By Shariq Khan

(Reuters) – U.S. blank check firms eyeing cannabis companies are struggling to find suitable targets and many are merging into unrelated industries, as weak after market performance of recent Special Purpose Acquisition Corps listings dent confidence.

After Democrats won slim control over both the Houses of Congress, and promising federal reform, public cannabis companies saw some of their greatest gains in years.

In the ensuing frenzy, 18 SPACs focusing on cannabis raised around $3.3Billion by August. More than half of that amount was invested in SPAC mergers. However, Democrats are not making any real progress with their promises and the euphoria seems to have waned.

According to investors and banks, cannabis SPACs without having finalized deals might run into problems. Reuters reported that HERBL in California, a distributor of cannabis, had its valuation reduced in recent months due to merger talks with BGP acquisition Corp.

Even though the SPAC boom in general has subsided and SPACs are still struggling, regardless of which target industry they operate within, the cannabis-oriented blank checks have suffered particularly.

SPACs have listed all but one weed business in America since 2020. They are now trading at $10/share IPO prices. BoardroomAlpha data provider SPAC data shows that 46.5% SPACs are currently trading at a higher level than before their mergers.

Joe Caltabiano founded Choice Consolidation Corp. He said that “share price is extremely important” and “it’s what investors see – but that it’s only half of the equation.

Caltabiano listed Choice Consolidation Canada in January. He said that the capital market is more difficult than ever before because of a variety of factors.

CANADA WOES

Foremost among their problems is the fact that cannabis companies are still unable to list on major U.S. indices because marijuana remains illegal at the federal level, forcing them to list in Canada, where trading volumes are a fraction of the U.S. level.

The AdvisorShares Pure U.S. Marijuana ETF shows that shares in U.S.-based marijuana companies have fallen 11.4% after soaring 60% in February. The MJ ETF is also up this year, tracking global pot stocks.

SPAC sponsor across all industries are having trouble raising cash via equity sales these months because of a regulatory crackdown. This has added to the cannabis trading woes.

Caltabiano expressed optimism for an improvement in equity markets. However, his SPAC is now turning to debt funding.

Due to a lack of target companies large enough to fulfill the requirements for deal sizes, cannabis SPACs are forced to invest in unrelated industries. According to Viridian, five out of 18 SPACs that have raised funds so far have merged in industries not connected to cannabis.

Two sources tell Reuters that Tuscan Holdings Corp II is another SPAC focused on cannabis. It’s currently looking to merge with a company operating in the real-estate technology sector.

The public and private markets have faced many challenges, but private capital remains strong. That has forced SPACs into overpaying when purchasing private companies, according to Bill Grownley from the law firm Goodwin.

Viridian reported that Glass House was purchased by Mercer Park SPAC in April for 28.8 times EBITDA.

The entire VC industry is on fire, and the valuations of all VC companies are extremely high. Grownley stated that if SPACs fail to perform, it will inevitably impact the private market valuations.

It’s simply a matter of “who blinks first”.