• Many US-based cannabis companies are going public on the Canadian Securities Exchange in a nontraditional way — a so-called reverse takeover.
• Reverse takeovers are when a private company buys a shell company that's already publicly-traded.
• It's a strategy to become a public company quickly, particularly in an industry that's federally illegal in the US. 
• Going public means these companies can roll up competitors using their stock as the cannabis industry enters a wave of consolidation. But there are drawbacks to the strategy, according to lawyers.  

The legal cannabis industry is booming, and US-based startups are looking towards their northern neighbor to capitalize on the frenzy around the emerging sector.

Because cannabis companies with operations in the US aren't able to list on US-based exchanges — marijuana is federally illegal, after all — these companies have pursued a little-known strategy for quickly going public in Canada: the reverse merger.

While reverse mergers have a mixed reputation because of their link to a series of accounting scandals in 2011 involving Chinese firms that gained access to U.S. markets through these transactions, they're now becoming increasingly popular with cannabis companies. 

According to data from Dealogic, the number of US companies pursuing reverse mergers in Canada has nearly doubled in the last five years.  

What's a reverse merger?

A reverse merger, or reverse takeover (RTO), is when a private company acquires a public company that's already trading on a public exchange. 

The public company is what's known as a shell, with no real revenue or executive team, though both retail investors and big funds are able to buy and sell shares as with any other publicly-traded firm. 

"Historically, reverse mergers in the US were kind of viewed as a 'backdoor' way of going public," said Charles Alovisetti, a corporate lawyer Denver, Colorado-based firm Vicente Sederberg. But "there's nothing necessarily nefarious about it." 

Read more: A competitor is emerging to challenge the marijuana retail chain dominating the industry, and it just closed a $640 million acquisition

In a traditional IPO, companies have to register with the Securities and Exchange Commission (or in Canada the Canadian Securities Administrators) and are rigorously vetted by major investment banks, whose analysts and bankers ask a ton of detailed questions about the company's finances.

The IPO process also involves a months-long "road show" where the company and the investment bankers handling the transaction pitch the company to potential investors. 

Companies choosing the RTO route are able to skip much of that process — though smaller banks do underwrite these types of deals — and step into a public listing immediately after the acquisition closes. 

This can be useful if the company is planning to use its stock to go on a buying spree, said Samuel Dibble, a San Francisco-based partner at law firm Baker Botts.

"The one circumstance where I would say, okay, this makes sense is look: we have a really viable company. We're confident we could raise money, but we don't want to wait because we think there's a real opportunity right now to consolidate within the industry," Dibble said.

It's deal mania for US-based cannabis retailers 

Companies that go public via RTO are triggering a deal boom. 

There have been 260 cannabis M&A deals so far in 2018, up from 131 at the same point in 2017, according to data from Viridian Capital Advisors, a cannabis-focused financial advisory firm. 

MedMen, which operates a number of upscale cannabis dispensaries in California, Nevada, and New York, among other states, went public at the end of May after buying the British Columbia-based Ladera Ventures (formerly T.M.T. Resources), a shell company which previously operated oil-and-gas extraction sites in Alberta.

Acquisitions followed: in October, MedMen acquired the medical-marijuana dispensary chain PharmaCann in a $682 million all-stock transaction, nearly doubling the combined firm's footprint overnight.

iAnthus, one of MedMen's retail competitors, went public via RTO in 2016 after acquiring Genarca Holdings. In October, iAnthus scooped up the Toronto-based MPX Bioceutical in a $640 million all-stock transaction, among many other smaller transactions.

'Two buckets' of cannabis companies 

RTOs don't make sense for every cannabis company.

There are companies like marijuana cultivator Tilray, which, though majority-controlled by a US firm, predominately operate in Canada and don't violate federal law — and are therefore able to list on US-based exchanges like the NYSE.

And then there are others like MedMen that have opted to go public via a reverse merger on the Canadian Securities Exchange (CSE). The CSE is a secondary exchange based in Toronto — the more mainstream Toronto Stock Exchange won't list companies that distribute or sell cannabis directly. 

Canada has federal laws legalizing marijuana on the books, meaning Canadian institutions are able to invest in the industry, and that companies dealing with the plant directly are able to access banking services, list on public exchanges, and deduct the regular costs of doing business from their taxes.

In the US, it's a different story: while recreational marijuana is legal in 9 states and medically legal in 31, it's still considered a Schedule I drug by the US federal government.

Read more: The CEO of the biggest cannabis company in the US reveals what's next following a $682 million acquisition

US-based exchanges won't list cannabis companies with any US operations, no matter what the states say. And most institutions won't invest, fearing a crackdown from federal regulators.

That leaves them few options to raise money, other than tapping into Canadian public markets.

"The CSE has become the exchange of choice for US operators," said Joe Lusardi, the CEO of Curaleaf, a Massachusetts-based cannabis retail company that owns dispensary licenses in a number of states. "It's where investment capital is meeting the opportunity of the moment." 

Curaleaf went public via an RTO in October.

Criticisms abound about reverse takeovers 

There are a number of drawbacks to reverse takeovers for both investors and the companies themselves. 

For investors, the process of an RTO is "a lot less transparent" than a traditional IPO, said Anna Pinedo, a partner at law firm Mayer Brown.

"Oftentimes it leads to some degree of concern by the institutional investor community," Pinedo said. Companies that go public through an RTO may not have been vetted in the same rigorous way as IPOs, leading to a dearth of solid information about the company's financials, she said.

For the company itself, it may not know exactly who owns their shares since they are acquiring a shell — and the shareholders may be in it for a short-term profit, Dibble said.

"It doesn't guarantee that there's any consistent trading market or that they're truly investors out there who are interested in owning your stock," Dibble said. "There's a lot of nefarious trading activity that goes on in any thinly-traded stock." 

That can lead to short-term volatility, as in Curaleaf's example, which dropped precipitously on the day it started trading (though it has since mostly recovered). 

Dibble said he always advises cannabis companies that there are easier ways to raise money than through an RTO. 

If you can get the money from a private investor, it's cheaper and faster than an RTO — and you can control who owns shares in your company, Dibble said.

"You won't lose your strategic advantage," he added. 

This story has been updated to reflect the correct number of cannabis M&A deals in 2018.

See also:

• The top 12 venture-capital firms making deals in the booming cannabis industry that's set to skyrocket to $75 billion
• A huge marijuana company that just went public in the US saw its shares slip after a damning industry report. Here’s why cannabis investors aren’t worried.
• Hedge fund legend Leon Cooperman is investing in the marijuana industry — and it's another sign the sector is heating up

SEE ALSO: BlackRock's president says the $6.4 trillion asset manager wants to invest in cannabis stocks, but there's one key problem

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• Voters in Tuesday's 2018 midterm elections made Michigan the 10th US state to legalize the recreational use of marijuana.
• Utah and Missouri legalized the medical use of marijuana.
• Weed stocks were rallying across the board Wednesday.
• Watch Aurora Cannabis, Aphria, Canopy Growth, Cronos Group, and Tilray trade live.

Weed stocks were gaining ground early Wednesday after Michigan became the 10th US state to legalize marijuana for recreational use. Voters rejected a similar measure in North Dakota, while the legalization for medical use passed in both Utah and Missouri.

Following the results, cannabis producers were rising across the board. Here's a look at the scoreboard at 9:32 a.m. ET on Wednesday:

• Tilray (TLRY): +5.61%
• Aphria (APHA): +2.59%
• Cronos Group (CRON): +3.76%
• Aurora Cannabis (ACB): +3.92%
• Canopy Growth (CGC): +3.03%

Cannabis stocks have captured the attention of both Main Street and Wall Street this year. In August, Constellation Brands, the maker of Corona beer and Svedka vodka, announced a $4 billion investment in Canopy Growth. That led to a "green rush" into the sector, with market values of the biggest names more than doubling.

Last month, Canada became the second country to legalize marijuana for recreational use, putting a top in shares. But the future remains bright for the sector.

"We believe today, the US is where Canada was 24 months ago — with cannabis legalization a shining beacon in its not-too distant future," George Archos, CEO of Verano Holdings, said.

"Investors believed cannabis stocks were over-valued ahead of legalization, and then the stocks rocketed upward as legalization neared and took effect. Today, some analysts are questioning the valuation of US cannabis stocks. But with legalizations looming – perhaps within the next two years -- and more States creating medical and recreational programs, we believe cannabis stocks are on a firm upward trajectory, although there may be a few dips along the way."

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Michigan became the 10th state to legalize marijuana for all adults on Tuesday night, while both Missouri and Utah passed measures legalizing medical marijuana. 

Marijuana legalization was on the ballot in four states in Tuesday's midterm elections. A legalization measure failed in North Dakota. 

A total of 33 states now have some measure of legal access to marijuana. 

Marijuana legalization is sweeping the US: In June, Oklahoma voted to legalize medical marijuana, joining the number of other states that already have medical marijuana laws on the books. Ten other states, including California and Colorado, have legalized the possession and sale of marijuana to all adults over the age of 21. 

It's also one of the few hot-button topics with widespread support. According to a recent poll from Pew Research, 62% of Americans support legalizing recreational marijuana, including 74% of millennials. 

And 2018 has been a banner year for marijuana legalization in North America. In October, Canada legalized marijuana federally, becoming the first Group of Seven country to do so. Mexico's supreme court ruled in October that marijuana prohibition was unconstitutional, paving the way for the country's new leader — Andrés Manuel López Obrador — to follow Canada's lead.

