Special purpose acquisition companies — or SPACs — have been around for decades, but they’re surging in popularity at a time when cash can be hard to come, particularly in the cannabis industry. And when cash-hungry companies cross paths with SPAC management teams with capital to offload, it can be a powerful driver of mergers and acquisitions.
“The great thing about SPACs is you can sort of do M&A alongside this transaction and within it. You could be merging something in there that is a really interesting value-added piece … or it could be a single asset, that the story really is more about them now being public,” said Joe Crouthers, CEO of Ceres Group, the cannabis investment group, that organized the SPAC Ceres Acquisition Corp.
Financing can be hard to come by in an industry as new and complicated (and in the U.S., illegal) as cannabis. It has been especially difficult to secure capital within the past year, during which companies in the nascent industry have faced a series of challenges, not least of which has been the coronavirus pandemic. According to Viridian Capital Advisors, capital raises have slowed considerably. In the first half of 2020, cannabis companies raised $2.55 billion, which is down about 66 percent compared with the amount raised during the same period in 2019. The number of transactions has also fallen by about 51 percent to 166, with public companies accounting for 89 percent of capital and 81 percent of total transactions, according to a report from Viridian, tracking deals in the first half of 2020.
U.S. cannabis companies have historically turned to the public markets in Canada for an answer to their cash problems. And SPACs are becoming a more popular cross-border mechanism for accessing the public markets, as well as for raising and dispensing capital in cannabis. Cannabis SPACs can also trade on major U.S. exchanges, so long as none of the companies they ultimately acquire are plant-touching in the U.S., according to The Street.
Cannabis SPAC initial public offerings have raised $2.2 billion since the third quarter of 2019, and $620 million in the first half of the year, according to a report from Viridian. They’ve also produced several high profile deals in the space. Columbia Care made its unconventional public markets debut in 2019 through a merger with a SPAC from Canaccord Genuity, Cannabis Business Times reported, and AYR Strategies began trading on NEO in 2019 as a result of several acquisitions by Cannabis Strategies Acquisition Corp.
Transactions like the popular reverse takeover (RTO), in which a cannabis company merges with what is essentially a shell company to go public, were — and still are — a common method in the U.S. cannabis industry for accessing public capital. They are faster and cheaper than a traditional IPO, plus they involve fewer regulatory hurdles, according to the Securities and Exchange Commission. But fewer hurdles can be both a blessing and a curse for companies with management teams that are not experienced enough to go public, but ultimately do.
SPACs, Crouthers said, are similar to RTOs, but offer certain advantages to both investors and acquisition targets. 
“Where you end up with better listings from a SPAC is that you still have that process, that full process,” he said. “It’s more of a collaborative effort to get through the end of the deal, which I think helps these companies bridge not only the financial gap but … the people running those companies have to be there as well.”
SPAC teams have a limited time, typically two years, in which to identify, vet, and acquire companies. If they fail to use the funds during the allotted window, that money is returned to investors.
SPACs also permit investors to play matchmaker with companies, in some cases combining multiple assets together to create a whole that, they wager, is stronger than the sum of its parts. The AYR Strategies deal raised eyebrows because it involved combining five separate businesses in Massachusetts and Nevada.
“Most cannabis companies don’t have it all figured out yet. There are either several small holes or a gaping hole or two in almost every business that you look at,” Crouthers said. “What’s great with the SPAC is you can use another company out there that potentially is doing an asset sale … put it right beside that other asset you are buying.”
Ceres Acquisition Corp. raised $120 million during its March IPO and is pursuing $300 million in cannabis M&A targets. Crouthers said the SPAC will target as few companies and assets as possible to keep the transaction simple. If the ideal acquisition target isn’t out there, he added, Ceres would not hesitate to consider acquiring multiple assets.
“We are sort of in the phase now of continuing to look at what’s out there, what pieces of the puzzle are out there today, and what makes sense to put together … At our size, we have the luxury of looking at single assets, as well, or operating businesses that are large enough to fill our full capital availability,” he said. 
He added later, “simpler is always better. If you can find one company that has the pieces that are important and the financial visions align, that’s the ideal. That’s the best.”
SPACs are not required to disclose what types of companies they’ll acquire, lending them the nickname “blank check companies.” But Crouthers said Ceres is targeting consumer-facing cannabis companies involved in retail, brand building, or consumer packaged goods. Since many U.S. states require cannabis companies to be vertically integrated, Ceres may well end up acquiring a company that does cannabis cultivation and production, as well. But considering Ceres went public in March, the team still has quite some time to identify its acquisition targets.
As SPACs become more popular in the cannabis industry, they promise to make M&A more interesting as management teams with money to spend and a limited time to do so attempt to create strong companies in a still-evolving space. And the sheer number of SPACs that went public within the past year means there should be a rash of M&A within the next 12 months as the clocks tick on their spending.