Hemp companies raised more than $230 million in the first half of 2019, which isn’t surprising
given that the value of hemp-derived CBD alone is expected to hit $7 billion by 2023.
Wise investors look before they leap, of course, but when it comes to hemp, they’d be wise to look harder — the due diligence required to minimize risk in this rapidly developing sector extends beyond what would be expected of someone investing in, say, telecomm or aerospace.
Passage of the 2018 Farm Bill made it federally legal to cultivate hemp beyond the pilot programs that have been “testing the waters” under the 2014 Farm Bill. But it’s up to the states to license hemp-cultivation operations within their borders, as well as the supply chain emerging to manufacture hemp-derived products.
Hemp is also subject to a level of regulation not found in most other investment vehicles because it’s a member of the cannabis family, the same one that produces marijuana. The difference between hemp and marijuana is the concentration of the psychoactive cannabinoid THC. The 2018 Farm Bill determined that the plant with less than 0.3% THC — a concentration insufficient to produce a psychoactive effect — is designated hemp; the plant with more than 0.3% THC is designated marijuana.
CBD, which promises to revolutionize the fields of health, wellness and beauty thanks to its seemingly miraculous ability to treat everything from epilepsy to anxiety to acne, is a cannabinoid too — but unlike THC, it does not produce a psychoactive effect. Still, its inclusion in consumer products is expected to be strictly regulated by the FDA.
Learn About the Leadership
Scrutiny of any investment target should begin with the company’s management team, but when the target is a hemp company, certainly one looking to produce CBD products, a prospective investor must ask, “Does this company’s management have experience in a heavily regulated industry? Are its senior executives intimately acquainted with complicated issues of licensing and compliance?”
A closely related and equally important question is, “Has this team worked in hemp before?” Hemp is a unique agricultural product, with its own demands. Among other things, it requires specialized infrastructure, equipment and labor practices, and it has to be properly dried and cured. You have three weeks to do that and you need facilities you’ll only use for those three weeks, but they must be big enough to accommodate all of your biomass. If the company’s principals have no experience in hemp cultivation but say they’re planning to farm 15,000 acres next year, that’s a red flag.
The management team’s intentions are another critical area of inquiry. If the company is headed by real-estate developers whose primary interest appears to be exploiting a parcel of farmland, think twice before going into business with them.
Get the 411 on the CGMP
Whatever function a company performs along the hemp-product lifecycle, another initial question should be, “Has this investment target received CGMP accreditation?” Though the FDA has not yet determined how it will regulate CBD, a hemp firm can receive the agency’s seal of approval in the form of Current Good Manufacturing Practice certification. This recognition means the target has robust protocols in place to ensure its products are safe and effective. The firms who’ve earned it have jumped through countless hoops to land in the winner’s circle.
CGMP inspections address not only facility design, environmental controls, extraction methods and potency testing but staff training, complaint processing, documentation and packaging. Does the information on the label, for instance, accurately reflect what’s inside the package? Is the company making claims the FDA has forbidden? The ultimate result of this rigor — which can apply to hundreds of SOPs — is consumer, and thus investor, trust.
As with any substantial investment, prospective investors are advised to investigate the target company’s business plan and financial condition, judge the soundness of its branding, marketing and retail strategies, read product reviews, solicit the opinions of industry leaders, survey any press coverage, and examine their public disclosures and press releases to learn as much as possible about how they’re making or acquiring their products. What, for example, can an investor unearth about the raw materials the company uses?
Suss Out the Source
This question is particularly important when evaluating a CBD-oriented hemp business. Is the company sourcing its hemp from a CGMP-accredited farm in Kentucky or one in China’s Yunnan Province? If a manufacturer is sourcing hemp oil, what strain are they using? If the company is just buying isolate on the open market without knowing precisely where it comes from, that’s another red flag.
In what other sector does due diligence extend to seed genetics? With hemp, it behooves investors to carefully assess the relationship between the grower and the seed producer. It is imperative that the seed produces a plant with a concentration of less than 0.3% THC, but there’s more to it than that. Does the CEO say the company has its own genetics though it’s only been in business a year? That’s also a red flag because it takes three to five years to develop a suitably strong, stable genetic.
Top geneticists are producing seeds with exceptionally high cannabinoid content — up to 20%. Is the company you’re reviewing as an investment possibility sourcing seeds of this caliber?
Investigate the Values
A savvy hemp investor must also look beyond brass-tacks factors like sourcing to peer into the very soul of the target company. Is it just out to make a fast buck off the CBD craze or do all involved believe in the power of hemp to change the world, if not as a force for health and wellness then as an instrument of natural-resource preservation? Hemp requires half the water cotton does and can be used to make biodegradable plastics and alternative fuels. It’s also capable of remediating soil contaminated by industrial pollutants. Advocates see industrial hemp as a tool for reversing climate change.
What are the target company’s own sustainability practices? Does it have a corporate social responsibility program? Where does it rank on “best places to work” lists? Neglect of what might be considered an enterprise’s “soft skills” can signal corner-cutting — and unnecessary risk-taking — in the “hard skills” that pertain to its bottom line. The care a company takes of its employees could be an indicator of the attention it pays to its consumers and, ultimately, the value it returns to its investors. Organizations in it for the long haul are mindful of these concerns.
We are only beginning to scratch the surface of hemp as an investment opportunity. There is much work to be done before institutional investment becomes commonplace in the industry — the question, however, is not IF this will happen but WHEN. Even amid an uncertain regulatory environment, companies manufacturing CBD tinctures and topicals are being acquired by larger companies making significant capital outlays.
In the meantime, individual and other investors are kicking hemp’s tires. The shrewdest among them are eschewing an “act now; ask questions later” approach. They understand that to invest in a hemp entity worthy of an A — or AAA — it pays to do your homework.