Here's where marijuana won and lost in the midterms: 

SEE ALSO: This map shows every US state that has legalized marijuana

AND MORE: Here's where you can legally consume marijuana in the US in 2018

Michigan

Voters in Michigan passed Proposition 1, making it the state the first in the Midwest to legalize the possession and sale of marijuana for adults over the age of 21. The bill will allow adults to possess up to 2.5 ounces of marijuana and allow residents to grow up to 12 plants at home.

The law is more permissive than other states with legal marijuana: Most allow residents to only possess up to an ounce at a time.

North Dakota

North Dakotans voted down one of the most permissive legal marijuana policies yet on Tuesday. The measure would have set no limits on possession and legalized the commercialization of marijuana without creating a regulatory framework, per The Washington Post. 

Utah

Bright-red Utah voters passed Proposition 2, a medical marijuana measure that allows residents with qualifying illnesses to legal access to marijuana. 

Opponents and supporters of the bill agreed that Utah's legislature would convene in a special session in November to hammer out a more restrictive version of the medical marijuana bill.

• A research letter published Monday in JAMA Pediatrics found that marijuana use among pregnant women has risen from 3% to 5% since 2002.
• Though the reason for the uptick is unclear, some attribute it to the increasing legalization of marijuana across the country.
• The risks of using marijuana while pregnant have not been studied as heavily as the risks of cigarette and alcohol use, both of which have decreased among pregnant women in the last 16 years.
• Some risks include premature birth and poor visual-motor coordination.

While cigarette and alcohol use during pregnancy is on the decline, marijuana use during those nine-plus months is on the rise.

On Monday, JAMA Pediatrics published a research letter that found that marijuana use among pregnant women has risen in the US since 2002.

The letter, which looked at data from the National Survey on Drug Use and Health between 2002 and 2016, evaluated responses from more than 12,000 women over the 14-year period. In 2002, 2.9% of women surveyed reported using cannabis while pregnant. In 2016, that number had almost doubled, reaching 5%.

Despite the increase in marijuana use, researchers found that cigarette and alcohol use among pregnant women had dropped in that same time span: 9.59% fell to 8.43% for alcohol use and 17.5% fell to 10.34% for cigarette use.

Still, the question remains: Why are more moms-to-be using marijuana? And how could marijuana use impact a child's health?

Some moms-to-be may use marijuana to deal with pregnancy symptoms

The reason for the uptick in marijuana use is unclear, as the researchers merely evaluated usage, but relaxed marijuana laws across the country may have contributed to the increase in use, according to Time reporter Jamie Ducharme. Although that may be true, as ease of access can lead to more use, it doesn't quite explain why moms-to-be are turning to marijuana more frequently.

It's possible that many pregnant people are using marijuana to treat the less-than-pleasant side effects of pregnancy. In a 2015 interview with Vice, two moms-to-be said they used marijuana to cope with morning sickness. For one of the women, whose morning sickness was so severe she had to go to the hospital once a week, marijuana was also a cheaper alternative to the medicine her doctor prescribed ($20 a gram compared to $11 a pill).

Read more: Everything you need to know about Kate Middleton's pregnancy condition that causes severe morning sickness

But morning sickness isn't the only pregnancy symptom eased by marijuana use. According to NPR, several moms-to-be have reported using cannabis to manage excruciating back pain and pregnancy-related depression.

There is limited research regarding the effects that using marijuana while pregnant can have on a child, but effects do exist

While the women interviewed by Vice and NPR reported that their children were healthy from a physical and neurological standpoint, the few studies done on marijuana use during pregnancy have found that there are some negative side effects.

According to the American College of Obstetricians and Gynecologists, psychoactive compounds in marijuana can enter the placenta and expose the fetus to up to 10% of the THC that the mother receives. This, according to several studies, can lead to poor visual-motor coordination, a decreased attention span, and behavioral issues down the line.

Read more: A mom's newborn went into withdrawal, and doctors think a mysterious supplement with a viral following could be to blame

Additionally, Healthline reported that marijuana use while pregnant could lead to premature birth, low birth weight, and smaller head circumference and length. And, according to the National Institute on Drug Abuse, while there is no research done with humans that connects marijuana use to the chance of miscarriage, at least one study done with animals found that the risk for miscarriage increases if marijuana is used early in pregnancy.

It's clear that more research needs to be done to determine the effects for a child of a mother using marijuana while pregnant. If you are pregnant and considering using marijuana, it is best to consult your obstetrician.

Visit INSIDER's homepage for more.

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• California-based vape company Heavy Hitters is hiring brand ambassadors to travel and promote their products at events.
• Ambassadors will be paid $1,200 a month, plus an extra $500 credit for Heavy Hitters products.
• To apply, upload a 60-second video to Youtube and Instagram that explains why you're perfect for the job.
• You can read more details about the application process below.

WHILE A PASSION for adventure and smoking weed might not qualify you for a job in the corporate world, it might actually give you a leg up on the competition for this unique position. Heavy Hitters, a Southern California vape company, is looking to hire 20 national ambassadors. These "Heavy Hitters Originals" ambassadors will be responsible for promoting their vape cartridges at a variety of events and on social media. You don't have to be an internet celebrity, but if you have some basic social media chops and a passion for cannabis, this position might be for you.

The job description's tagline reads, "Travel. Smoke Weed. Get Paid." And it truly looks as simple a job as that. Each ambassador will be generously compensated, earning $1,200 each month in cash, plus a $500 credit for Heavy Hitters products. They'll also enjoy all-expenses-paid travel to cannabis events, be among the first to try new strains and products from Heavy Hitters, and work closely with prominent dispensaries.

To be considered, upload a one-minute YouTube video of yourself, in which you explain why you love Heavy Hitters, what makes you original, and speak to any special skills or talents you may have. Then, upload the video to Instagram with the @heavy tag.

Visit INSIDER's homepage for more.

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• The midterm elections have further loosened marijuana restrictions in the United States — Voters in three of four states with ballot proposals on marijuana approved those initiatives.
• However, medical and recreational marijuana progress may well stall after this latest round of successful ballot initiatives.
• The remaining states with marijuana restrictions are very unlikely to liberalize access without a significant push by the federal government. That is unlikely under the Trump administration.

The midterm elections have further loosened marijuana restrictions in the United States. Voters in three of four states with ballot proposals on marijuana approved those initiatives.

In Utah and Missouri, voters on Tuesday decided that patients should have access to medical marijuana.

Michigan, which already had medical marijuana, became the first Midwestern state to fully legalize pot. It joins nine other US states, Washington, DC, Canada, and Uruguay in launching a regulated recreational marijuana market.

North Dakotans decisively rejected a proposal to make marijuana legal for recreational purposes.

Before Tuesday's vote, 22 American states had adopted comprehensive medical marijuana programs.

California was the first, recognizing in 1996 the therapeutic uses of marijuana in easing the symptoms of serious illnesses like HIV, cancer, epilepsy, PTSD, and glaucoma. Recently, marijuana's potential value for treating chronic pain has garnered attention as an alternative to opioids.

No tipping point

Nationally, support for marijuana has never been stronger. Seventy-two percent of Democrats and a narrow majority of Republicans — 51% — support legalization, according to Gallup.

Strong public support and successive waves of state-level legalization in election years have led many policy analysts to argue that marijuana has reached a tipping point in the United States.

Two-thirds of all US states have now legalized some kind of marijuana. After that, the argument goes, its nationwide expansion is inevitable.

As marijuana policy researchers, we question that narrative.

Our research indicates that medical marijuana progress may well stall after this latest round of successful ballot initiatives. Recreational marijuana may continue to expand into states with legal medical marijuana but will ultimately hit a wall, too.

Our caution has to do with the particular way marijuana legalization has occurred in the United States: at the ballot box.

Ballot initiatives have power

So far, all but one of the recreational marijuana laws passed has occurred via ballot initiative, not through the state legislative process.

Seven of the first eight medical marijuana laws — those in California, Alaska, Oregon, Washington, Maine, and Nevada — were also adopted via ballot initiative.

Such direct initiatives — where citizens can put a policy on the ballot for approval — are a powerful, if nontraditional, form of policymaking in the United States.

Rather than relying on lawmakers to write and pass legislation on certain issues — often, controversial ones — ballot initiatives harness public opinion. They have been used to legalize or restrict same-sex marriage, place limitations on taxing and spending, raise the minimum wage, and much more. Some are funded by wealthy individuals with specific business interests.

Even in states where ballot initiatives have little hope of passing, they can be an important force for policy change.

In Ohio, marijuana advocates in 2015 spent over US$20 million in an effort to legalize both medical and recreational marijuana in the same ballot initiative. Ohio voters overwhelmingly said no — but the campaign revealed broad support for a medical marijuana policy.

The Marijuana Policy Project, an advocacy organization, said it would put medical marijuana on Ohio's ballot in 2016. In response, Ohio's legislature moved quickly to craft and pass its own medical marijuana legislation.

In Utah, where Gov. Gary Herbert opposed the expansive medical marijuana proposalpassed on Tuesday, lawmakers have already promised to supercede the initiative and pass marijuana legislation that would be more acceptable to conservative state legislators and the influential Mormon Church.

