Amid the vast ocean of red ink that marijuana stocks have fallen into, Mitch Baruchowitz and Peter Lee see an even more vast opportunity to make money.
Baruchowitz and Lee run the blank-check company Merida Merger Corp.
, which raised $120 million earlier this month, via a dual listing on the Nasdaq and Canada’s Neo Exchange under the symbol MMK.U. They plan to use the cash to merge with or acquire a yet-unnamed cannabis business — but aren’t interested in Canada, and likely won’t work with companies with operations in just a single U.S. state.
Even to work with a so-called U.S. multi-state cannabis operator, Baruchowitz says, would require a situation that is “a little bit unique, with a unique value proposition, because obviously the world has voted on MSOs and they voted that the market for MSOs might have gotten a little overheated.”
Lee said he’s thinking about and looking for a generation of cannabis companies that will be “a new wave and a little different, and in some ways it’s hard to be specific about what that looks like.”
The listing in Canada is designed to provide the acquisition company with a greater array of options when examining potential deals. Because marijuana is illegal under U.S. federal law, the Nasdaq would likely delist Merida if it makes a deal with a weed producer or seller. By listing on the Neo Exchange, the company will remain in good standing if it does so.
Despite the listing in Canada, it doesn’t signal an interest in moving into that market. When asked whether he saw investing opportunities there, Baruchowitz said, “The short answer is no.”
The special purpose acquisition company, or SPAC, joins a handful of other, similar investment vehicles focused on the weed industry, a sector that often has trouble getting its hands on institutional money or other forms of early-stage capital required to grow a business.
Several blank-check companies have taken weed companies public at this point. MTech Acquisition transformed into Akerna Corp.
through a merger with cannabis software maker MJ Freeway. Several others such as Columbia Care Inc. and Ayr Strategies Inc. have also listed on the Neo Exchange.
“As the industry continues to professionalize, there are larger and larger companies that needed traditional growth capital, and people who need to raise $30 million, or $50-plus million — that list of opportunity, that list of [investors] who can provide that capital is very, very short,” said Peter Lee, who is acting as Merida’s president and chief financial officer.
Lee has been investing for more than 20 years and has focused on technology businesses in the past.
“Most of these cannabis companies are funded by somebody’s father-in-law or uncle, it’s very unlike the typical tech company [capital structure] that I’m familiar with,” he said.
Backed by Baruchowitz’s private equity firm Merida Capital Partners — which will own roughly 20% of the blank-check company’s stock — the SPAC is looking to use the cash to grow a business over the next three to five years. Merida Capital will lend the insights it has gleaned from the 40 portfolio companies it has invested in over the years.
Baruchowitz, who has been investing in weed companies for roughly a decade, said the blank-check company doesn’t have a target in mind at this point, with two years remaining to figure out how it wants to spend the money.
Overall, the weed SPAC’s objectives revolve around broad investing axioms such as selecting a strong executive group, and a company with unique advantage that can sale exponentially.
“There’s a lot of profit to helping companies resolve friction to hitting their core markets, or hitting their stride,” Baruchowitz said when MarketWatch pressed for specifics. “So if you can identify friction that does exist, or will exist — and if you can identify the tools, whether its electronic tools or on-the-ground tools — if you can identify what resolves that friction, there is a lot of profit in stuff people need … In terms of the production of products, I think the profitable models tend of be companies who don’t need to add as much infrastructure once they get to a certain size, or scale.”