By James Francis, Chief Research Officer at CRB Monitor
Understanding which publicly-traded issuers CRB Monitor classifies as "Cannabis Linked” can be important for two different types of users:
- Compliance groups restricting cannabis for custody, asset management or investment advisory businesses; and
- Investors and investment managers interested in cannabis-linked securities deliberately.
CRB Monitor helps both types of users by defining “cannabis-linked" issuers and then identifying all relevant issuers globally, including categorizing/organizing issuers by Sector, Exchange and Degree of Exposure to the cannabis industry.
Those seeking to restrict cannabis trading are primarily institutions that are sensitive to government regulations. Because the US federal government still considers marijuana a Schedule 1 narcotic, any Cannabis Banking transaction that involves marijuana, regardless of legality at the state level would be considered money laundering by the US Federal Government. Depending on the financial institution’s particular policy regarding cannabis exposure, they may seek to prohibit every cannabis-related security, exclude just a segment of the cannabis industry (such as Tier One cannabis), or not exclude anything cannabis-linked at all.
Another category of investor that has become sensitive to cannabis trading is the broadly diverse group of faith-based institutions. For regulatory as well as moral reasons, religious institutions tend to restrict/exclude securities in industries with perceived negative connotations such as alcohol, tobacco, firearms, internet gambling and even crypto-currency. Faith-based investors’ aversion to owning cannabis securities, which is both federally illegal and considered immoral by some, is consistent with their prohibition of these other industries.
CRB Monitor organizes Cannabis-Linked businesses into three tiers with different sub-distinctions:
Tier One Cannabis Linked Businesses either hold cannabis licenses or own subsidiaries that are licensed for the cultivation, retail, production, processing and/or manufacturing of cannabis. The Tier One companies and owner/investors whose holdings exclude licensed US CRBs are not in violation of US federal laws. The exchanges and regulators allow these companies to acquire cannabis-related businesses outside of the US, and most of these subsidiaries are located in Canada. CRB Monitor provides coverage of all cannabis-linked businesses with any connection to the cannabis space, and institutions might be surprised at some of these companies that we define as Tier One CRBs.
Some examples of companies that investors might not think of as Tier-One Cannabis-Linked Businesses are:
- Constellation Brands, Inc. (NYSE: STZ) an international alcohol beverage company. They own a large percentage of Canopy Growth Corporation, which is a publicly traded Tier One Cannabis Related Busines. (Under CRB Monitor database rules, we would include Constellation Brands as a "Tier 1B," an owner/investor in a Tier One Cannabis Related Business.)
- Altria Group, Inc. (NYSE: MO) a holding company diversified across smokable products, smokeless products and the beverage industry. Their subsidiaries include companies such as Philip Morris, a large tobacco producer in the United States. Altria is also an owner/investor in Chronos Group, a Tier One Cannabis Related Business.
- Molson-Coors Beverage Company (TSX: TPX.A, TPX.B), a holding company that essentially operates as a brewer. Recently, Molson-Coors has acquired (through a subsidiary) a cannabis license that allows them to engage in plant-touching operations. It's early days in the cannabis industry for Molson-Coors, but we would now regard them as a Tier One Cannabis Linked Business under CRB Monitor rules because they have, through one of their subsidiaries, a cannabis license issued in Canada.
- Loblaw Companies Limited (TSX: L), a supermarket chain in Canada, has a division called Shoppers Drug Mart- a large, licensed dealer of medical marijuana products in Canada.
- Alimentation Couche-Tard Inc. (TSX: ATD.A, ATD.B), or Couche-Tard, a Canadian operator of convenience stores, owns subsidiary cannabis businesses.
Tier Two Cannabis-Linked Businesses may not have “cannabis” in their name, but they generate the majority of their revenues by supplying goods and services in the cannabis space. CRB Monitor also includes “pure play” producers of CBD products in Tier Two.
Here are examples of Tier Two Cannabis-Linked Businesses:
- Akerna Corp. (NAS: KERN), a NASDAQ-traded technology company that provides clients and government entities with a central data management system for tracking regulated cannabis products--from seed to product to shelf to customer--through the complete supply chain. Effectively 100% of Akerna's revenues are derived from the services it provides to the cannabis industry.
- Innovative Industrial Properties, Inc. (NYSE: IIPR), an internally-managed real estate investment trust ("REIT") focused on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated state-licensed cannabis facilities. Effectively 100% of IIPR's revenues are derived from Tier One cannabis operators, and, per SEC regulations, IIPR must distribute to its shareholders at least 90% of its annual earnings as dividends.
- Hydrofarm Holdings Group, Inc. (NAS: HYFM) manufactures and distributes hydroponics products such as lighting equipment, climate control devices, garden accessories and other related products to its customers in the United States. By CRB Monitor's calculations, Hydrofarm Holdings' cannabis-related revenue constitutes more than 50% of the company's overall revenue and therefore is assigned to Tier Two.
Tier Three Cannabis Linked Businesses’ relationship to the cannabis space is more incidental in nature. Cannabis would represent the source of less than 50% of the company’s revenue, and in most cases it is an incidental percentage of revenue.
Some examples of Tier Three Cannabis Linked Businesses are:
- CVS Health (NYSE: CVS), which sells products derived from hemp--CBD oil-type products.
- Abercrombie & Fitch Co. (NYSE: ANF) and Shopify Inc. (NYSE: SHOP) both carry products made from CBD.
- The Scotts Miracle-Gro Company (NYSE: SMG)’s Hawthorn division is 100% focused on providing products to cannabis cultivators. CRB Monitor designates Scotts a Tier 3 Cannabis-Linked Business because although Hawthorn generates multiple hundreds of millions in revenue from cannabis cultivators, it represents significantly less than 50% of Scotts’ overall revenue.
CRB Monitor Founder and CEO Steven Kemmerling developed the methodology for inclusion and risk tier assignment for cannabis related businesses that has become the industry standard for some of the largest financial institutions worldwide. For more information, please contact CRB Monitor today.
Wondering what a Tier 1, Tier 2 or Tier 3 CRB is?
See our seminal ACAMS Today white paper Defining “Marijuana-Related Business” and its update Defining "Cannabis-Related Business")