The limits of direct initiative

So the ballot initiative is powerful. But our analysis suggests its potential for liberalizing marijuana access in the US is nearly tapped out.

Of the 17 US states that still have no form of legal marijuana, only five — Idaho, Wyoming, South Dakota, Nebraska, and Missouri — allow direct initiatives.

The rest are mostly conservative places like South Carolina and Alabama, where legislatures have indicated reluctance to loosen restrictions. If voters there wanted medical or recreational marijuana, they would not have the option of bypassing policymakers to get the issue on the ballot.

Marijuana legalization won't end with the 2018 midterms. There is still room for recreational marijuana to expand into the 22 — soon to be 24 — states that have legal medicinal marijuana.

History shows that once people grow comfortable with medical marijuana — seeing its impacts on patients and tax revenues — full legalization often follows.

In our analysis, the remaining 13 states are very unlikely to liberalize access to marijuana without a significant push by the federal government.

That's unlikely, but not impossible, under the Trump administration.

Federal law still considers marijuana an illegal Schedule I drug under the Controlled Substances Act, meaning that as far as the US government is concerned, the plant has no medical value.

SEE ALSO: A journalist got dragged for saying 'America isn't at war' in an Election Day tweet

The Obama administration took a hands-off approach to states' legalization, allowing them to experiment. But Attorney General Jeff Sessions has directed Justice Department attorneys to fully enforce federal law in legal marijuana states.

Quietly, however, the Trump administration has also sought public comments on reclassifying marijuana. And the president himself has at times signaled support for leaving marijuana up to the states.

If Sessions leaves the Trump administration, as rumor has long suggested, the DOJ's position on marijuana enforcement could change.

And Democrats, who won control of the House on Tuesday, have previously indicated that they could push to remove marijuana as a Schedule I drug as soon as next year.

This article is an updated version of a story originally published on Oct. 31, 2018.

SEE ALSO: Washington state representative Matt Shea wins reelection after coming under FBI scrutiny for writing a how-to guide on killing non-believers in a 'holy war'

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• It's been a head-spinning 24 hours in the news cycle, particularly for investors in the scorching-hot cannabis sector.
• While cannabis bulls cheered Attorney General Jeff Sessions stepping down Wednesday — and Rep. Pete Sessions' loss — they said the federal government needed to clarify rules around banking in the industry before big institutions would jump in and the market could really open up.
• Still, the past 24 hours "is the first time I see the light at the end of the tunnel," a cannabis CEO told Business Insider.

It's been a head-spinning 24 hours in the news cycle, particularly for investors in the scorching-hot but often volatile cannabis sector.

In the past two days, Michigan became the first state in the Midwest to legalize recreational marijuana. Bright red Utah and Missouri voted to legalize medical marijuana. And two of marijuana's staunchest opponents in Washington, Rep. Pete Sessions and Attorney General Jeff Sessions, were kicked to the curb.

The Canadian marijuana producer Tilray's stock has been on wild a ride, gaining over 30% immediately after Sessions announced he was stepping down on Wednesday. The stock has since fallen over 12% during trading on Thursday, perhaps due to confusion over where Sessions' replacement, acting Attorney General Matthew Whitaker, stands on marijuana. 

Read more: Marijuana companies are using a 'backdoor' strategy to tap the public markets — and it's fueling an M&A boom

To Todd Harrison, the founding partner of CB1 Capital, a cannabis-focused hedge fund, these huge swings in the cannabis sector are just a sign of "shaking out the weak hands" and putting the shares in "firmer accounts."

All this has led the many cannabis bulls to predict that there will be some federal movement in the US on marijuana legalization — or at least to allow cannabis companies to access regular banking services — in the near future.

Paul Rosen, the CEO of Tidal Royalty, a Toronto-based firm that provides financing to US cannabis firms, said pending legislation like the bipartisan States Act — cosponsored by Sens. Elizabeth Warren and Cory Gardner — was the most likely path for the federal government to clarify its position on the patchwork of state-legal cannabis industries.

If passed, the States Act would exempt states that have legalized marijuana from the Controlled Substances Act, effectively removing a conflict between state and federal law. The bill would also clarify rules around banking and tax deductions, allowing cannabis to operate like any other industry.

And this, said Brady Cobb, an attorney who is the CEO of SOL Global Investments, is what would let big institutions — like BlackRock and Goldman Sachs — "jump headlong" into the US cannabis operators.

"This is the first time I see the light at the end of the tunnel," Cobb said.

Read more: A competitor is emerging to challenge the marijuana retail chain dominating the industry, and it just closed a $640 million acquisition

Harrison said that Sessions' stepping down was "positive on the margin" for weed's expansion in the US but that clarity around banking rules was the more "meaningful catalyst" for the cannabis industry.

"The bulls are training their ears on that," Harrison said.

BlackRock's president, Rob Kapito, said last week that his firm "will be investing" in the cannabis industry, but because most bank custodians won't clear cannabis stocks, it'd have to wait.

The first likely targets for institutional investors are the billion-dollar retail cannabis companies that operate in multiple state markets, like MedMen and iAnthus, according to Morgan Paxhia, managing partner at cannabis-focused hedge fund Poseidon Asset Management.

Big institutions are "stuck with the law of large numbers," Paxhia said. They have to focus on deals worth hundreds of millions that will actually "move the needle" on their balance sheets, he added.

"Otherwise, what's the point in terms of risk?" Paxhia said. "It's a headache for compliance."

And to most investors in the space, it's still early innings for the cannabis industry.

"In the context of 30,000 years of humanity's relationship with cannabis, 90 years of propaganda is like a pimple on an elephant's ass," Harrison said. "The best catalysts are still in front of us."

See also:

• The top 12 venture-capital firms making deals in the booming cannabis industry that's set to skyrocket to $75 billion
• The CEO of the biggest cannabis company in the US reveals what's next following a $682 million acquisition
• Hedge fund legend Leon Cooperman is investing in the marijuana industry — and it's another sign the sector is heating up

SEE ALSO: BlackRock's president says the $6.4 trillion asset manager wants to invest in cannabis stocks, but there's one key problem

Join the conversation about this story »

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• In states and districts won by Democrats, residents can expect a leftward push for expanded health care coverage, gun control, education funding, and legalized recreational marijuana.
• While Republicans remain in charge in more states, Democrats nearly doubled the number of places where they will wield a trifecta of power over the governor's office and both chambers of the state legislature.
• With a slew of new governorships and strong support from midterms results for one-party control, Democratic lawmakers are optimistic about installing liberal policies.

From New York to New Mexico, residents in a number of states can expect a leftward push for expanded health care coverage, gun control, education funding and legalized recreational marijuana as Democrats who gained new or stronger powers in the midterm elections seek to put their stamp on public policy.

While Republicans remain in charge in more states, Democrats nearly doubled the number of places where they will wield a trifecta of power over the governor's office and both chambers of the state legislature.

Democrats also broke up several Republican strongholds, forcing GOP lawmakers who have been cutting taxes and curbing union powers to deal with a new reality of a Democratic governor.

All told, Democrats gained seats in 62 of the 99 partisan state legislative chambers, according to data provided by the National Conference of State Legislatures (Nebraska is the lone state with a single, nonpartisan chamber). Democrats also added seven new governorships.

In New York, where a new Democratic-run Senate will provide the missing link in liberals' political power, the expansive agenda could go beyond guns, pot and health care to also include more protections for abortions rights and higher taxes on millionaires.

"We will finally give New Yorkers the progressive leadership they have been demanding," said Sen. Andrea Stewart-Cousins, who stands to lead the Senate when the new session begins in January.

Read more: Behind the scenes of one of the midterms' biggest upsets — Democrat Max Rose's defeat of incumbent Republican Dan Donovan on Staten Island

The US  is a deeply divided nation politically, a fact reflected in a midterm vote that gave Democrats the US House while adding to the Republican majority in the US Senate. But within states, the overall outcome of the 2018 elections was a continued trend of one-party control — Democrats in some places, Republicans in others.

For the first time since 1914, there will be only one state — Minnesota — with its two legislative chambers led by different parties.

If Republican gubernatorial candidates maintain their slim leads in Florida and Georgia, Republicans will hold full control over the governor's office and legislative chambers in 22 states compared with 14 for Democrats. Just 13 states will have a split partisan control between the governor's office and legislature, nearly matching the 60-year low point set in 2012.

There also has been a decrease in ticket-splitting between governors and state attorneys general, with the number of such divisions expected to decline from 12 to 10 as a result of Tuesday's elections.

"This is the most hyper-polarized, hyper-partisan time we've see in generations, and nobody can deny that," said Illinois state Sen. Toi Hutchinson, a Democrat who is president of the National Conference of State Legislatures.

Illinois is one of a half-dozen states where Tuesday's election put Democrats in control of the governor's office and legislature.

Democrat J.B. Pritzker, who ousted Republican Gov. Bruce Rauner, wants to legalize and tax recreational marijuana. He also has promised to push for a constitutional amendment to replace Illinois' flat income tax system with a progressive one that requires the wealthy to pay a greater share.

