Cannabis Exchange Traded Funds are finally getting the green-light from U.S. regulators after Big Law has stepped up to shelter the registration process with the Securities and Exchange Commission. Cannabis Law Report, a publication covering legal challenges and rule making for the cannabis industry, asked me to report on the first two marijuana ETFs who slugged through the SEC’s rigorous process to become effective. I analysed Innovation Shares Cannabis ETF $THCX and Advisorshares Pure Cannabis ETF $YOLO. What stood out was the fund manger and their lawyers view on investing in multi-state operators – one took a tone of caution the other a brazen work around around to skirt intended rules.
Matt Markiewicz runs $THCX and Dan Ahrens runs $YOLO. Both mangers have experience in ETFs and wanted to create an ETF focused only on the cannabis business. YOLO got a head start on grabbing investors money when it beat THCX to market nearly three months with a mid-April launch date. Its current AUM is $57.9 million. THCX, which launched July 8th, has $13.3 million in assets under management. THCX is a passively managed fund that follows an index which can make changes to its holdings monthly. YOLO acts more like a hedge fund with the ability to change holdings daily. It is the only ETF that uses derivatives
(called swaps) to invest in MSOs. Both funds list on the NYSE; an exchange that doesn’t allow multi state operators to trade.
My story at CLR dives into concerns from market players, like derivatives expert Jon Najarian and Matt Karens of Greenwave Advisors, on YOLO’s use of MSO/SWAPs. While researching the story last week I saw Lara Crigger, a seasoned jouranlist for ETF.com, report that the SEC and the NYSE have their legal counsel reviewing YOLO’s move to get MSOs into the fund via swaps. Crigger reported she heard that Dan Ahrens didn’t list the swap positions when he showed the NYSE what their holdings were before launch. Nate Geraci, an investment advisor who host a popular ETF podcast, also brought up the use of swaps in an interview with Ahrens that took place on Tuesday July 23rd and aired latter.
On Monday July 29th, after investors started to tweet out my story and other publications picked up the news Noah Hamman, CEO of Advisorshares (YOLO’s parent), went on a heavy defense on twitter.
Another journalist and an investment pro had taken public note of the MSO/SWAP thing one of Hamman’s funds was doing but Hamman appeared surprised I would question Ahrens answers in our interview. Hamman apparently wasn’t use to seeing a jouranlist covering the cannabis industry do more than rewrite a press release. I wanted Ahrens to explain why he didn’t tell the NYSE about the swaps. His response in our interview was almost verbatim to what he said in the podcast that aired Monday.
“This is just silly,” YOLO’s Ahrens told Nate Geraci. Ahrens said everyone one who worked with them on the offering was very aware of the structure of the holdings in YOLO.
Now I don’t think investors find it ‘silly’ that the fund’s exchange and the SEC are questioning the funds structure. Neither the SEC or NYSE would comment on the record about YOLO.
I also asked his custodial bank, US Bancorp, to go on the record saying they think YOLO’s offering docs following the letter of the law and they wouldn’t do it. I explained in my story Advisorshares scored a huge win when it was first to get a custodial bank to agree to work with its cannabis fund.
I also noticed that the big law firm YOLO used to file their offering with the SEC, Morgan Lewis, wouldn’t sign the needed third party opinion letter an ETF now needs to become effective and made available for trading. YOLO went and got Fox Rothchild, ranked as a 2nd tier law firm, to write the opinion letter. This was in contrast to THCX whose offering and opinion letter was done by big law firm Greenberg Traurig.
Ahrens keeps saying they got an opinion letter from an expert in cannabis law. Fox Rothcild had written one other opinion letter which I don’t think makes them an expert. While we are seeing some big law firms, like Duane Morris and Greenberg Traurig, build out a cannabis business via private M&A transactions I don’t think any US law firm is an expert yet. Given the lack of cannabis companies that have IPO’d with US regulators or done an ETF, compared to the number of cannabis companies listing on Canada exchanges, how could they be?
Because of YOLO’s reaction to a profile story on new ETFs, that I didn’t think would grab a ton of readers like my blockbuster investigative reports do, turned into driving even more attention to a new cannabis publication.
The reaction to my reporting highlights one of the problems with media coverage on the cannabis market. Lots of journalist are jumping into to cover the hot sector but few are asking tough questions, know how to read a balance sheet, or fact check executives statements in filings with regulators and press releases. Sean Hocking, the editor and publisher of Cannabis Law Report, hired me after he’d seen my original reporting on the abuse and alleged fraud by Andy DeFrancesco in cannabis stocks Aphria ($APHA) and Sol Global Investments ($SOLCF).
If you are an insider or whistleblower working in the Cannabis industry and see something you don’t think is right reach out. I’ve proven over and over I will protect confidential sources and investors need better warning than most reporting is offering now.
interesting….