What Does the Shutting Down of the AdvisorShares Cannabis ETF Investment Fund Say About the Future of the Marijuana Industry?

Poseidon Cannabis ETf To Shut Down Less Than 2 Years After Launching

The impact of the failure of cannabis reform at the U.S. federal level extends beyond the scope of retail and cultivation operators in the industry. As investor enthusiasm wanes for the legally restricted cannabis sector, a prominent cannabis exchange-traded fund is set to cease operations.

As CNBC reported, AdvisorShares, the largest manager of cannabis funds, has announced that its Poseidon Dynamic Cannabis ETF will end its trading on August 25. The Fund will liquidate its assets and distribute payments to shareholders on September 1. This information has been provided through a notification on the Fund’s official website.

The investment advisor for the AdvisorShares Trust series, the Board of Trustees of the Trust, has sanctioned the liquidation of the Fund in line with a predetermined Liquidation Plan. This is according to an Addition Information Statement dated August 8, 2023, and acting upon the recommendation of AdvisorShares Investments, LLC.

The final trading day for Fund shares on the NYSE Arca, Inc. is set for August 25, 2023, and the complete closure of the Fund is slated for September 1. During the period between the last trading day and the Liquidation Date, shareholders will not have the ability to buy or sell shares on the secondary market.

However, all is not lost for investors already holding shares in the Fund at its closure.

After the Liquidation Date, the Fund will distribute cash to its remaining investors, equivalent to the net asset value of their holdings as of the close of business on the Liquidation Date. This amount will encompass any accrued capital gains and dividends. Investors who maintain their position in the Fund until the Liquidation Date will not face any transaction fees from the Fund.

The cash distribution provided to shareholders throughout the liquidation process will be regarded as compensation for their shares.

The Fund, established by siblings Emily & Morgan Paxhia, was launched on the New York Stock Exchange in November 2021, a time marked by a surge in cannabis sales due to the pandemic. However, the Fund’s closure comes as investor interest in the quasi-legal cannabis sector diminishes. This sector has encountered challenges in achieving significant growth, with declining wholesale prices and a lack of federal legal reform by Congress hindering its expansion.

In a statement sent via email to CNBC, Morgan Paxhia, one of the co-founders, acknowledged that the fund was not impervious to the broader macro-economic landscape and, more notably, the significant shift in investor sentiment that has profoundly affected the cannabis sector.

Even though nearly half of the U.S. states have legalized adult recreational cannabis usage, its federal illegality remains. Its classification as a Schedule I substance, equivalent to heroin and LSD, has prevented the industry from accessing the majority of banking services and from engaging in interstate trade. This situation has led to excess cannabis in numerous states and a subsequent price decline.

The decline in equity values has prompted investors to distance themselves from the industry, resulting in a shortage of capital.

The Fate of Poseidon Dynamic Cannabis Deteriorates with Falling Equity Values

Amid the seemingly endless postponements of federal cannabis reform, U.S. cannabis equities are entrenched in an extended bear market. Consequently, these circumstances have severely hindered Poseidon’s capacity to yield a satisfactory profit, ultimately causing it to fall victim to political stagnation.

Poseidon Investment Management was established in 2013 as one of the earliest hedge funds focused on cannabis. Since then, it has witnessed its ETF experience a substantial decrease of approximately 74% in value, in contrast to a mere 1.7% dip in the S&P 500.

With a management fee of 0.80%, the Fund’s profit generation is notably limited relative to the remaining assets under management, totaling just $2,912,951.84. Although the Fund never attained the size and popularity comparable to AdvisorShares Pure U.S. Cannabis ETF (MSOS), the current management fee is likely inadequate to cover operational expenses. Given the uncertain outlook for U.S. reform in the upcoming election year, the decision to cease operations might have been prudent.

Does that mean there is no hope for the future of cannabis investing?  Marijuana businesses today are closing for a varitey of reasons, but an investment fund usually has a 3 to 5 year outlook.  One problem with this fund closing is that it is basically a statement that “the 3 to 5 year look ahead to make a decent return is just not there”, better to put your money in other stocks or assets to make money for the next 5 years. Another problem that is known by industy insiders is that while big “sales” headlines create nice headlines, profits remain elusive for almost 75% of cannabis businesses in America according to Whitney Economics.

Big sales numbers by state are flashy, but if there is hardlyl any profits, well that is a business problem, not a sales problem.  The gray and black market that does not have to pay sales tax, licensing fees, or be subject to 240E federal taxation codes is taking that margin and becoming profitable, while legal marijuana businesses cannont do that.  The margin lies in those onerous restrictions, hence great sales numbers, but no profits to speak of at this point. 

Ultimately, the progress of the cannabis industry equities has been significantly hindered by the reluctance of Washington, D.C., to take action. Whether the unsuccessful CAOA initiative led by Chuck Schumer or the repeated failure to pass SAFE Banking despite House approval on seven occasions.

The act aims to provide legal protection to financial institutions that offer services to state-legal cannabis businesses. However, its repeated failure to pass the Senate has left the marijuana industry and related companies without access to traditional banking services.

It’s now evident that the lack of advancement has had huge repercussions. While many equities have experienced declines, Poseidon has found itself as a confirmed casualty.

In the same timeframe, the Pure US Cannabis ETF, another fund within the industry managed by AdvisorShares, experienced a significant drop of approximately 60%. Poseidon has now become the most recent victim in an industry grappling with the pressures of market dynamics and economic policies.

The preceding month, a merger valued at $2 billion between cannabis multistate operators Cresco Labs and Columbia Care disintegrated over a year after the initial acquisition announcement. Additionally, Mastercard, in a move that further isolates the cannabis industry from mainstream banking, revealed its decision last month to halt cannabis transactions on its debit cards to adhere to federal law.

Conclusion

The cannabis industry is at a pivotal juncture where uncertain regulations, volatile market dynamics, and constrained financial options shape its landscape. The difficulties faced by funds like Poseidon and the broader industry illustrate the intricate interplay between political decisions, economic forces, and legal constraints that steer its evolution. These challenges serve as a stark reminder of the imperative to navigate these multifaceted elements astutely to ensure a trajectory of sustained growth and accomplishment.

As stakeholders grapple with these complexities, it becomes increasingly evident that achieving equilibrium amid divergent factors holds the key to cultivating a resilient and flourishing cannabis sector. The path forward demands careful consideration of evolving legislative climates, adept responses to market fluctuations, and innovative financial strategies. The industry can overcome these hurdles through proactive and strategic measures, paving the way for a more stable and prosperous future.

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