Democrats with new influence slated to address gun control, healthcare, and minimum wage

Democrats also are planning aggressive agendas in other states where they expanded their political power:

• Nevada is expected to pass a ban on bump stocks on guns as the state Legislature meets for the first time since the October 2017 mass shooting on the Las Vegas Strip. Democrats also will be pushing to spend more on education, expand Medicaid coverage, raise the minimum wage and require employers to provide paid sick leave.
• In New Mexico, Democratic Senate Majority Leader Peter Wirth said minimum wage and teacher pay increases will be at the top of the agenda. Democrats also could overhaul the state's approach to climate change, gun control and marijuana.
•  In Colorado, Democrats are planning a renewed push to expand health coverage, adopt gun controls, boost public education funding and enhance environmental protections.
• In Maine, new Democratic Gov.-elect and Attorney General Janet Mills has vowed to finally expand Medicaid as voters demanded in a 2017 referendum but which has been slowed by her Republican predecessor.

The states shifting to Democratic dominance can look to New Jersey, which held its governor's election in 2017 and replaced a Republican with a Democrat. With the Legislature already controlled by Democrats, the state promptly tightened gun regulations, passed a paid sick-leave requirement and restored funding to Planned Parenthood.

Read more: 7 photos that perfectly capture the history-making wave of women who won on Election Day

But it hasn't been like Christmas every day for liberals. It took a last-day deal before the budget expired over the summer to avoid a state government shutdown as Democrats disagreed over which taxes to raise. Lawmakers have missed their own deadlines on legalizing marijuana for adults, and some advocates are upset the state has not moved faster to boost the minimum wage.

New Jersey state Sen. Loretta Weinberg, a Democrat who's been in the legislature since 1992, said there's a big difference in legislative debates when there's one-party control.

"It is more about details than the broader principles," she said.

Longtime Republican-controlled states preparing for changes

Some states that became accustomed to Republican control over the past decade also will be making adjustments.

In Wisconsin, Republican lawmakers have been privately discussing ways they could limit the rule-making powers of Democratic Gov.-elect Tony Evers, who narrowly defeated Republican Gov. Scott Walker. Republican Senate Majority Leader Scott Fitzgerald said they are looking at reconstituting boards to make sure they have equal representation.

North Carolina's Republican-led Legislature did something similar after Democrat Roy Cooper won the governor's race in 2016. But Cooper successfully sued over a law weakening his influence over the state elections board.

In Kansas, Democrat Laura Kelly's election as governor immediately recasts the debate over several big fiscal issues.

She supports expanding the state's Medicaid health coverage as encouraged by the Affordable Care Act. While bipartisan backing for that has grown, supporters had not achieved the legislative supermajorities that would have been needed to overcome the opposition of Republican Govs. Sam Brownback and Jeff Colyer.

Kelly also is pledging to reinstate an executive order barring anti-LGBT bias in state hiring and employment decisions, something Brownback rescinded in 2015.

In Michigan, Democratic Gov.-elect Gretchen Whitmer broke a Republican trifecta while campaigning to "fix the damn roads" and replace aging water pipes with a multibillion-dollar infrastructure plan. But tax increases or increased borrowing could be a tough sell in the Legislature, which remains under Republican control.

The next Senate majority leader, Republican Sen. Mike Shirkey, signaled that he would oppose raising Michigan's corporate income tax and said he would fight any attempt to repeal Michigan's right-to-work laws "with every ounce of my body."

Republicans who control the Minnesota state Senate said they will fight Democratic Gov.-elect Tim Walz if he follows through with a proposal to raise the gas tax to pay for infrastructure improvements. A number of states have taken that step in recent years to fund road repairs. That includes states where Republicans control the legislature and governor's office, including Indiana, Oklahoma and Tennessee.

Split power at the Minnesota Legislature also could lead to gridlock on the top issue from the election — health care. Walz campaigned on expanding one of the state's low-income health care programs to offer a public option, but Senate Republicans have shot that down as an unworkable government takeover of health care.

___

Lieb reported from Jefferson City, Missouri, and Mulvihill from Cherry Hill, New Jersey.

___

AP reporters Jim Anderson in Denver; Scott Bauer in Madison, Wisconsin; David Eggert in Lansing, Michigan; John Hanna in Topeka, Kansas; David Klepper in Albany, New York; Morgan Lee in Albuquerque, New Mexico; John O'Connor in Springfield, Illinois; Kyle Potter in St. Paul, Minnesota; Michelle Price in Las Vegas; and Marina Villeneuve in Augusta, Maine, contributed to this report.

SEE ALSO: Democrats are reportedly gearing up to investigate Trump's actions against CNN and the Washington Post

DON'T MISS: Adam Schiff says if the acting attorney general doesn't recuse himself from the Mueller probe, he'll have to answer to Democrats

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NOW WATCH: Trump once won a lawsuit against the NFL — but the result was an embarrassment

• Aurora Cannabis reported first-quarter results on Monday.
• The marijuana grower generated $29.7 million in revenue, up 260% year-over-year.
• Watch Aurora Cannabis trade live.

The marijuana producer Aurora Cannabis jumped 4% early Monday after posting results for the quarter ending September 30. But the stock is down 5% now.

Here are the key numbers:

• Revenue: $29.7 million, +260% year-over-year
• Profit: $104.2 million, +2,826% YoY
• Gross margin on cannabis: 70%,  +12 percentage points YoY
• Total kilogram equivalents sold: 2.68 million, +201% YoY
• Production run rate early in 2019: 150,000 kilograms per year

"The commencement of adult consumer use sales in Canada has been very successful for Aurora, with strong performance across all product categories and brands,"CEO Terry Booth said in the press release.

"Our initial roll-out success demonstrates how our high-quality Aurora Standard products and well-positioned brands have resonated strongly with the consumer market and our preparedness for the logistical challenges in effectively bringing our products to market.  Given the strong unmet consumer demand evident across Canada, we are confident that our rapidly increasing production capacity will result in continued acceleration of revenue growth." 

Shares are down 21% this year.

Now read:

• Weed stocks are getting slammed as worries surface that the new attorney general could be against legalizing marijuana
• ANALYST: These are the next 4 states to legalize marijuana
• Weed stocks are surging as 2 states vote on legalizing marijuana

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• Ed Schmults, a former executive who spent years at Patagonia and orchestrated a number of turnarounds — including storied toy retailer FAO Schwarz — was recruited by a headhunter to become the CEO of cannabis firm Calyx Peak Capital.
• Schmults is now building out his team. He said in an interview with Business Insider that he's looking for candidates from smaller companies who can move fast with little support because the industry is "evolving almost daily."
• "I'm looking for people with the quintessential entrepreneurial experience," Schmults said.

When veteran retail executive Ed Schmults received an out-of-the-blue phone call from a headhunter in July, he had no idea that in just a few short months he'd end up as the CEO of a cannabis company.

As the new CEO of Massachusetts-based Calyx Peak Capital — a firm that invests in cannabis retail licenses in a number of states — he's now looking to build out his team.

And he's not looking for big-name executives.

"Some of our competitors are out there trumpeting their executives from multibillion-dollar companies, and I'm sure those men and women are awesome," Schmults told Business Insider in an interview. "But I think what you really want at the start of an industry are people who've been involved in smaller companies who can work fast, be nimble, and wear multiple hats."

Schmults said the cannabis industry is "evolving almost daily." That's why he's focusing his recruiting on people who have deep experience in smaller businesses "where everyone's going all out," rather than mega-corporations.

"You know, I'm looking for people with the quintessential entrepreneurial experience," Schmults said. "I need people who can create the reports themselves and make decisions on the fly."

Read more: Sessions is out, marijuana wins in midterms: Cannabis investors react to a head-spinning 24 hours in Washington

To Schmults, that sweet spot between startup and multibillion-dollar firm is what he knows best.

After a stint at Goldman Sachs, Schmults spent seven years at Patagonia in California and Tokyo in the 1990s — while the outdoor-oriented clothing brand was rapidly growing — before he was recruited to turn around another clothing company, Moonstone Mountain Equipment.

He parlayed that experience into executing a turnaround of FAO Schwarz, the storied New York City toy retailer.

Schmults said the headhunter calling him about the CEO position at Calyx was "one of those cock-your-head-to-the-side" moments.

"I was like, 'Huh, cannabis? I'll have to think about that,'" Schmults said. But the more he dug in, the more he realized that the potential health benefits of the plant were "astonishing."

"At the end of the day, I really liked the investors," Schmults said.

And the chance to take what he learned across his career to build a team from the ground up was a "rare opportunity" that doesn't come along so often, Schmults said.

"I just think it's a fascinating intellectual opportunity and a chance to remove the stigma," Schmults said.

See also:

• The top 12 venture-capital firms making deals in the booming cannabis industry that's set to skyrocket to $75 billion
• The CEO of the biggest cannabis company in the US reveals what's next following a $682 million acquisition
• Hedge fund legend Leon Cooperman is investing in the marijuana industry — and it's another sign the sector is heating up

DON'T MISS: 'The new avocado toast': A former Coca-Cola and AB InBev executive reveals why every food and beverage boardroom needs to be talking about cannabis

AND MORE: An executive who led turnarounds at Victoria’s Secret and American Eagle reveals what the cannabis industry can learn from big retail brands

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• Vittorio Dominelli was called a "complete idiot" in court as he pleaded guilty to eating marijuana-laced chocolate he had stolen during a January raid.
• Crown attorney Philip Perlmutter said the Toronto police officer and his partner, Constable Jamie Young, ate the chocolate while on duty.
• Twenty minutes after consuming the chocolate, Dominelli requested medical help over his police radio.

A judge in Canada called a Toronto police officer a "complete idiot" as the officer pleaded guilty to stealing and eating a marijuana-laced chocolate bar he had seized in a raid.

