While the cannabis industry is rapidly expanding into the food and beverage sector, it faces numerous challenges as pioneers in this regulatory-sensitive field. Since the enactment of the 2018 Farm Bill, which legalized hemp and CBD, a surge of startup companies has entered the cannabis market. However, federal law still technically prohibits the use of these substances in food and beverages. The FDA’s approval of CBD in the epilepsy medication Epidiolex complicates matters further, as federal regulations stipulate that once a substance is approved as a prescription drug, it cannot be marketed in food products. Although the U.S. Food and Drug Administration held its first public hearing on cannabis this summer, and former FDA Commissioner Scott Gottlieb is advocating for clearer regulations, it may take years to establish a legal framework for these products.
This gray area in regulation has led to investor hesitance, making it difficult for some brands to secure funding. Cannabis companies must be cautious in their advertising, transportation, and manufacturing practices while simultaneously persuading wary investors to invest in their ventures. However, executives in the cannabis sector claim that as more brands emerge, overcoming these obstacles has become somewhat easier. In the last two years, venture capitalists have significantly increased their cannabis investments. For instance, in 2018, cannabis startups in the U.S. attracted a record $1.5 billion in venture capital, and this year has already seen an additional $2.1 billion raised as of November, according to data from Pitchbook.
Greg Wank, head of Anchin’s food and beverage industry practice, described the current environment as “different shades of gray.” While the FDA hasn’t legalized the use of cannabis in food, it is also not removing existing products from the market. This situation has created an “area of risk tolerance” that companies and investors must assess. Wank categorizes cannabis as a high-risk, high-reward investment, noting that investors have numerous other opportunities for their funds.
As brands navigate the complexities of this sector, both companies and investors are learning how to secure funding amid the murky regulatory landscape. Following the Farm Bill’s passage, smaller food and beverage companies are racing to introduce CBD products, including coffee, cocktails, jelly beans, and snacks. A report from Rabobank noted that CBD is entering food and beverage products at an “astounding pace.” However, securing funding for these brands remains challenging. Matt Oscamou, co-founder of CBD-infused food and beverage company Weller, highlighted the “plenty of challenges” in raising capital for cannabis products, which are likely to persist for the foreseeable future. He emphasized the importance of being transparent with investors about the challenges cannabis brands encounter.
Oscamou noted that Weller recently raised $3 million in a funding round led by Brand Foundry Ventures, which allowed the company to enhance production and marketing efforts, expand its sales team, and grow the brand. Despite an increase in investments, there remains a level of caution. Oscamou mentioned that engaging with angel investors—typically wealthy individuals—differs from dealing with syndicate investors, who are generally venture capital funds with stricter regulations.
In the future, it may become easier to secure funding and credit if legislation protecting financial institutions that serve cannabis-related businesses is enacted. In September, the House of Representatives passed the Secure and Fair Enforcement (SAFE) Banking Act, but it still awaits Senate approval. The Senate received the bill in September and has referred it to the Committee on Banking, Housing, and Urban Affairs. Steve Hawkins, executive director at the Marijuana Policy Project, praised the bill, stating that the cannabis industry cannot progress without equal access to financial services available to other legal businesses.
William Bogot, a partner at Fox Rothschild, warned that challenges in raising funds for CBD companies in the food and beverage sector will continue due to its federal illegality. Many companies and investors are awaiting the FDA’s decision on how cannabis can be marketed and under what regulations. Until then, consulting with attorneys specializing in FDA regulations is advisable to provide assurance to both companies and investors. Bogot emphasized that while business owners dislike stringent regulations, they are also averse to taking risks. He believes that established players and larger investments will be drawn to the sector once regulations are clarified.
For founders of cannabis-related businesses with experience in other sectors, securing investment is less daunting. David Holmes, who previously launched SpikedSeltzer and sold it to AB InBev, now leads PLNT Blend Beverages, which produces hemp-infused drinks. His previous success has helped attract investors. However, Holmes acknowledged the challenge of finding investors who support the company’s mission rather than those seeking quick profits. He aims to cultivate a consumer base interested in hemp-infused products.
Despite the risks associated with investing in this sector, early investment and research and development in this growing category can yield significant financial rewards. Wank expressed optimism about continued strong interest, noting that many believe this could become a substantial market. Currently, the global cannabis market is valued at $150 billion, with legal sales projected to account for 77% of the total market by 2025, according to a recent Euromonitor report.
Sat Joshi, interim CEO of BR Brands, described the cannabis industry as an attractive sector for growth, although funding remains scarce. Traditional financial institutions, such as banks and credit unions, are reluctant to invest due to federal illegality. Joshi pointed out that while there is strong demand for capital in this growing market, the supply is limited. This situation drives up the potential returns on investments compared to other industries. BR Brands has partnered with and invested in various companies, including Défoncé, a manufacturer of premium cannabis-infused confections, and Rebel Coast, which produces THC-infused non-alcoholic beverages. Joshi noted the absence of national brands in the edible cannabis space, presenting a significant opportunity for smaller brands to expand.
Currently, there is an opportunity to create the brands of the future, with the potential for monetization in a favorable legal environment. Joshi stated that BR Brands mitigates risk by adhering to state regulations, which include rigorous lab testing of all products. For investors, supporting companies that conduct thorough lab testing and comply with regulations can lessen risks. Many are seeking legal counsel to help them navigate the complexities of investing in cannabis brands under the current regulatory framework.
Kendall Almerico, a securities attorney for cannabis grower Goldenseed, urged potential investors and businesses to conduct thorough due diligence before entering the cannabis market. He emphasized the importance of obtaining comprehensive documentation about the company and its operations, reviewing the business plan, and consulting with an attorney familiar with the industry and its risks. Almerico advised that while there are legal risks, cannabis companies are currently operating with less fear of shutdown due to more accommodating laws.
While some experts believe the risks may outweigh the potential rewards for investors, drawing parallels to the cryptocurrency bubble, Robert Johnson, a finance professor, cautioned that individual investors are often caught up in the excitement of the cannabis market, ignoring fundamental investment principles. He urged investors and companies to view cannabis as a commodity, warning that as more growers enter the market, prices may decline. Ultimately, he advised caution in cannabis investments, suggesting that the potential for profitability remains uncertain.
In conclusion, the cannabis market, particularly in the food and beverage sector, is poised for growth, but it involves navigating a complex regulatory landscape. Companies and investors must remain informed and cautious as they explore opportunities in this evolving industry, which may eventually include innovative products like chewy calcium citrate infused with cannabis extracts.