By Diana Novak Jones & Sam Reisman

Law360 (March 8, 2021, 8:28 PM EST) -- The pandemic marked a turning point for the cannabis industry, which was facing its first real downturn when state officials chose it as one of the businesses that could stay open amid the closure orders designed to curb COVID-19.

The end of 2019 brought months of dropping share prices, layoffs and concerns about capital in the cannabis industry. Experts saw 2020 as a year where many businesses in the nascent industry would fail.

But the wave of insolvencies didn't happen, and instead 2020 seemed to reboot merger activity and investor interest in the industry. The pandemic might have — at least temporarily — turned the tide for the cannabis industry.

After most states with legalized marijuana declared their recreational and medical dispensaries essential, the cannabis industry could keep its doors open and access a customer base that was looking for an escape from the pandemic's anxieties, industry experts told Law360.

"That [essential] designation clearly signaled to investors, to shareholders, to the general public, it's a legitimate industry that is going to be operating at a time when others weren't," said Peter Marcus, spokesman for multistate cannabis business Terrapin Care Station.

"I think it launched one of the most impressive growth years for the industry on multiple levels," Marcus said.

Essential Designations

Last March 13, President Donald Trump declared the COVID-19 pandemic a national emergency. As lockdowns commenced nationwide, the cannabis sector received an unexpected windfall when state governments declared dispensaries and growers to be essential services, placing a federally illegal industry on a par with grocery stores, pharmacies and gas stations.

"That was, for advocates and the industry, the most important element, because everything sort of flowed from there," said Steven Hawkins, executive director of the advocacy organization Marijuana Policy Project, or MPP. "That meant that tens of thousands of people kept their jobs. It meant that, at least from the cannabis industry, tax dollars were still collected."

When it became clear that mandatory lockdowns were coming, cannabis lobbying groups warned state governments that shuttering licensed medical cannabis businesses could have the collateral effect of driving patients to the illicit market to secure the treatments they needed.

At first, some localities attempted at first to draw a line between medical and recreational cannabis, but the distinction quickly proved unworkable as customers, patients and supply chains were inextricably intertwined.

The MPP wrote to governors of states that had legalized both recreational and medical marijuana, urging them to consider all licensed cannabis businesses critical saying that many people used "recreational" cannabis to treat various ailments.

The organization highlighted various factors that could drive people seeking treatment to sidestep the medical program, including difficulties involved with securing a doctor's recommendation, lack of insurance, and federal policy barring U.S. Department of Veterans Affairs physicians from recommending marijuana use for military veterans.

In areas where recreational cannabis was deemed inessential at first, backlash and consumer panic-buying came swiftly.

Initially, Massachusetts Gov. Charlie Baker allowed medical marijuana dispensaries but not adult-use recreational sellers to remain open. The state's so-called "colocated marijuana operations," which are licensed for both medical and adult use, were allowed to perform only their medical functions.

This prompted a raft of Bay State recreational marijuana licensees to sue in state court alleging that the distinction between adult use and medical use was arbitrary and violated their right to equal protection. The court denied them an injunction, but the retailers were ultimately allowed to reopen in May.

On March 17, 2020, San Francisco issued a public health order declaring that medical marijuana dispensaries were essential and recreational retailers were not. By the next day, the city updated its policy to clarify that both medical and recreational facilities could remain open.

One week later, Denver Mayor Michael Hancock announced that cannabis and liquor retailers would have to close the following afternoon, only to backpedal hours later.

According to Truman Bradley, executive director of Colorado's Marijuana Industry Group, the day of the announcement, March 23, marked the largest single day of cannabis sales in the history of the state's regulated market, eclipsing every "4/20" — or April 20, the unofficial cannabis celebration day — since legalization.

However, most governors in states with legalized recreational marijuana immediately deemed the business essential while implementing emergency rule changes to limit person-to-person interaction as well as relax certain regulations in response to the pandemic.

Yoko Miyashita, CEO of cannabis e-commerce and news site Leafly, said recently at a webinar hosted by Perkins Coie LLP that the essential designations marked a "milestone" for the industry.

"There was widespread support for this," she said. "There was recognition that people turn to cannabis for so many different reasons — not just recreational. This is critical medicine. This is how legalization started."

Sales Spiked

As soon as cannabis businesses were deemed essential, they started seeing their sales increase, insiders told Law360.

Marcus of Terrapin Care Station said the company has seen double-digit growth in sales since last year. A year in, Marcus says the growth has largely leveled out at its new, higher level, but that it's not unusual to see a record-breaking week.

Terrapin is headquartered in Colorado, which saw a 25% increase in sales in 2020 as compared to 2019, according to data from the state's Department of Revenue. The increase was driven largely by spiking recreational sales, the data shows.

California's Legislative Analyst's Office said in November that the state's tax revenue from marijuana rose steadily in 2018 and 2019 but "accelerated" in 2020, with the total the state had collected climbing from just over $100 million to about $200 million over the course of last year.

That type of sales activity is happening broadly, according to Barry Saik, chief executive officer at Greenbits, a cannabis retail platform that processes transactions and inventory for dispensaries across the country.

Saik says Greenbits' analysis of its clients' transactions showed a 35% increase in sales over the year before, with a sales spike in March and April of last year.

"It looks pretty well aligned with the pandemic lockdowns," Saik told Law360. "We haven't seen a jump like that before."

The sales continued to climb as the year went on, then they hit a plateau and have remained high ever since, he said.

The increases in sales attributable to the pandemic were primarily observed in states that have a longer history with legalized weed, such as Colorado, California, Washington and Oregon, Saik said. Sales increases states with more recent legalization could be due to new licensees entering the market, he said.

