South Africa’s upcoming cannabis IPOs: For “pop” and prosperity

It sounds like something only finance gurus really understand. Sure, there is economic and legal complexity required to make them happen. But the IPO – initial public offering – makes intuitive sense. In fact, it is very similar to asking your dad to invest in your first lemonade stand in primary school.

First, an IPO is genuine investing. Often when we buy shares in a company we are removed from the actual company we are “investing” in. We pay the last owner of the shares, and become the new holder of those same shares. The firm itself doesn’t see the money. They get no new capital to expand. As investors, we don’t mind. We want access to the dividends and future growth in the share price.

When we participate in an IPO, we are actually putting new money in the hands of a company to be productive. Typically it is a startup or very young business. Much like with your young self with a lemonade stand idea, they have an idea, a plan and lots of energy. They explain what they will do with the money, commit to that, and invite you to join them on the journey.

They will actually take your R100 or R1,000,000 and buy stock or rent a factory or develop a new technology.

So, there are entrepreneurial elements to buying into an IPO that aren’t present when buying market price for some shares. That feels good. Of course, that isn’t enough reason to put hard-earned money anywhere. There are two reasons people usually invest in IPOs. One happens on the very first day and the other is the long game.

IPO investors have the opportunity to enjoy a so-called “price pop” on the first day. This is an interesting economic phenomenon. In short, the price can pop up significantly from the IPO price – that is, what you pay to get in before the share starts trading – to the market price at the end of day one.

The reasons are complex and debate around them carries on as per all economic debates. Of course, it doesn’t always happen either. But the simplest explanation lies in the tried-and-tested mechanism of risk and return. When you buy a century-old JSE share, you have the comfort of that long track record. The traded share price tells you what many other investors think it is worth. An IPO is different. Sometimes you have to do more of your own homework to understand the company you’re investing in. You don’t have the luxury or years and years of expert analysts providing their comment.

Investors in IPOs deserve the potential for higher upside in return for that.

The second reason to participate in an IPO is what people call “getting in on the ground floor”. Here the first day is less relevant. Now were talking about years. And decades. You may have heard people saying things like, “If I had bought one share in Microsoft when it listed, I’d be worth X billion dollars”. That would have been getting into the elevator on the ground level of a very tall skyscraper! If you genuinely believe in the long-term prospects of the industry and the company, that’s when the ground-floor reasoning becomes compelling.

EasyEquities has created the opportunity for investors to participate in two upcoming IPOs. Both are in the cannabis industry. It is important for anyone considering investing in one or both of these to buy into not just the companies but also the industry.

The global cannabis industry is growing. You’ll find estimates online for how many billion dollars it will be worth in 2030 and 2050 and beyond. It is worth exploring those. Keeping in mind that all estimates about the future are wrong, but some are useful. It is fair to say that this is a growing industry.

What is the official status in South Africa? The Constitutional Court applied the right to privacy to set the precedent in 2018 that decriminalised private use and cultivation of cannabis. Government appears on board to enable the industry, too. As Lexology.com puts it, “In August 2021, the Department of Agriculture, Land Reform and Rural Development (DALRRD) unveiled its cannabis master plan – a two-year strategy to commercialise and industrialise cannabis in South Africa”. That process is ongoing.

Keep in mind that there are many different cannabis products. They are treated differently under South African law. You’ll have seen products on shelves advertising their CBD content. Those are regulated by the Medicines Act. THC, however, is the psychoactive component. The ever-changing framework covering this element is something the cannabis investor should read widely on. You’ll want to know what is simply “not illegal” and what actually actively regulated. What can be used privately, what needs a permit, and what is contained in proposed legislation. Just as important, what are the IPOs you’re considering planning to do with the capital you provide them?

EasyEquities have secured the opportunity to participate in the IPOs of SilverLeaf Investments and Cilo Cybin Holdings.

SilverLeaf aims to raise R7 million to invest in various parts of the South African cannabis value chain, including things like cultivation, product development and distribution. According to the company, “Silverleaf has received almost 200 proposals from cannabis-related companies seeking funding, but to date has only invested in SAHPRA-licensed Druid’s Garden. However, the company is eyeing two new investments and is gearing up for more business ahead of the anticipated regulatory changes that will allow the commercial trade in cannabis.”

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Cilo Cybin’s IPO involves listing shares on the JSE, targeting R2 billion. Part of the plan is to acquire a Pretoria cannabis manufacturing facility and “supersize” it.. According to an interview CEO Gabriel Theron gave to Bloomberg, they aim to follow this up by acquiring companies that test brain health and genetics, and even get into psilocybin (the active ingredient in magic mushrooms). The company’s prospectus is available online. It is a treasure trove of information on not just the company and its plans, but the cannabis and psychedelics industries globally and locally.

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IPOs may be far simpler than finance gurus would have you believe. But that doesn’t mean investing in them is easy. If this note has conveyed one message, it should be that you’re best off doing some research before participating in an IPO. Decide why you’re investing. Are you buying for the pop or the prosperity? Or both? Is yours a vote for the industry prospects? Or is your conviction based on the company itself? Both of those are entirely valid things to buy into. And nothing is holding you back. The information is all around us.

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Sources –EasyResearch, Cilo Cybin Limited, Silverleaf Limited