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Acreage Holdings to become the next cannabis company to list on the CSE via reverse takeover

Over the weekend Acreage Holdings, formerly High Street Capital, announced their intention to go public via a reverse takeover with Ontario’s Applied Inventions Management Corporation. The company plans to list on the Canadian Securities Exchange, which seems to embrace the American cannabis industry, with the transaction completing by November 6.

Acreage Holdings officially changed their name earlier this year as part of the company’s plan to execute their large-scale cannabis roll-out plan across the United States. Acreage currently holds 20 licenses in 14 states* for cultivation, processing, and sales. The goal for Acreage CEO Kevin Murphy is to be vertically integrated in every state where they have a piece of the marijuana market, medical or recreational. Murphy will continue leading the company after the takeover along with Acreage President George Allen and CFO Glen Leibowitz.

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"Following an extensive review of strategic options, we believe an RTO best positions our company to maximize the large footprint, operational depth and powerful consumer brands that we are building," said Acreage Holdings Founder and Chief Executive Officer, Kevin Murphy in a statement. "Accessing the capital markets will provide us additional financial resources to continue innovating, bringing consumers safe, predictable cannabis products, and providing them an exemplary customer experience."

RTOs between companies that never touched cannabis before is nothing new. Curaleaf would not exist without the reverse takeover between PalliaTech and Lead Ventures, a former mining company. And MedMen Inc. (CSE:MMEN) (OTCQB:MMNFF) coordinated an RTO with Canada’s Ladera Ventures back in May, a move that was shortly followed by MedMen’s listing on the Canadian Securities Exchange. Cannabis investors are now waiting for Acreage to make a similar announcement.

Source: Acreage Holdings

The growing trend of reverse takeovers and access to fast capital

Without a stable federal policy for cannabis, American companies are using RTOs as a means to access the market in Canada. An RTO is one of the few ways American executives and investors can take advantage of Canadian capital while building a legitimate foundation in an otherwise illegal industry. And for companies looking to list on a public exchange, buying out a non-operational or closing Canadian company can speed up that process.

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Having legalized medical marijuana nearly a decade ago, the Canadian public market is operating with a well-established regulatory framework for cannabis the likes of which American markets have not seen yet.

“Canada has a very well developed ecosystem for early-stage corporate finance in the public markets,” said Richard Carleton, CEO of the CSE, in an interview with San Francisco’s Smell the Truth. “We did grow up on extractive industries like mining exploration, and oil and gas exploration and production...From our perspective, we don’t see any institutional risks to the Canadian securities exchange if we work with these [cannabis] companies.”

This would explain why many companies participating in American-inspired RTOs are involved in all kinds of industries and not just cannabis. Any access to the market is good access apparently. Pot stocks do not seem to be too picky about which industries these companies used to be affiliated with before buying them out.

Acreage CEO Kevin Murphy, Advisory Board Member John Boehner and cannabis industry analyst Matt Bottomley/ Source: Acreage Holdings

The downside of an RTO for investors

A reverse takeover may set Acreage Holdings up for success, but that same success is not guaranteed to investors. Unlike an IPO, insiders hold much of the stock during an RTO. This means that the money involved does not always pay out huge for the rest of the pot stock’s shareholders. Dilution is also forgotten about during the excitement, leaving smaller investors left with less than they originally thought.

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The potential is there, though, which is what makes these reverse takeovers so attractive to executives and investors alike. North American cannabis grew over thirty percent between 2016-17, reaching almost $10 billion. Canada’s recreational market, opening next month, has the potential to add another $5 billion. RTOs can look good on paper when investors are working with numbers like these. But applying that to a real-life portfolio can present more risks than it is worth. Before betting their dollars on another reverse takeover in cannabis, investors should do their due diligence.

*An earlier version of this article incorrectly noted Acreage's footprint was in 11 states.

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