The pandemic spikes were attributed to both more buyers and larger purchases, Saik said.

"There is higher consumption overall, with a broader set of people, and people are stocking up a little bit more," he said.

Cannabis business software company Akerna reported last week that customer behavior changed dramatically during the pandemic, with shoppers spending 25% to 30% more every time they go to a dispensary.

Saik believes the long weeks stuck at home led many new customers to try legal pot during the pandemic. The outbreak sped up the normalization of cannabis, he said.

"Just like in some other areas, COVID is causing some long-lasting lifestyle changes," Saik said.

Regulations Loosened

Once declared essential and permitted to remain open, cannabis licensees received some measure of relief in the form of relaxed regulations allowing remote telemedicine, curbside pickup and the presence of minors in places previously forbidden. Many of these policies were put in place as emergency measures but have remained in effect as the pandemic rages into its second year.

"Just like we saw this expansion of delivery and curbside pickup with restaurants, we saw that with the cannabis industry," said Hawkins of MPP. "We will see what disappears as the pandemic lifts, but my sense is we're going to see those new consumer options be available."

According to Bradley, director of Colorado's cannabis trade group, the state's cannabis retailers were among the first to adopt measures that have since become commonplace such as floor markers indicating 6-foot distances, hand sanitizer stations and sneeze guards at cash registers.

"Pot plants want to be 72 degrees. The cannabis industry was already an expert in controlling the environment indoors," Bradley said. "That paved the way for a quick transition to adopting guidelines for COVID."

Certain rules were also loosened to acknowledge the toll the pandemic had taken on parent employees unable to find child care. In Washington state, regulators made an allowance for outdoor cannabis growers and retailers to allow minors on the premises, an accommodation that is still in place.

Many of the changes, such as remote purchases, marry consumer safety with customer convenience, although it's unclear how many of them will be adopted as permanent measures. In Colorado, the Marijuana Industry Group is backing legislation to codify the social distancing guidelines, Bradley said.

"We've seen how successful they've been. They keep people safe," Bradley said. "I think that all businesses will continue to focus on cleanliness and safety measures. With different variants coming out, COVID may be a part of our future for a long time. I don't see that going way."

Alex Traverso, spokesman for California's Bureau of Cannabis Control, said, "We have granted disaster relief to licensees based on COVID but do not have general changes to the regulations. The disaster relief modifications are still in place today, but at a yet-to-be-determined time will revert back to what is currently in our regs."

The Future Burns Bright

After essential designations drove a sales uptick, the cannabis industry appears poised to emerge from the pandemic amid another boom.

At the start of last year, the industry was stuck in a capital crunch and a slowdown of merger and acquisition activity, which coincided with drops in company valuations that began in late 2019.

But in the early weeks of 2021, it seems the industry is back in a boom of investment and transactions, experts say.

In a recent report, cannabis capital and transactions advisory firm Viridian Advisors said cannabis companies raised $4.3 billion in capital in 2020, which is 63% less than the industry raised in 2019.

But things began to improve in the later part of 2020, according to Viridian, and the start of 2021 has been historic. Cannabis companies have raised $2.8 billion in the first nine weeks of the new year, Viridian said.

Last year saw one of the biggest cannabis debt financing deals in the industry's history, a sign things the sector was changing.

In July, cannabis supply chain financier LeafLink Financial landed a $250 million debt financing deal with a private commercial lender.

A couple months later, cannabis e-commerce business Dutchie said it raised $35 million in a funding round.

Samantha Gleit, a Feuerstein Kulick LLP partner who works with the cannabis industry on debt and equity financing, told Law360 she advised lenders on a credit facility for cannabis biopharmaceutical company TerrAscend and on an upsize loan for Cresco Labs at the end of last year.

Cannabis companies have been able to get better pricing recently than what she was seeing at the end of 2019, Gleit said.

And interest is building from formerly reluctant institutional investors and conservative private wealth investors, groups that are relatively new to the cannabis space, she said.

Those investors "now have seen this strong market performance, so it feels like a safer thing to consider," she said.

Some blockbuster acquisition deals were put together in the waning months of 2020 as well, largely driven by a rush of special purpose acquisition companies targeting cannabis assets.

Subversive Capital Acquisition Corp. announced plans to acquire cannabis brand Caliva and vertically integrated company Left Coast Ventures in November, creating a company valued at nearly $1.2 billion.

Fall brought more good news for the industry.

The election, which saw more cannabis-friendly Democrats take control of the federal government and five states vote in favor of legalization measures, came at the same time as financial reporting that, for some businesses, revealed high sales during the pandemic, Gleit said.

"I think it really was a pretty strong message for the investment community," Gleit said.

And there is no sign that 2021 will bring a slowdown.

Neptune Wellness Solutions, which makes cannabis and other plant-based consumer products, closed on a $55 million direct offering with institutional investors in February.

Acreage Holdings sold its Florida operations in a $60 million deal last month, just weeks after cannabis producer and distributor Hexo Corp. acquired cultivator Zenabis Global Inc. in a deal worth $185 million.

Hawkins, the MPP director and interim CEO of the newly launched U.S. Cannabis Council, said the optimism the industry is feeling about the future must be apparent to investors.

"It could very well be that we see the end of federal prohibition," Hawkins said. "If, for whatever reason, that does not happen, there is going to be banking reform and other reasons that will make it easier for the cannabis industry to flourish.

"So that certainly is going to give investors confidence in the future of the industry," he said.

--Additional reporting by Sarah Jarvis, Jack Queen and Elise Hansen. Editing by Jill Coffey.

For a reprint of this article, please contact reprints@law360.com.