August 09, 2017
PE HUB has featured a recent article from Torys’ private equity team, including partner Mike Akkawi and associates Allison Segal, Sarah Carter and Owen Payne. “Raising Capital and Investing in the Cannabis Industry” focuses on how the upcoming cannabis market can result in legal headaches for investors, particularly when looking at cross-border issues. Below is an excerpt from PE HUB’s article.
Currently, the majority of equity capital for cannabis businesses in both Canada and the United States is being raised by boutique investment banks. While initially investors in the cannabis industry included individuals and a limited number of small venture capital and private equity funds, larger established funds have recently begun to turn their attention towards the industry.
Whether VC firm, institutional investor or startup, those seeking early-mover benefit in the “green rush” will want to thoroughly assess their investment mandates, regulatory concerns, and other considerations.
[…] It is not uncommon for institutions to be prohibited from investing in portfolio companies that derive revenue from activities such as gambling, pornography, tobacco, alcohol or munitions. Institutional investors will generally negotiate excuse rights with respect to investments in portfolio companies that contravene such policies, which are typically set out in the side-letters that investors negotiate alongside the limited partnership agreement of the fund.
Mainstream VC and P funds looking to invest in the cannabis industry should assess whether their institutional investors are subject to internal policies that would prohibit them from investing in cannabis and consider ways to structure cannabis investments to address the concerns of their institutions, including through the use of side-letter provisions to address confidentiality, reputational risk and other concerns (and, where necessary, by granting excuse rights).
To read the full article, click here.
For more articles from the new Torys Quarterly, click here.