ackrell Capital may have
a conflict of interest that could affect the objectivity of this report.
Ackrell Capital does not make any representation or warranty as to the accuracy or completeness of this
report. This report relies on and includes information, estimates and opinions from a wide range of sources, both
public and private, including surveys, interviews, market databases, market research reports and Ackrell Capital’s
own opinions and estimates. The information, estimates and opinions relied on by or included in this report
have been obtained from sources we believe to be reliable. Any statement in this report that is not a statement of
historical fact (which may be indicated by words such as “believe,” “expect,” “anticipate,” “estimate,” “project,”
“predict” and similar expressions) should be considered the opinion or estimate of Ackrell Capital or others.
A number of factors could cause actual results or events to differ materially from those indicated by such opinions
and estimates. The opinions and estimates included herein or relied on hereby are subject to change without
notice, and we assume no obligation to update this report; readers are cautioned to not place undue reliance on
such opinions or estimates.
While this report includes information developed by others, our original contributions are protected by
copyright. We are not looking to prevent others from using our work, however. Others are free to copy and distribute
this report or portions of it, so long as they credit Ackrell Capital, LLC. More specifically, we are using
the same license used by Wikipedia. Thus, this report is licensed under the Creative Commons Attribution
ShareAlike 3.0 License (CC-BY-SA). Others are free to use, re-use, share, reproduce and make derivative works
of the report, provided they comply with the requirements of the CC-BY-SA, which can be found at: https://
creativecommons.org/licenses/by-sa/3.0.
© 2017 Ackrell Capital, LLC | Member FINRA / SIPC 175
Cannabis Investment Report | December 2017
Ackrell Capital Cannabis Team
Mike Ackrell
Founder
mackrell@ackrell.com
Mike Ackrell founded Ackrell Capital in 2003. Previously, Mr. Ackrell was the Head of
ABN AMRO’s U.S. Technology Investment Banking Group and the Head of Investment
Banking at WR Hambrecht+Co. He also was a Senior Vice President in the
Technology Investment Banking Group of Donaldson, Lufkin & Jenrette, where he
began his investment banking career in 1988. Mr. Ackrell has completed more than
150 financing transactions, including more than 50 initial public offerings, and more
than 100 M&A transactions, totaling more than $15 billion in value. He serves on the
Board of Directors of a number of companies, including American Giant, Scrubbed
and Vator.tv. Mr. Ackrell holds a B.S. in Economics, summa cum laude, with majors in
Finance and Accounting, from the Wharton School of the University of Pennsylvania.
Tim Coxon
General Counsel
tcoxon@ackrell.com
Tim Coxon joined Ackrell Capital in 2017 after serving as the firm’s legal counsel for
more than five years. Previously, Mr. Coxon was a corporate finance attorney in Silicon
Valley focused on venture capital fund formation, early stage company financings,
mergers and acquisitions and related areas of tax and securities law. He has advised
dozens of VC firms on fund and management-level structuring and portfolio company
investment transactions, and has advised private companies in M&A transactions valued
at more than $1.5 billion. Mr. Coxon also has worked as a consultant performing
financial and economic analysis for use in corporate litigation and regulatory matters,
and taught college level mathematics for more than 13 years, including 7 years
as an adjunct statistics professor for the M.B.A. program at Santa Clara University.
Mr. Coxon holds a J.D. from the Santa Clara University School of Law, an M.A. in
Mathematics from San Francisco State University, and a B.A. in Mathematics from the
University of Texas at Austin.
Bryan Castillo
Partner
bcastillo@ackrell.com
Jeff Mathews
Partner
jmathews@ackrell.com
Bryan Castillo joined Ackrell Capital in 2015. Previously, Mr. Castillo served as an
adviser to governments on economic and foreign policy. He has more than 10 years of
investment banking experience focused primarily on cross-border transactions spanning
Asia, Europe and the Middle East. Mr. Castillo has experience in a number of
industries, including agriculture, cleantech, consumer, energy, media, real estate and
technology. He has advised on more than 50 financing transactions, primarily with
state-owned enterprises and private companies. Mr. Castillo works closely with several
family offices on private equity and venture capital investments. Mr. Castillo holds a
B.S. in Economics from the Pennsylvania State University.
