Stoners beware, investing in High Times might sound too good to be true
America’s most iconic cannabis magazine wants to go public, allowing for anyone to own a piece of the company. But the road to dank profits may be littered with a lot of schwag.
As the U.S. inches closer toward legalization, American cannabis companies are looking to follow Canadian counterparts who have already announced initial public offerings, or IPOs. If federally regulated, experts estimate the American marijuana industry could rake in at least $132 billion in taxes and create over one million new jobs.
One company looking to cash in on the upcoming cannabis craze is an old classic, High Times. For as little as $99, you too can invest in the publication and have the chance to make millions in the marijuana space! Go to its website, navigate to the “investor relations tab,” and voilà: with the click of a button, anyone with a credit card can buy shares of the media company. With no disclaimers in sight and an encouraging message that investing in cannabis shouldn’t be limited to those with brokerage accounts, it’s easy to brush off concerns and purchase a share of the green rush.
Yet with the cannabis industry still in its infancy and a smorgasbord of new players joining the sector every day, it’s hard to decipher the good investments from the bad.
A BRIEF HISTORY
High Times has been an emblem of cannabis counter-culture since Tom Forçade, an American underground journalist and marijuana activist, started the publication in 1974. Originally meant to be a single-release magazine parodying Playboy with centerfolds featuring glistening weed plants and voluptuous bud, the first issue ended up selling over a million copies. It quickly grew in readership and popularity as weed-friendly celebrities like Bob Marley, Andy Warhol and Cher graced its covers.
After founding the magazine, Forçade ran the Underground Press Syndicate, later known as the Alternative Press Syndicate, a network of countercultural publications. In 1978, Forçade committed suicide at 33 years old, leaving behind the High Times brand — at this point an undisputable success with an estimated circulation of four million readers a month.
The magazine continued to prosper as it dared to go where others wouldn’t, openly advocating for the legalization of marijuana long before it was trendy. It hit a brief road-bump in 2004 when it attempted to stop covering weed and instead become a literary magazine. The experiment was abandoned after a few months. A few years later, though, the publication was again in trouble as the shift from print to online news led to a decline in advertising and circulation. From 2014 to 2016, the media organization plummeted from a $3.4 million profit to a $2.9 million loss, according to a regulatory filing from January of last year. That decline continued into the following year as High Times struggled to convert its dedicated readership base into a profitable digital site.
Currently, the magazine is trying to gain enough funding to go public through Hightimes Holdings Corporation, its parent company.
Hightimes first attempted to go public in 2017. When that didn’t pan out, it turned to a Regulation A+ IPO, also known as a mini-IPO, a route usually favored by smaller companies with less funding than big-name businesses.
This type of IPO has been around since the 1970s and was created by the U.S. Securities and Exchange Commission (SEC) to make it easier for young firms to raise money. In the last two decades, the number of public companies has halved and the average amount of IPOs per year has dramatically decreased. To try and remedy the situation, the SEC updated the offering framework in 2012 with the JOBS Act, signed into law by President Obama with bipartisan support. The new legislation eased regulations that many in congress thought had gotten too heavy-handed.
One of the most enticing features of a mini-IPO is that unlike a traditional IPO, it doesn’t require any underwriters. Underwriters are typically investment banks that volunteer to fund a promising idea or product. Then, the organizations sell the newly created shares of that company to institutional investors, which are organizations like Fidelity that invest on behalf of its members. Because these smaller IPOs don’t need underwriters, companies can instead pool money through individual investors in small amounts through crowdfunding.
“It’s not common, but it’s not unheard of,” says Jay Ritter, PhD, a finance professor at the University of Florida’s Warrington College of Business, about Hightimes’ fundraising approach. Ritter is known as “Mr. IPO” for his extensive work on the topic.
The SEC, which regulates exchanges like the NASDAQ, has two objectives. One is to protect investors and the other is to facilitate the raising of capital for companies, explains Ritter. Part of that investor protection is requiring firms to disclose financial information and potential risks through offering circulars, which are hefty documents that contain company data and analysis. Another protective measure is that businesses supplying direct shares to private investors are required to use a registered website that does some vetting and performs a certification process.
Although the SEC focuses on accurate disclosure and minimizing fraud, there isn’t a mandate for the federal organization to determine what is and what isn’t a smart investment, points out Ritter. “Should you have government employees deciding who can raise money and who can’t? With investor protection, should you protect people from making their own bad decision?” Ultimately, it’s up to the market to decide if a company is overvalued.
A February 2018 study by Barron’s found that of the 300 or so companies that undertook Reg A+ offerings since the new measures were introduced in the JOBS Act, only 14 non-bank firms secured a trading price. Those stocks fell an average of 40 percent in just six months of trading. Despite the low success rate, Ritter emphasizes the fact that future companies going public through a mini-IPO may not necessarily have the same poor returns. “I don’t think there is any easy fix-it that will solve all problems,” he says.
HIGH TIMES BY THE NUMBERS
The Hightimes’ investor website paints a pretty picture, but the numbers tell a different story.
