Cannabis Wheaton Income Corp.’s chief executive and marijuana industry pioneer Chuck Rifici admits the intricacies of large private placement deals are not his forte.
But he trusts the Vancouver-based company’s team of legal and banking experts would have flagged any conflict of interest in the controversial $80-million private placement cancelled last Monday amid questions about the personal stakes taken in the deal by some of those very same advisers.
“As an entrepreneur, I rely on the professionals around me and this issue was not raised as an issue going into our financing as something that would preclude our deal,” he said in an interview. “What was disclosed was vetted by lawyers for both underwriters and Cannabis Wheaton. If (conflict of interest) was the case, I would suspect that our disclosure would have been different.”
Rifici moved swiftly to contain the damage fuelled by speculation about the deal’s ethics that sent the stock of the world’s first marijuana streaming company plunging 70 per cent from its peak of $3.35 per share reached ahead of its public listing in May.
Though he “categorically” denied that there was any wrongdoing in the way the company went about raising its money, Rifici spent a busy weekend negotiating with investment bankers to improve the optics of the deal, which was finally scrapped and a new $50-million deal put in its place.
There is perhaps no one more familiar with how to get up after being knocked down in the nascent marijuana space than Rifici. The man who has been called “the Godfather of Canadian weed” is used to controversy and even boasts it has helped his career.
As the former chief financial officer of the federal Liberal party, his name has been thrown into political spats about cannabis sector cronyism — though he points out it was a Conservative government that gave another company he co-founded, Tweed, one of the first medical marijuana licences back in 2013.
And as chief executive of that company, now called Canopy Growth Corp., Rifici was instrumental in planting the seeds of growth at the world’s first cannabis unicorn — a $1-billion valuation. That is, of course, before he was ousted by the board in 2014 shortly after it became North America’s first publicly listed marijuana company.
He and fellow co-founder Bruce Linton made the decision to list publicly not because they expected to attract huge amounts of capital the way companies do now, but because the resulting attention in an advertising-restricted market was key to distinguishing the company with early customers.
But Rifici is also no stranger to taking legal action when the controversy no longer benefits him. He’s involved in a libel suit against former MP Rona Ambrose for retweeting a disparaging remark and also a wrongful dismissal suit against Canopy, whose board ousted him as chief executive in 2014.
In Canopy’s early days, a partnership was struck in which Rifici would serve as chief executive and take a 70-per-cent stake, while Linton, who was busy with other ventures, would act as chairman for 30 per cent.
“That’s probably been something he regrets given how healthy the industry has become,” Rifici said.
The company’s early growth — which included growing from zero to 50 employees in eight months — also led to a cash burn that put the company, which was not yet earning revenue, at a financial crossroads. It became increasingly clear that difficult decisions needed to be made about which co-founder’s vision the company should follow, Rifici said.
Linton’s point of view on what happened is slightly more succinct, if less diplomatic: “He was fired by the unanimous consent of the board.”
Nevertheless, Linton, who is now Canopy’s chief executive, is rooting for Cannabis Wheaton to overcome its current controversy, he said, because it has reflected poorly on the entire nascent sector.
Rifici insists he isn’t bitter despite his suit against the Canopy directors, including Linton. He considers getting fired as a founder a “rite of passage.” It certainly didn’t stop him. Determined to be a part of a sector he helped launch, and still with a 19-per-cent share of a company skyrocketing toward a billion-dollar valuation, he came up with a new venture to put in place once his one-year non-compete clause was up: a private holding company that would invest in lucrative aspects of the business that do not involve a federal government licence.
That company, founded in 2015, is called Nesta Holding Co. and it casts a wide net that includes everything from proprietary products to snapping up Canadian brand rights.
Cannabis Wheaton, the highest-profile Nesta company, had a business model Rifici felt was too good to pass up — providing seed money and guidance to marijuana producers in exchange for a slice of future production — despite his reluctance to be involved with licensed producers.
The royalty company has already invested in 15 companies in six provinces, including some of Canada’s existing 40 licensed producers as well as new applicants. Rifici said those deals are completely unaffected by the controversy surrounding Cannabis Wheaton’s recent financing.
After Cannabis Wheaton’s public debut in May, the company embarked on a roadshow to sell potential investors on its unique business model, but it was soon overshadowed by questions about how it is financed.
Company insiders, who hold about 55 per cent of the company’ stock, purchased shares at fractions of a penny earlier this year before it went public in a reverse takeover of TSX venture-listed shell Knightwood Capital. The controversy eventually boiled over and an $80-million financing deal was scuppered when Eight Capital and Knightwood Capital, who lead the deal and own eight per cent of the company, “mutually agreed” to terminate it on June 5.
The next day, Cannabis Wheaton said it was launching a $50-million financing with a new investment bank, Mackie Research Capital Corp. And it announced the following day that its lawyer Hugo Alves, who owns a “significant” personal stake in the company, was leaving his firm, Bennett Jones, to become the company’s president.
Those early backers are making a hefty return even under the new deal, which prices the stock at $1, down from $1.15 in the cancelled agreement.
“Any false information doesn’t help when you’re in the middle of a transaction,” Rifici said. “The message was that these were investors and bankers second, these are people that made an investment into a company before there was really a business there.”
Alves said in hindsight perhaps having his firm advise the company on the deal was not the right move, not because of a conflict of interest, but from a “noise” perspective.
He said he took a stake in Cannabis Wheaton in March, noting that it’s not uncommon for lawyers to take an equity position in clients as payment, and decided to join Cannabis Wheaton after first clearing it with his firm.
“It’s unfortunate that there’s noise around the deal, but that’s not something I’m going to focus on and it’s not something that in any way detracts from the fact that in my view this is a phenomenal business idea,” he said.
Rifici believes the trouble the company has encountered since it went public in May is already in the rear-view mirror and will subside further as more investors understand the many doors opened by its model.
“We’ve created a lot of value quickly and that’s going to bring a lot of volatility with it,” he said. “The cannabis space moves very fast and I’ve been through it once before and I think that’s helped prepare me for the ride ahead.”