Jeff Mathews joined Ackrell Capital in 2015. Previously, Mr. Mathews was a Director
with Seven Hills Group, a boutique investment bank focused on middle-market
technology companies. He has more than 15 years of investment banking experience
and was also an Associate in the Technology Investment Banking Groups at Deutsche
Bank and Lehman Brothers. He has advised on a broad range of financings and M&A
transactions across a variety of technology industries totaling more than $10 billion in
value. Mr. Mathews holds a B.A. in Economics from the University of Chicago.
176 © 2017 Ackrell Capital, LLC | Member FINRA / SIPC
ACKRELL CAPITAL
The green field 2018
Cultivation
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Production Equipment
and Supplies
Production and Testing
Services
Dispensaries
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E-Commerce
Distribution
Services
ACKRELL CAPITAL
The green field 2018
Consumer Products
Flower and Concentrates
Infused Products
Vaporizers and
Accessories
Pharmaceuticals
Business Solutions
Digital Media
Business Software Business Services Online Content Online Directories
and Networking
Inclusion in The Green Field 2018 does not represent an investment recommendation or an endorsement of any particular company. Our intent in providing this industry landscape is to provide a graphical representation
of the cannabis industry, its segments and participants. This landscape is necessarily subjective. Numerous companies operate in multiple segments. None of the companies referenced in The Green Field 2018 have
seen The Green Field 2018 prior to publication; therefore, there is no endorsement of The Green Field 2018 or the inclusion in The Green Field 2018 by any company referenced. In addition, any display of any company’s
logo is meant solely as an efficient communications method of identifying the company so referenced. For additional disclosures and disclaimers, see page 175.
ACKRELL CAPITAL
TOP 100 PRIVATE CANNABIS COMPANIES 2018
AEssenseGrows Défoncé Jetty Extracts River Collective
Ample Organics Dixie Elixirs Kikoko Rubicon Organics
Apeks Supercritical Dosist KIVA Confections S2S Development
The Apothecarium Eaze Solutions Korova SC Laboratories
Auntie Dolores Eel River Organics LeafLink Scrubbed
Baker Technologies Elemental Wellness Leafly SPARC
BAS Research Euflora Level Blends Spectrum King
BDS Analytics Evolve Therapeutics LivWell Enlightened Health Steep Hill Labs
Beboe Evoxe Laboratories Lunchbox Alchemy StickyGuide
Berkeley Patients Group Flow Kana Mary's Medicinals Strainz
BioTrackTHC Flowhub Meadow Teewinot Life Sciences
Bloom Farms FunkSac Merry Jane Tikun Olam
Brewbudz Garden State Dispensary MiNDFUL Treez
Bud and Bloom GFarmaLabs MJ Freeway Trellis
Calyx Brands Gold Coast Extracts MJardin Trulieve
Cannabis Reports Green Dot Labs MM Acquisition Co. Utopia Farms
CannaCraft Green Flower Media Native Roots VapeWorld
CannaKorp Green Rush New Vansterdam Vapexhale
Colorado Harvest Company The Green Solution Northwest Cannabis Solutions VCC Brands
Columbia Care Harborside Health Center NWT Holdings (Firefly) Vuber
Confident Cannabis Harvest Organa Brands Wana Brands
Cultivation Technologies Headset PAX Labs Web Joint
Cura Cannabis Solutions HelloMD PharmaCielo Weedguide
CW Analytical Humboldt Legends PRØHBTD Media Weedmaps
Deep Cell Incense Specialties Qind Wellness Connection of Maine
None of the companies referenced in the report, including those companies referenced in the Top 100 Private Cannabis Companies 2018 and The Green Field 2018, have seen this report prior to publication; therefore, there
is no endorsement of the contents of this report or the inclusion in the Top 100 Private Cannabis Companies 2018 or The Green Field 2018 by any company referenced. In addition, any display of any company’s logo included
in this report is meant solely as an efficient communications method of identifying the company so referenced. Inclusion in the Top 100 Private Cannabis Companies 2018 and the Green Field 2018 does not represent an
investment recommendation or an endorsement of any particular company or product. For additional disclosures and disclaimers, see page 175.
Ackrell Capital, LLC
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