Vittorio Dominelli, 36, resigned from the force last week, The Globe and Mail reported.

On Friday, he pleaded guilty to attempting to obstruct justice in connection to the marijuana incident in January.

Dominelli, a father of three, was part of a raid on an illegal marijuana dispensary on January 27.

He and his partner, Constable Jamie Young, pocketed the marijuana-laced chocolate bars as they left the dispensary to get pizza for the squad, according to a statement of facts read in court by Crown attorney Philip Perlmutter.

Neither Dominelli nor Young had ever tried cannabis before the raid, the court heard.

After the raid concluded, Dominelli and Young were ordered to conduct surveillance on an after-hours bar, where the partners decided to try the chocolate bars.

They consumed all eight squares of the chocolate bar while surveying the bar and became "severely intoxicated," the court heard.

Twenty minutes later, Dominelli made an emergency 10-33 call, which is police code in Canada for "officer needs assistance," and asked for an ambulance, Vice reported.

"My heart was pounding. I felt like it was going to come out of my mouth," Dominelli said in a statement submitted as court evidence. "I realized instantly what a stupid thing I had done. At that point, I did not care anymore about the prospects of getting caught or the professional consequences. I just wanted medical help."

Dominelli was taken to hospital, where he threw up and tested positive for THC.

His attorney is asking for a conditional discharge and 200 hours of community service for the obstruction of justice charge.

"The conduct here, you cannot describe as anything other than stupid," Justice Mary Misener said in court, adding that Dominelli is a "complete idiot."

Young has also been charged with attempting to obstruct justice as well as breach of trust, but the charges have not been proven in court.

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• Canopy Growth reported second-quarter revenue that missed even the lowest estimate by a wide margin.
• Shares fell more than 7% early Wednesday.
• The cannabis producer received a $4 billion investment from the beverage maker Constellation Brands earlier this year, sparking a so-called green rush into the sector.
• Watch Canopy Growth trade live.

Canopy Growth was under pressure early Wednesday, down more than 7%, after reporting revenue that missed even the lowest estimate by a wide margin.

The cannabis producer said second-quarter revenue totaled 23.3 million Canadian dollars, missing the Bloomberg consensus of 59.1 million. The consensus consisted of three estimates, ranging from 33.7 million to 83.6 million Canadian dollars.

Canopy lost 1.52 Canadian dollars a share and showed an adjusted EBITDA loss of 57.7 million Canadian dollars, worse than the 23.7 million loss that was expected.

The company sold 2,197 kilograms and kilogram equivalents, up 9% versus a year ago, while its average selling price of 9.87 Canadian dollars represented a 24% increase.

"With extensive investments over the past year, including most notably in the second quarter, in branding and retail development, our entrance into the retail cannabis market has been a success with our SKU assortment obtaining over 30% listings market share in multi-store physical retail store networks nationwide," the company's chairman and co-CEO, Bruce Linton, said in the press release.

"With substantial product inventories on hand, new product formats coming to market as planned, a captive sales force driving increased demand through physical retail stores and increasing internal and channel efficiencies, we believe based on market conditions today that we will attain significant and sustainable market share of the Canadian recreational market."

In August, Constellation Brands, the maker of Corona beer and Svedka vodka, announced a $4 billion investment in Canopy Growth, sparking a so-called green rush into the sector and causing companies across the industry to see their valuations more than double in a matter of weeks.

The industry remained in the headlines this fall as Canada became the second country to legalize marijuana for recreational use and Michigan joined nine other US states and Washington, DC, in legalizing the drug for anyone over the age of 21.

Shares were up 63% this year through Tuesday.

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Although it is still greatly stigmatized, medical marijuana is increasing in popularity across the United States.

Today, 33 states and Washington DC have laws legalizing medical marijuana. Proponents of medical marijuana see it as an alternative to many of the addictive opioids prescribed today. "If people read the literature, they will see marijuana is not a gateway drug and it's not evil. This stigma was created decades ago, but studies prove time and again there is little basis for it," said Dr. Jacqueline Montoya, MD, and founder of GreenMed MD, a medical marijuana practice in South Florida, where medical marijuana with a prescription is legal.

"Of course marijuana is not a cure-all, but it is an excellent alternative therapy for many chronic conditions and should be available to those who can benefit from it," she told INSIDER.

Studies have suggested that cannabis can be a viable substitute for certain opioid drugs because it's not as addictive and damaging as prescription painkillers. But before you smoke a joint for your headache, Dr. Montoya explained that depending on a patient's condition, some strains may be better than others. "Sometimes it takes a little bit of trial and error to find what will work best for you," she said.

INSIDER asked Dr. Montoya which strains she prescribes most frequently at GreenMed MD. Here are her top six. 

Editor's note: While the science remains murky and various strains affect different people in different ways, we pulled product descriptions from Leafly.

OG Kush is said to "crush stress."

One of the most famous strains, OG Kush, "is cherished for its ability to crush stress under the weight of its heavy euphoria. It carries an earthy pine and sour lemon scent with woody undertones, an aroma that has become the signature of OG Kush varieties and descendants."

Blue Dream is said to deliver "symptom relief."

Blue Dream "delivers swift symptom relief without heavy sedative effects. The popular strain is often prescribed for "treating pain, depression, nausea, and other ailments requiring a high THC strain." 

Consumers say Jack Herer is "blissful."

Named after the famed marijuana activist and author of "The Emperor Wears No Clothes," Jack Herer is a popular medical grade bud. "Consumers typically describe this 55% sativa-hybrid as blissful, clear-headed, and creative."

• Executives from big retail brands and consumer-packaged-goods companies are pouring into the rapidly maturing cannabis industry.
• The financial opportunity is massive — analysts say the cannabis industry could skyrocket to $194 billion if other countries follow Canada's lead and legalize the drug.
• Expect to see more high-profile executives taking positions in cannabis companies as more markets open up.

When Ed Schmults, a veteran retail executive, received an out-of-the-blue phone call from a headhunter in July, he had no idea that in just a few short months he'd end up as the CEO of a cannabis company.

"She was working hard to put the hook in — about the size of the opportunity and the 'clean slate,' if you will," Schmults told Business Insider. She didn't initially tell Schmults that she was recruiting for a cannabis company.

"I was like, 'Huh, cannabis? I'll have to think about that,'" he said. "At the end of the day, I really liked the investors."

Schmults, now the new CEO of Calyx Peak Capital, a firm based in Massachusetts that invests in cannabis retail licenses in several states, is just one of numerous consumer veterans who have moved into the nascent industry.

Executives like Schmults see an opportunity to use their experience to help build brands, cut deals, and create the complex distribution and supply-chain networks the cannabis industry needs in order to mature.

Getting in early may also be a windfall. According to the Bank of Montreal, the cannabis industry could become a $194 billion global market if more countries follow Canada's lead and legalize the drug.

From a 'radical notion' to 'how can I get in on the action?'

To Schmults, cannabis is a "rare opportunity" to take part in creating an industry from the ground up.

After a stint at Goldman Sachs, Schmults was the chief operating officer of Patagonia and the CEO of the storied toy retailer FAO Schwarz.

While some of his former colleagues ribbed him over his "sharp career turn," Schmults said that when he described the size of the opportunity, their jokes turned to questions of how and when they could invest.

Other executives came into the cannabis industry through different paths.

Chris Burggraeve, the former chief marketing officer of Budweiser's parent company, AB InBev, found his way into the cannabis industry after MBA students at a class he was teaching at New York University submitted proposals for cannabis startups as their final projects.

Read more: A cannabis CEO who led turnarounds at FAO Schwarz and Patagonia explains why he's looking to poach 'nimble' people from small companies — rather than big-name execs

"It piqued my interest," Burggraeve said in a recent interview with Business Insider. In 2016, Burggraeve took the plunge and founded Toast, a cannabis brand geared toward upscale consumers.

When Burggraeve launched Toast, he said that leaving the traditional consumer-packaged-goods world (he held positions at Procter & Gamble and Coca-Cola before AB InBev) for cannabis was a "radical notion."

Now Burggraeve says nearly all former colleagues he speaks with have one question: How do I get in on the action?

Peter Horvath, who led the shoe retailer DSW's initial public offering in 2005 as the company's president — along with serving in C-suite positions at American Eagle and Victoria's Secret — said that jumping into the cannabis industry was a matter of "skating to where the puck is going."

Horvath said he expected cannabis products to pop up on the radars of boardrooms everywhere, from beauty startups like Glossier to retail behemoths like Amazon.

He's now the CEO of Green Growth Brands, an Ohio-based cannabis retailer backed by the billionaire Schottenstein family. The company went public on Tuesday via a reverse merger with Xanthic Biopharma on the Canadian Securities Exchange and plans to use its stock to buy dispensary licenses in new state markets like Massachusetts.

"We're going to apply what we know to a brand-new business, and the upside is tremendous," Horvath said.

Read more: Coca-Cola is eyeing a deal in the marijuana industry, and insiders say it's a sign that other beverage giants may soon dive in

There are other high-profile execs in cannabis as well.

Beau Wrigley Jr., the heir to the Wrigley fortune and former CEO of the eponymous gum company, was just named the CEO of Surterra Wellness, a medical cannabis company based in Florida.

