The Next Frontier: Cannabis Investing - KingsCrowd

July 24, 2019

The Next Frontier: Cannabis Investing

 

Yesterday on Capitol Hill, the Senate Banking Committee held a hearing on relaxing restrictions on banks providing services to cannabis companies. The Committee heard arguments in favor of the Secure and Fair Enforcement Banking Act of 2019 (the SAFE Banking Act). 

The Act’s stated purpose is “to increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses.” In lay terms, since marijuana is still not legal under federal law, banks and financial institutions avoid doing business with these companies for fear of getting hit with charges of money laundering or racketeering. 

As a result, these businesses often go “unbanked” with no place to keep their cash balances – or (and this is where crowdfunding comes in), obtain financing. So in honor of yesterday’s hearing, I thought I would turn my focus today to Fundanna and the companies utilizing the platform to finance their endeavors.

Fundanna was founded as the “first Reg CF portal dedicated exclusively to the cannabis businesses in the United States” and mentions the challenges in obtaining funding for these companies was a motivation behind its founding. As it targets a very specific market, it should not be surprising then that in my data (collected since October of 2017) there are only 9 offerings. Compare that to the 227 Wefunder and 406 StartEngine offerings I discussed the other week, and we’re definitely looking at a smaller pool of offerings. But if it’s important enough for Capitol Hill, it’s important enough for us to take a look at too. 

Looking at a high level, Fundanna has worked out ok for the companies raising capital. 6 of the 9 offerings in our sample have hit their target, with two offerings passing the million-dollar threshold (although it appears one of those offerings had to refund its investors due to regulatory issues). Of the three offerings that are currently live, all have hit their targets, with one offering, 420 Real Estate, nearing $450K from nearly 1,000 investors. In total, these offerings have raised commitments of $3.0M, for an average of $337K per offering – and they’re only asking for $15K!

Of the 6 offerings that have achieved their goal, 3 of them reached their target in the first week of the offering, with the offerings averaging $20K in commitments during the first 7 days. And Fundanna’s investors appear to be a loyal group. Offerings on the platform average 480 investors per offering (compared to 237 and 116 for Wefunder and StartEngine), with Transatlantic Real Estate crossing 2,500 investors. On average, these investors are kicking in $773 per investment, in line with the average investment on StartEngine ($751). 

So why the focus on Fundanna this week? Reg CF was brought about to open up these investment opportunities to a new class of investors, while at the same time bringing about new avenues of financing for firms who have been shut out of the traditional markets. The fact that there is a bill in the Senate right now focused on trying to open up traditional financial markets to these firms illustrates the usefulness of Reg CF for firms in this industry, and the necessity of platforms like Fundanna, and the greater crowdfunding marketplace.


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About: John Aland

John is an Accounting PhD candidate at the University of Michigan’s Ross School of Business. His research interests include crowdfunding, disclosure, and debt contracting. Prior to Michigan, he worked as an auditor at KPMG in Philadelphia for seven years, leaving the firm as an audit manager. John has a BS in Accountancy from the University of Notre Dame. He can be reached at alandj@umich.edu.

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