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Part of cannabis and investing

Tilray Inc. chief executive Brendan Kennedy is a seriously smart guy. We’re talking Yale University MBA and the good sense to start investing in marijuana producers seven years ago, when legalized cannabis was something that only seemed possible after an evening in the basement with a bong.

Mr. Kennedy just made serious money taking his company public on a U.S. stock exchange. Tilray sports a US$6-billion market capitalization, and a stock price that is up more than three-fold since making its debut on NASDAQ in July. As one of the first cannabis companies to go public on the easily accessed NASDAQ exchange, Tilray has won a dedicated following among U.S. retail investors.

You would think Tilray’s success would make the company something of a trailblazer, with rival CEOs at privately owned cannabis businesses scrambling to emulate Mr. Kennedy’s approach by filing for an IPO on a U.S. exchange. Canopy Growth Corp., the largest Canadian cannabis producer by market cap, has seen a similar upswing in U.S. investor interest since listing on the New York Stock Exchange in May.

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Yet few of Mr. Kennedy’s peers plan to follow the path that Tilray so successfully forged, according to lawyers and bankers focused on the sector. They predict the dozens of cannabis companies lined up to stage initial public offerings will head to Canadian markets. The bulk of the action will continue to be on the Canadian Securities Exchange (CSE), which set records for financing activity over the first half of the year by hosting 25 marijuana-related IPOs that raised a total of $1-billion.

The logic behind choosing to go public on the CSE rather than the NASDAQ speaks volumes about CEO sentiment on cannabis markets. The decision is driven almost entirely by timing. No one knows how long the cannabis boom will last, and the sector has shown considerable volatility. It’s far easier and quicker to go public in Canada, so that’s where companies are choosing to list. And recreational marijuana will be legal in Canada in October.

Investors are diving into cannabis stocks on the belief that some of these businesses are the next Coca-Cola Co. -- global consumer-product franchises -- and that’s resulted in billion-dollar valuations on companies with millions of dollars in sales: Tilray sold US$9.7-million of marijuana in the most recent quarter.

Mr. Kennedy has knocked off six Ironman triathlons, experiences that surely helped give him the perseverance needed for the 18-month regulatory slog that preceded Tilray’s listing on NASDAQ. Corporate finance experts say under the best conditions, it would likely take nine months for a marijuana producer to stage an IPO on a U.S. exchange. Remember, smoking a joint is still illegal under U.S. federal laws.

In contrast, it can take as little as three months for a cannabis company to go public on the CSE. The road was paved by generations of junior mining and energy plays.

Mr. Kennedy was willing to put the time needed to get Tilray listed on NASDAQ because he runs a Seattle-based private equity fund, Privateer Holdings Inc., that owns a number of other cannabis business. He will benefit from establishing a robust U.S. public market for all things marijuana. For most other cannabis companies, the priority is quick access to capital.

Cannabis executives weighing the choice between Canadian and American markets also know that listing on a U.S. exchange can attract the attention of folks who approach markets the way some bikers walk into bars – looking for a fight. Toronto-based cannabis company Cronos Group Inc. started out on the TSX Venture Exchange, then opted to also list on NASDAQ in February. Like Tilray, Cronos attracted a U.S. retail investor following, and a US$3-billion market capitalization.

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Cronos came under attack last week from hedge fund Citron Research, which outlined a number of concerns with Cronos and argued the $16 stock was worth $3.50 a share. Cronus management countered the claims, but Citron’s missive showed the cannabis space now has the full attention of short sellers. At best, a short seller’s broadside is a distraction, at worst, it can cripple a fledgling public company.

Rival CEOs have nothing but respect for what Mr. Kennedy accomplished at Tilray. Any executive in this emerging industry would be thrilled to have the B.C. company’s U.S. investor following. But few rivals share Mr. Kennedy’s patience. A smooth, swift path to public markets means Canada will continue to win the vast majority of cannabis company IPOs.

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