And the publicly traded cannabis company Green Thumb Industries — whose CEO, Ben Kovler, is an heir to the Jim Beam whiskey fortune — on Wednesday closed a $290 million acquisition of three new dispensary licenses in Las Vegas; the firm is also backed by the hedge fund billionaire Leon Cooperman.

MedMen, a chain of retail cannabis dispensaries, hired Ben Cook, a former vice president at Sam's Club, as its new COO in October.

And Jakob Ripshtein, who spent 10 years at the alcohol giant Diageo, is now the president of Aphria, a publicly traded Canadian cannabis cultivator.

In August, reports surfaced that Diageo was looking at pursuing a deal with a Canadian cannabis company — and Aphria was at top of the list.

"We are seeing high-profile companies, in addition to institutional investors, waking up to opportunities in the space," Kovler said.

Read more:

SEE ALSO: 'The new avocado toast': A former Coca-Cola and AB InBev executive reveals why every food and beverage boardroom needs to be talking about cannabis

AND MORE: A cannabis CEO who led turnarounds at FAO Schwarz and Patagonia explains why he's looking to poach 'nimble' people from small companies — rather than big-name execs

Join the conversation about this story »

NOW WATCH: Trump once won a lawsuit against the NFL — but the result was an embarrassment

• US cannabis companies are going public and pursuing large acquisitions worth hundreds of millions in a race to scale up and capture what some Wall Street analysts say could be a $75 billion market.
• But a threat is on the horizon: The biggest publicly traded Canadian cannabis companies are shoring up their balance sheets to enter the US market, if, or when, federal law changes.
• All signs point to war.

A war is brewing in the cannabis industry.

US cannabis companies are going public and pursuing large acquisitions worth hundreds of millions almost every day in a race to scale up to capture what some Wall Street analysts say could be a $75 billion market in the US alone.

But a threat is on the horizon: The biggest publicly traded Canadian cannabis companies, many of which reported earnings last week, are shoring up their balance sheets to enter the US market — and they're not planning on taking any prisoners.

Take a look at all the activity:

• Acreage Holdings, a US cannabis company that counts former Republican House Speaker John Boehner (among other notable former politicians) on its board, last Thursday began trading on the Canadian Securities Exchange after completing a reverse merger with Applied Inventions Management Corp.
• Green Growth Brands, an Ohio-based cannabis retailer backed by the billionaire Schottenstein family, began trading on the CSE last Tuesday after completing a reverse merger with Xanthic Biopharma.
• Green Thumb Industries, an Illinois-based cannabis retailer, closed a $290 million acquisition of three dispensary licenses and two cultivation facilities in Nevada last Tuesday.

Many cannabis CEOs and investors point to the midterms as a sign the federal government, spurred by the firing of Attorney General Jeff Sessions and the election of a new, Democratic-led House, will start to ease federal restrictions on US cannabis companies.

If the federal government legalizes cannabis in the US — or if the Farm Bill passes, which would effectively legalize hemp products in the US — then it will be open season for both US and Canadian firms to rush into the market.

2 types of cannabis companies are gearing up for an epic showdown

There are two buckets of publicly traded cannabis companies: those that operate entirely in the US, known as multistate operators, and those that are based in Canada, known as licensed producers.

In the US, multistate operators, like Acreage Holdings and GTI, operate retail cannabis dispensaries in states where the drug is legal.

Because the federal government classifies cannabis as an illegal, Schedule I drug, major exchanges like the New York Stock Exchange and the Nasdaq won't list companies that operate in the US. To access public markets, and generate the currency needed to pursue acquisitions, these companies mostly go public on the CSE by merging with companies that are already publicly traded.

These reverse mergers have fueled a mergers-and-acquisitions boom as cannabis companies wield their stock in the race to build out their footprints — and create a moat around their business for when the northern invaders come.

Read more:Marijuana companies are using a 'backdoor' strategy to tap the public markets — and it's fueling an M&A boom

In the other bucket are the big Canadian growers, such as Tilray and Canopy Growth. Cannabis is federally legal in Canada, so these companies are able to list on major stock exchanges such the Toronto Stock Exchange, the New York Stock Exchange, and the Nasdaq, giving them access to lots of liquidity.

Both Canadian and US cannabis companies are raring to go once the US market opens

US cannabis companies operate in "open defiance of federal law," creating an unsustainable long-term situation, said John Vardaman, a former Department of Justice attorney who's now the general counsel at Hypur, a fintech startup that serves the cannabis industry.

For that reason, Vardaman expects Congress to pass the bipartisan States Act, which would protect cannabis businesses from federal interference.

And if the States Act passes, Canadian licensed producers signaled they would be ready to pounce.

Cam Battley, the chief corporate officer of Aurora, a Canadian LP, said his firm was ready to move into the US once federal laws change.

"You're seeing the American system really move quickly now," Battley said on the company's earnings call last week, referring to Michigan legalizing cannabis and states across the populous Northeast weighing cannabis legislation. "My lips are wet, my mouth is watering to get a piece of that."

"Companies such as ours would deploy massive amounts of capital in one single location or two single locations in one or two states and quickly move that product from state to state," Brendan Kennedy, the CEO of Tilray, the largest cannabis company in the world by market cap, said on the firm's earnings call last week.

This, Kennedy said, would give Canadian companies like Tilray a distinct advantage over US companies because they're already publicly traded on major US exchanges, with deep balance sheets and access to a network of institutional investors.

Meanwhile, US cannabis companies aren't able to ship product between states — even if both states have legalized cannabis. This ends up creating 33 individual state markets, making it difficult and expensive to streamline operations if cannabis becomes federally legal.

That puts US cannabis firms at a "distinct disadvantage," Kennedy said.

US cannabis companies aren't backing down, however.

Asked whether he was worried about competition from the Canadian players, Acreage Holdings' CEO, Kevin Murphy, said his newly public company had a "balance sheet to match any balance sheet."

While Murphy said all cannabis companies would benefit from changing legislation, he said he was "angling to be in first place."

"And second place for us is the first loser," Murphy said.

Read more:

• These execs are leaving behind careers at companies like Coke and Victoria's Secret to tap into the $194 billion cannabis industry
• The top 12 venture-capital firms making deals in the booming cannabis industry that's set to skyrocket to $75 billion
• Hedge fund legend Leon Cooperman is investing in the marijuana industry

SEE ALSO: Marijuana companies are using a 'backdoor' strategy to tap the public markets — and it's fueling an M&A boom

AND MORE: A competitor is emerging to challenge the marijuana retail chain dominating the industry, and it just closed a $640 million acquisition

Join the conversation about this story »

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• The world's largest asset managers are sitting on the sidelines of the marijuana industry in the US.
• Marijuana is illegal in the US at the federal level, meaning custodian banks are generally reluctant to clear stocks of marijuana companies that have US operations.
• That could change with the passage of the States Act, which securities lawyers say would give enough clarity about how the federal government would treat the nascent sector for banks and asset managers to do business.

BlackRock, the world's biggest asset manager, says it wants to invest in US marijuana stocks — but not quite yet.

There's one key problem: The $6.4 trillion asset manager can't clear US pot stocks without banking middlemen called custodians. Until that changes, BlackRock's hefty assets, along with those of other mainstream institutional investors, will be stuck on the sidelines of an industry that could skyrocket to $75 billion in the US alone.

"We will be investing, but right now, because of issues with states and the federal government in the US, some of the custodians will not clear cannabis stocks, and we will have to wait until that happens," BlackRock's president, Rob Kapito, said earlier in November at an investor conference in Toronto.

Cannabis is illegal in the US at the federal level, and the government could come down hard on a firm of BlackRock's size — as well as the custodians that support these transactions — for flouting the law.

What do custodians do?

In short, a custodian holds stock and settles trades for funds that invest in the stock market. Think of them like the plumbing that allows investors to buy stock in public companies.

The biggest custodians include State Street, Northern Trust, and Bank of New York Mellon, and tend to be sleepy and conservative.

Read more: BlackRock's president says the $6.4 trillion asset manager wants to invest in cannabis stocks, but there's one key problem

Most custodian banks are federally chartered, so it's little surprise that they wouldn't want to risk flouting federal laws by holding marijuana stocks, said Samuel Dibble, a San Francisco partner at the law firm Baker Botts. If they lost their charter, they'd be out of business.

State Street, Northern Trust, and Bank of New York all declined to comment.

The challenges that marijuana companies face in attracting these middlemen came to a head earlier this year.

The ETF Managers Group in September replaced US Bancorp, a large custody bank, as the custodian for its cannabis exchange-traded fund, ETFMG Alternative Harvest, with Wedbush Securities, a smaller broker-dealer, according to a regulatory filing.

No reason was given for the switch, and representatives for ETF Managers Group and US Bancorp declined to comment.

The episode exposed a problem with investing in publicly traded marijuana companies that operate in the US: Because marijuana is federally illegal, most banks and large institutions don't want to touch it.

While some smaller players like Wedbush may be able to take more risks than a large brokerage like US Bancorp might want to, holding cannabis stocks for a cannabis-specific fund could be like "betting the entire firm on one line of business," Dibble said.

Companies that choose to take this risk are "looking at their risk and their exposure and balancing that with short-term profitability," Dibble said.

A Wedbush spokeswoman declined to comment.

Cannabis isn't legal in the US — for now

There's an important distinction between Canadian marijuana firms and their US counterparts. Canada legalized marijuana in October, meaning it's open season for large funds to buy shares of companies that confine their operations to Canada — or at least don't cross the border into the US.