Listed revenue sources include media, events and licensing deals, with a six-pronged family of brands. These brands include the OG High Times website and magazine, the well-known Cannabis Cup trade shows and Dope Magazine, among other endeavors. High Times projected 23 events for 2019, most of those being various Cannabis Cups. From the available information, it seems there have been two live events this year. The schedule notes two upcoming events.
Depending on the size of the investment, pre-IPO supporters will be sent High Times merchandise. A $1100 investment nabs them limited edition High Times investor merch; $20,000 investors receive a limited edition Cannabis Cup investor trophy; $100,000 will make anyone a lifetime Cannabis Cup VIP.
The media company was acquired in March 2017 by a group of investors led by Oreva Capital’s Adam Levin (not to be confused with the singer Adam Levine). After just a few months, Levin was named president and CEO. However on April 3, less than two years into the job, he stepped down into an executive chairman role. He was replaced by Kraig Fox, a Live Nation founder and executive, as well as a Core Media and Guggenheim Partners alum.
Ray Wang, principal analyst and founder of Constellation Research, an advisory firm based in Silicon Valley, was optimistic about Fox’s arrival. “We see Hightimes as a risky stock, but the arrival of Kraig Fox means they have a huge expansion into live events, trade shows, experiential offerings, and awards,” Wang wrote in an email to Rooster.
Other experts aren’t as convinced of Hightimes’ prospects for success. To them, the numbers just don’t lie.
According to the most recent offering circular submitted to the SEC on July 26, 2018, the company is trying to sell 4,545,454 shares of common stock at $11 a share, for up to $50 million.
Mr. IPO, Jay Ritter, highlights the contradictory nature of the company’s high valuation compared to its recent profits. “It’s not clear that they have a path to earning profits that are big enough to justify a $275 million valuation given that for 2016 and 2017, they had revenue of only $14 million and were losing money,” says Ritter. “I don’t think it’s likely that within a few years, they’re going to be earning $27 million dollars a year in after-tax profit.” At a low enough price it might be a good investment, but at $11 a share Ritter doesn’t see investors getting good returns.
Ritter points out that though mini-IPOs have more leeway than regular IPOs, they still have to follow certain legal protocols and securities fraud laws don’t disappear. So if Hightimes ends up failing, investors may have the option to take the enterprise to court. “The problem, of course, is that if the company fails, squeezing blood out of a stone is not easy,” Ritter added.
Rooster reached out to High Times for comment multiple times without a response.
THE FUTURE OF LEGALIZATION
The nationwide legalization of marijuana may improve the success rate of firms going public through mini-IPOs, at least for cannabis companies. And while Hightimes’ current roster of available products doesn’t include any cannabis items, the media organization plans to launch 420.com, a website dedicated to selling cannabis-related products. Additionally, legalization has the potential to boost Hightimes’ customer base as marijuana consumption becomes increasingly accepted in mainstream society.
Matt Hawkins, CEO of Cresco Capital Partners, a private equity firm that has been investing in the cannabis space since 2014, says this year could be pivotal in deciding the future of legalization.
The STATES Act, re-introduced in April by Senator Elizabeth Warren, would allow states to make their own cannabis laws. While this wouldn’t legalize cannabis on a federal level, it would resolve a lot of the conflict between state and national law. The SAFE Act, first introduced in February, deals with the financial side of things and would allow banks to do business with cannabis companies without breaking the law. Both pieces of legislation are at this moment being reviewed by congress.
Hawkins says the strength and size of the cannabis industry hinges on what congress decides. “There’s no doubt that no one understood the size of the black market,” he comments. “Now that we’re seeing tax dollars generated at the state level, it gives us the ability to figure out what those top line sales are on the legal side. It’s staggering.” And the market will only grow as new applications for cannabis in the food and beverage industry are discovered, he says.
Today’s biggest players are Canadian companies that have the law on their side, allowing them to fully embrace the industry. The most influential U.S. enterprises are currently Harvest Inc., Green Thumb Industries, Cresco Labs and Curaleaf. Once the law changes though, U.S. banks that previously couldn’t work with cannabis companies for fear of losing their listing on the stock exchange, will come to the industry in waves, says Hawkins. If the STATES Act or the SAFE Banking Act are passed this year, the U.S. weed industry could easily overtake its Canadian competition.
Hawkins gave his thoughts on Hightimes’ place in the sector. “I think that if they are successful, there’s no doubt that it’s been because of the rising tide of the cannabis public marketplace that has been driven primarily by the Canadian Stock Exchange and their position on listing Canadian companies that have U.S. assets.”
The cannabis space is ripe with opportunity as firms anticipate widespread legalization. Hightimes is one of 139 upcoming cannabis IPOs, according to an April report from Wyatt Investment Research. These American businesses can look to Canadian companies for guidance, but as with any newfound industry, the first few years are likely to be peppered with a limited number of successes among many more failures. Early investors should prepare themselves for a few bad trips before experiencing the high of scoring big.