Wellington Weekly

Wednesday Market Note (Incl. An ECM Update)

April 28, 2021

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Here we go.

The story hasn’t changed across the new issue market, with very few companies tapping investors for cash.

As US MSOs begin to report earnings, I am hearing more talk about distressed or stressed Canadian cannabis companies (mainly LPs) quietly marketing rescue financing across the street. This news comes as no surprise as the capital markets have been closed for the better part of 12+ months (with the exception of Jan/Feb) for Canadian LPs. Canadian LPs continue to burn remarkable amounts of cash, with no bridge to profitability in sight.

MindMed completed its long awaited listing on the NASDAQ. The listing was well timed, following news of Peter Thiel’s backed psilocybin company, ATAI Life Sciences, announcing a US$100M IPO. MindMed shares have been on a remarkable run-up, closing the day above C$5.50 - shares are up nearly 100% in just over a week.

I’ve highlighted many similarities between the psilocybin space and cannabis circa 2015/16, but I am beginning to notice a material difference in financing structure/book building. Leading shrooms companies are predominantly venture-backed, and US-focused. Canada is not a consideration (rightfully so), unless you consider the less promising issuers. If you can raise capital with a lead order from names such as Peter Thiel - you will never have to step foot in Canada to build your book. I tend to think of MindMed as Canopy Growth’s sister company - promote-feel, egregious pro-formas, poor use of capital, but both considered leaders by market cap in their respective industries. Lastly, MindMed and Canopy are both backed by similar nefarious characters, and a notable Canadian hedge fund, MMCAP.

The relationship between Canadian dealers and MMCAP is an interesting one. Almost all new issues are built around a lead order dictating the terms, but almost all small-mid cap new issues that fall within a “hot” momentum-driven industry are built around a lead order from MMCAP. The only problem here is that MMCAP almost always comes out on top, blowing out the capital structure in the process. MMCAP’s event-driven fund is one of very few I can think of that continue to execute a death-spiral-like financing structure, while dealers building the book continue to look the other way…clipping their fees and moving on to the next. If I received word that management of one of my holdings was providing borrow to a fund such as MMCAP, I’d hit the bid and head for the door.

This is where I take issue. Let’s paint a scenario. For illustrative purposes, independent dealer Nine Capital hits the street with a $20M marketed deal of units. The book has a lead order of $7M from hedge fund RRCAP, $10M from a syndicate of other institutions/family offices, and $3M from retail. In most cases, Nine Capital has a strong sense of how this stock is going to perform - and if they don’t, I’d suggest those bankers open their eyes. But, the book is marketed in its most simplistic form - a lead order of $10M from an institution. The retail orders flow in, followed by retail orders on the secondary market from those that couldn’t participate. Little does the retail know, that $10M lead order is preceded with a short of the stock - something considered grey area in Canada, and illegal in the US. But the bankers don’t care - they’ve made good on their promise for a fully-subscribed book. Rinse and repeat.

This type of structuring is prevalent across industries and deals in Canada where valuations are sky-high - management couldn’t care less about who is shorting their stock…until they do. We saw this during the rise and peak of cannabis financings, and we see it across other sectors today…such as psilocybin.

So long as the bankers get paid, they don’t really care how the stock performs. BUT, if I am a banker and I know a book is being built around an MMCAP-type lead order, so I choose to NOT participate in the issue, is that right?

I had an interesting conversation with one of my Twitter counterparts over the weekend, where we discussed the “gate-keepers” of retail. To summarize, there are a handful of shops across the street that have been “proactive” in establishing a group dedicated to screening and the diligence of new issues on behalf of retail brokers. The focus is on non-brokered deals as there is no agent or underwriter to lean on for diligence, but in the Canadian markets, non-brokered private placements are just as plentiful, if not more, than brokered deals. The diligence process is pretty high level, a sniff-test if you will, and more so to protect the firm from undue liability - but a step in the right direction nonetheless.

ECM World

Top 5 Notable Transactions

• PMML Corp.

  • US$20M RTO of subs

  • 8Cap lead w/ Cormark

• WD Growth I Corp.

  • $10M IPO of units

  • CG lead

• VOTI Detection

  • $4.3M best efforts of units (1sh + ½ wt)

  • EWP w/ Haywood, Stifel

• Surge Energy Inc.

  • $15M bought deal of FT

  • Cormark lead w/ NBF

• Awakn Life Sciences

  • $8M best efforts of subs

  • CG lead w/ 8Cap

Cheers,

G.G.