BlackRock has already invested in these types of Canadian firms, holding 4.4 million shares of Aurora Cannabis, a cannabis cultivator listed on the New York Stock Exchange, and over 700,000 shares of Aphria, a medical-marijuana firm listed on the Toronto Stock Exchange, among other Canadian cannabis holdings.

Read more: 'My lips are wet, my mouth is watering to get a piece of that': A war is brewing between US and Canadian marijuana companies to claim a $75 billion market

Vanguard, the largest provider of mutual funds in the world, holds close to 19 million shares of Aurora and 4.3 million shares of Canopy Growth, one of the largest cannabis cultivators.

But because marijuana is federally illegal in the US, companies that cultivate or sell the plant in the US can't list on major stock exchanges like the NYSE or the TSX, Canada's top trading venue. And big investors won't touch them.

Publicly traded marijuana companies in the US like Green Thumb Industries and MedMen, which are listed on a secondary Canadian exchange called the Canadian Securities Exchange, don't have big funds as investors — rather, they're high-net-worth individuals or family offices better able to take on the risks involved with stepping into a federally illegal industry.

While some investors have dabbled personally — the hedge-fund billionaire Leon Cooperman has bought shares of Green Thumb Industries — it's unlikely that any major fund would invest in marijuana companies that operate in the US until the federal government provides some clarity about how it treats the industry, securities lawyers said.

As several states have legalized recreational or medical marijuana, some cannabis investors and CEOs say they expect Congress to soon pass the States Act, a piece of bipartisan legislation that would protect cannabis businesses from federal interference.

Read more: Sessions is out, marijuana wins in midterms: Cannabis investors react to a head-spinning 24 hours in Washington

The States Act isn't full-scale legalization, but it would provide enough certainty for institutional funds to invest and for major US stock exchanges to list cannabis businesses, said Brady Cobb, an attorney and CEO of Sol Global Investments, which focuses on cannabis.

If the States Act is enacted, it might spur major custodian banks, who play a crucial role as middlemen between institutional investors and public companies, to do business in the industry — paving the way for trillion-dollar institutions to jump in.

Beyond regulatory hurdles, stigma remains

But apart from these regulatory hurdles, stigma still exists around the marijuana industry generally.

"There are a lot of institutional investors that do not want to have their name associated with cannabis," said Jordan Wellington, an attorney and chief compliance officer of Simplifya, a cannabis industry consultancy.

Investing in cannabis also comes with an extra due-diligence burden to show regulators that the money isn't flowing into the black market.

While the cannabis industry may be growing rapidly, for some big investors like BlackRock, the US cannabis industry may still be too small to make that headache worth it.

"It really comes down to risk tolerance," said John Vardaman, a former Justice Department attorney who's now the general counsel at Hypur, a fintech startup that serves the cannabis industry.

Some investors, Vardaman said, won't invest until marijuana is federally legal.

"But if you take that position and you're interested in the industry, you've already missed out on a lot of growth," Vardaman said.

SEE ALSO: 'My lips are wet, my mouth is watering to get a piece of that': A war is brewing between US and Canadian cannabis companies to claim a $75 billion market

AND MORE: Marijuana companies are using a 'backdoor' strategy to tap the public markets — and it's fueling an M&A boom

Join the conversation about this story »

• High-flying and volatile cannabis stocks have caught the attention of both Main Street and Wall Street this year.
• Canada recently became the second country to legalize recreational cannabis, and Michigan joined nine states and Washington, DC, in allowing full use of marijuana.
• The money manager Ken Mahoney explains why so-called pick-and-shovel companies are a great way to take advantage of the opportunities that cannabis brings while avoiding the volatility of weed stocks.

High-flying and volatile cannabis stocks have caught the attention of both Main Street and Wall Street this year, especially with Canada and Michigan recently legalizing the recreational use of marijuana.

While traders are embracing the opportunities of the "green rush," they should be aware of the high volatility of pot stocks, said Ken Mahoney, the CEO of the New-York based Mahoney Asset Management.

"When there is a lot of excitement about it, I get worried because the valuations are stretched," Mahoney said. "People don't do enough homework before they invest."

Mahoney, who offers clients retirement solutions, says his experience shows smaller investors always end up in the wrong direction when a new concept comes to the market because there's always a high level of uncertainty.

"It’s hard to find the ultimate winner," he said. "It's hard to be the stock picker."

So, instead of buying individual cannabis stocks such as Tilray, Aphria, Cronos Group, Aurora Cannabis, or Canopy Growth, Mahoney recommends using a "pick-and-shovel" strategy, which involves investing in the underlying technology needed to produce cannabis rather than in the final product.

Most weed stocks are new to the market and don't have a record of revenue or profits to support what Mahoney calls their "outrageous valuations." But pick-and-shovel companies, which provide services such as fertilizing, real estate, and packaging for marijuana producers, already have a well-established business and can capitalize on the opportunities that cannabis brings.

Below Mahoney gives four stock picks and explains why he likes them:

Innovative Industrial Properties

Ticker: IIPR

Industry: Real estate

The first marijuana-related real estate firm to be publicly traded, Innovative Industrial Properties (IIPR) provides real-estate solutions and capital for the medical-use cannabis industry. With big bank and direct equity investments hard to come by due to strong federal laws and regulations, IIPRs sale and leaseback option is becoming increasing popular in the industry. It currently runs over 10 properties and has more than half a dozen growers in operation.

Source: Mahoney Asset Management

Scotts Miracle-Gro

Ticker: SMG

Industry:Growing & Fertilizing

A manufacturing firm with a 150-year history. Scotts Miracle-Gro offers fertilizers, plant foods, seeds, soils and pest controls. SMG purchased of one of the top hydroponic companies in the United States, Sunlight Supply, for $450 million began to develop its presence in the marijuana market.

Coupled with the recent law changes in Canada and some US states legalizing marijuana, its hydroponics business, which is the process of growing any plant, including marijuana, has been improving.

SMG has more than 1,000 retail locations spread across major legal marijuana states in the US, so any soil, fertilizer, pest control, or even simple gardening products bought will most likely fall under the SMG brand.

Source: Mahoney Asset Management

GW Pharmaceuticals

Ticker: GWPH

Industry:Testing & medical treatment

A British bio-pharmaceutical company recognized for its use of cannabinoid-based drugs for medical treatments. In 2010, one of its products was approved and used in the UK to help treat multiple sclerosis. But more recently (June 2018), here in the United States, it was the first drug-maker to be approved for a cannabis derived drug by the US Food and Drug Administration.

Source: Mahoney Asset Management

• Rose Capital, a marijuana-focused firm founded by Wall Street veterans, closed its first $55 million fund, bringing its capital under management to $100 million.
• The fund avoids investing in "plant-touching" companies, Timothy Simon, the firm's head of capital markets, told Business Insider in an interview.
• Rose Capital joins a number of cannabis-focused funds in the New York City area as legalization sweeps the US.

The cannabis industry is seeing a wave of dedicated funds hoping to capitalize on the green rush.

Rose Capital on Thursday closed its first $55 million fund, bringing the firm's assets under management to approximately $100 million, said Timothy Simon, the firm's head of capital markets.

Based in Greenwich, Connecticut, the firm's partners include Sat Joshi, a veteran of Apollo Global Management and hedge funds Ziff Brothers and Incline Global Management, and Andrew Schweibold. Schweibold also spent time at Apollo, as well as hedge fund Vision Capital and private equity shop Delos Capital, according to LinkedIn.

The firm's Fund I is fully deployed across a range of cannabis startups, including Mary's Medicinals, a CBD oil company; Helix Biotrack, a software provider; and Eaze, a cannabis delivery service, among others.

Read more: Federal marijuana prohibition has opened a short window of opportunity for investors willing to stomach the risk

The fund primarily focuses on three verticals within the cannabis industry: consumer packaged goods, data and analytics, and distribution. Their investments are spread equally across the three verticals, Simon said.

The firm avoids investing directly in "plant-touching" companies — those that cultivate or sell marijuana directly — because of the "pricing erosion" due to the commoditization of wholesale cannabis, Simon said.

"The industry has existed for hundreds of years but has previously been supplied and managed by illicit markets," Simon said.

Simon declined to disclose the investors in the fund. Investors in cannabis-specific funds, however, are generally either high-net-worth individuals or family offices that are able to take risks that institutions can't.

Read more: 'My lips are wet, my mouth is watering to get a piece of that': A war is brewing between US and Canadian marijuana companies to claim a $75 billion market

Rose Capital joins a bumper crop of cannabis-focused investment funds led by Wall Street veterans in the New York City area.

Merida Capital, founded by Mitch Baruchowitz, a former corporate lawyer, mostly invests in later-stage cannabis companies with a focus on ag-tech and data analytics.

And Altitude Investment Management, another New York-based fund, on Wednesday closed its first $30 million fund. The firm is planning on raising another fund in the first quarter of 2019, which partner Jon Trauben — a former managing director at Barclays and Credit Suisse — told Business Insider will be "north of $100 million."

