Though access to capital for public cannabis companies improved in early 2021, liquidity remains low for the U.S. plant-touching operators in comparison to the Canadian licensed producers.
U.S. operators have access only to lower-volume exchanges, such as the Canadian Securities Exchange (CSE) and the over-the-counter-market, which allow “touching the plant” in the U.S., because the Nasdaq and Toronto Stock Exchange (TSX) don’t allow this type of operator because it breaks federal American laws.
How much could liquidity increase for U.S. cannabis companies if they could “uplist” to higher-volume stock exchanges?
Most investment cases for cannabis equity mention uplisting to higher-volume stock exchanges with wider access to more institutional investors and liquidity. We quantify that qualitative positive below.
By our math, the liquidity as a percent of valuation would increase about 3X for stocks that move to the TSX from the CSE.
Moving to the higher-volume Nasdaq offers a 2.5X-5X improvement in liquidity from the TSX and a 12.5X-25X improvement from the OTC markets, as seen in the chart above.
Higher liquidity results in greater access to capital at a lower cost (which, in turn, means higher valuation).
Investors require a discount for illiquidity, which is typically why private companies transact at a discount to public companies. The more liquid a public company’s stock, the smaller the discount applied by investors compared to fair value.
We have written about the higher valuations and trading volumes of the public Canadian LPs compared to the public U.S. multistate operators, which we believe stems in part from greater liquidity and access to institutional investors.
Uplisting to these higher-volume exchanges would happen either as federal laws change or if the exchanges themselves change their policies (as is currently rumored at the TSX).
Our analysis scales the trading volumes for the size of the companies involved.
For example, on June 15, the Nasdaq traded 0.50% of Canopy Growth’s market capitalization (or $47 million of $9.4 billion) and the TSX traded 0.19%. The same math for Green Thumb Industries shows that the OTC traded only 0.07% ($5.5 million of $7.4 billion) and the CSE traded only 0.04%, as shown below.
We did this same calculation on 25 cannabis companies with 51 ticker symbols for the 858 trading days from Jan. 1, 2019, through June 15, 2021, to get the average percentage of each company’s market cap traded each day on each exchange to arrive at the figures in the chart above.
We provide a range for the Nasdaq volume because the exchange’s reported volume can be double-counted depending on how the trade is routed, but even in the most conservative routing assumption the volume is more than 12X higher than the OTC and 2.5X higher than the TSX.
Regardless of the range, the conclusion stands that uplisting to either the TSX or the Nasdaq would bring a significant increase in liquidity, which has historically shown an increase in valuation.