• Read more:
• A top cannabis private equity fund manager reveals how he picks companies to invest in
• The top 12 venture-capital firms making deals in the booming cannabis industry that's set to skyrocket to $75 billion
• Big asset managers like BlackRock are sitting on the sidelines of the $75 billion US marijuana industry because of one big pain point

SEE ALSO: These execs are leaving behind careers at companies like Coke and Victoria's Secret to tap into the $194 billion marijuana industry

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• With the rapid spread of marijuana legalization in the US, big law firms are discovering that the tangled web of regulations guiding the rapidly growing industry is a boon for business.
• As cannabis companies grow, merge, and start getting the attention of Fortune 500 corporations as acquisition targets, they need more sophisticated advice.
• Numerous big law firms have built out specialized cannabis practice groups to serve the nascent industry.

When Joshua Horn and his wife traveled to Colorado about five years ago, they thought they'd check out one of the state's new marijuana dispensaries for fun.

"The 'budtender' says, 'What I can do for you?'" Horn, the cochair of Fox Rothschild's Cannabis Law Practice, told Business Insider in an interview. "We actually didn't buy anything — we just wanted to see what one of these looked like."

After the two left Colorado and returned home to Philadelphia, Horn's wife said he should think about cannabis law as Pennsylvania began moving toward legalizing medicinal marijuana.

Read more: Big asset managers like BlackRock are sitting on the sidelines of the $75 billion US marijuana industry because of one big pain point

"Five years later, I'm the cochair of a national cannabis practice," Horn said. "And we have clients all over the world."

With the rapid spread of marijuana legalization in the US, once reluctant big law firms are discovering that the tangled web of regulations guiding the rapidly growing industry is a boon for business.

Following the midterm elections, some form of cannabis is now legal in 33 states, and many in the industry say it's only a matter of time before legalization sweeps the nation.

And big money, naturally, has followed.

From boutiques to big law

As cannabis companies grow, merge, and start getting the attention of Fortune 500 corporations as acquisition targets, they need more sophisticated advice on financing, tax planning, and corporate structure.

"It's one of the few emerging markets with a multibillion-dollar potential," said Seth Goldberg, a partner at Duane Morris who heads up the firm's cannabis practice.

While some boutique firms have served the cannabis industry since Colorado legalized the drug in 2012, most small law shops may not be able to negotiate complicated joint ventures or merger agreements, lawyers say.

For Christopher Barry, a longtime capital-markets lawyer who is the chair of Dorsey & Whitney's Canada Practice Group, that's exactly what piqued his interest.

A few years ago, Barry, who's based in Seattle, picked up the phone and had a representative of a multibillion-dollar Asian investment group on the line.

The representative said he was looking at evaluating marijuana investments in the US. But when he went to the fund's regular counsel — a large, white-shoe law firm — the firm turned them down.

"So the person said, 'We did a bunch of research about who could do the work and who could provide the level of service we're used too,'" Barry said. "Well, that got my attention."

Since then, Dorsey has built up a cannabis practice group across its offices in Denver, Seattle, and Toronto, with about 20 to 25 lawyers.

Barry has since helped well-known US cannabis companies like MedMen and Green Thumb Industries execute cross-border mergers — in these instances, firms that went public in Canada by merging with a publicly traded shell company.

The market for these cross-border mergers is red-hot. According to data from Dealogic, the number of US companies pursuing reverse mergers in Canada has more than doubled in the past five years, to over 16 this year from just 7 in 2013, with cannabis companies leading the charge.

Read more: Marijuana companies are using a 'backdoor' strategy to tap the public markets — and it's fueling an M&A boom

Ben Reznik, a partner at the Los Angeles-based Jeffer Mangels who has spent much of his career working on land-use issues, said he started taking work from cannabis companies in Southern California on an "ad hoc" basis.

Many partners at his firm, however, were reluctant to get in with the specter of federal illegality hovering over the industry. "So we didn't jump right into this by any means," Reznik said. He said that as the firm debated the issue internally, about 10% of the partners were "naysayers."

"They were more about, why take the risk?" Reznik said. "Do we really want to do that?" Ultimately, Reznik said Jeffer Mangels was an "entrepreneurial firm."

"There was just a tremendous need for our services," Reznik said. Now, like Dorsey, the firm earlier this year established a cannabis group.

Getting in on the ground floor of a global industry

For younger lawyers, cannabis is a way to get in on the ground floor of what is set to be a global industry.

Neeraj Kumar, a New York-based associate at Duane Morris, started his career as a corporate-securities lawyer around partners who had been practicing law for over 20 years.

Because cannabis is such a new industry — no lawyers have more than five or six years of experience in the field — "it definitely presents a unique opportunity to be a thought leader," Kumar said.

"At least in my career, there hasn't really been an industry with that opportunity," he said.

Rachel Gillette, a Denver-based partner at Greenspoon Marder, was one of the earliest practitioners of cannabis law.

In 2010, right when Colorado first started regulating medical marijuana, she quit her job as a tax attorney. "I borrowed a little money from my mom and started my own practice focusing only on representing cannabis businesses," Gillette said. "I was probably one of the first attorneys in the nation to do something like that at the time."

When she emailed her favorite law professor to tell her about opening her own practice, her professor responded curtly: "She was like: 'You're going to be disbarred.'"

Fast forward to 2018, Gillette is now a partner at Greenspoon Marder. That same professor recently reached to invite Gillette to teach a class on cannabis law.

"A few years ago, you couldn't find a large law firm to touch the area with a 10-foot pole," Gillette said. "But now I'm cool."

'More fun than a barrel of monkeys'

While many law firms have quickly built up cannabis practices, the biggest white-shoe firms aren't quite there yet. Some of the lawyers Business Insider spoke with speculated that some big firms might steer clear purely for reputational reasons.

Others said it's not worth the risk for firms with blue-chip clients.

It boils down to this: Recreational marijuana isn't yet legal in New York state, where most of the largest firms are headquartered. Though that may change in 2019, the cannabis industry may still be too small for the largest firms to take the risk of dealing with an industry that's federally prohibited, the lawyers said.

Read more: Beverage giants like Heineken and Constellation Brands are duking it out in the billion-dollar market for marijuana-infused drinks

But if the federal government removes cannabis from the list of controlled substances — or if Congress passes legislation like the bipartisan States Act — then "the floodgates will open," Reznik said.

"I think there'll be a flood of lawyers getting into the field at that point," Reznik said. "It'll be a free-for-all." And when that happens, those who are already experts in the field hope they'll have the first-mover advantage.

In any case, being at the forefront of a brand-new, exciting field is just plain fun.

"This is more fun than a barrel of monkeys," said Barry, the Dorsey & Whitney partner. "Look, I'm 71 years old. I've been practicing for over 40 years — if I weren't having so much fun with this, I'd be retired."

• Read more:
• These execs are leaving behind careers at companies like Coke and Victoria's Secret to tap into the $194 billion marijuana industry
• A marijuana-focused investment firm started by a pair of Wall Street veterans just closed a $55 million fund
• A cannabis CEO who led turnarounds at FAO Schwarz and Patagonia explains why he's looking to poach 'nimble' people from small companies — rather than big-name execs

SEE ALSO: The top 12 venture-capital firms making deals in the booming cannabis industry that's set to skyrocket to $75 billion

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• Marijuana producer Tilray sank 2.7% after a hedge fund pitched its short position in the company on Monday.
• Chris Brown, a partner at the long-short firm Aristides Capital, said at the Kase Learning Short-Selling Conference that marijuana is a "commodity business" and that the price of marijuana would "come down aggressively."
• Tilray wasn't the only marijuana producer discussed as a short target at the conference. Aphria sank close to 30% after a short seller called the marijuana producer a "black hole" on Monday.

Marijuana producer Tilray sank on Monday after a hedge fund announced it opened up a short position in the company.

Chris Brown, a partner at the long-short firm Aristides Capital, said his firm is targeting Tilray at the Kase Learning Short Selling Conference in New York on Monday.

"This is definitely commodity business," Brown said, referring to the nascent marijuana industry. Brown said the price of raw marijuana would come down over time, and "come down aggressively."

The Nanaimo, British Columbia-based producer sank $6.55, or 2.7%, following Brown's presentation.

Tilray did not immediately respond to a request for comment.

Aphria, another Canadian marijuana producer, sank as much as $1.31, or 30%, before recovering slightly on Monday after short seller Gabriel Grego, the founder of Quintessential Capital Management, said the company was a "black hole" earlier at the conference.

Read more: Famous short seller Andrew Left is creating a cannabis fund. He explains why the market's not in a bubble, but does need to 'chill out.'

Tilray and other marijuana producers have been the target of short sellers before.

Andrew Left, who gained notoriety for shorting the pharmaceutical company Valeant, opened a short position in both Tilray and the marijuana producer Cronos Group in August through his firm, Citron Research.

Left is building out a fund to focus on long and short plays in the cannabis sector.

In October, TD Ameritrade warned retail investors to steer clear of the often volatile sector.

"The marijuana and cannabis industry — sometimes referred to as the Wild West of investing — is littered with high-flyers, potentially over-valued companies, and even scams," the stock brokerage firm said in a three-minute video posted on its Youtube account.

Bradley Saacks contributed reporting.

• Read more:
• 'My lips are wet, my mouth is watering to get a piece of that': A war is brewing between US and Canadian marijuana companies to claim a $75 billion market
• The CEO of the first marijuana company to IPO in the US reveals why this was the right time to go public
• A marijuana-focused investment firm started by a pair of Wall Street veterans just closed a $55 million fund

SEE ALSO: Big law firms are building out specialized pot practices to chase down a red-hot market for weed deals

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