Why did NASDAQ block cannabis trading entity from listing? We find out

A somewhat remarkable and high profile response ensued across North America’s corporate commentary yesterday with regard to NADSAQ’s refusal to allow a cannabis company to list on the public exchange.

MassRoots, which is a social platform for marijuana, was refused a listing following an application made to NASDAQ which planned for public shares being available in August this year as a result of a ruling by NASDAQ that it may be aiding and abetting the distribution of an illegal substance, however there is more to the rationale than just that.

Whilst the distribution of marijuana itself is illegal across the United States, the trading of hemp, one of the raw materials products that is classified by the US for engineering and manufacturing purposes, and derives from the cannabis plant, is among the oldest of tradable commodities on some of the most prominent exchanges.

Hemp, which is the commonly used term – as well as the legally defined one – for industrial varieties of the cannabis plant and its products, which include fiber, oil, and seed.

The raw material, however has tremendous value as an industrial input because hemp is refined into products such as hemp seed foods, hemp oil, wax, resin, rope, cloth, pulp, paper, and fuel.

Other factors than the arguable illegality of the distribution of marijuana may well be at the root (excuse the pun) cause of NASDAQ’s decision.

Speaking to a Edward Woodford, co-founder of SeedCX, a specialist in exchange-traded commodities in North America’s commodity and futures trading Mid Western heartlands, FinanceFeeds was told “Seed CX has found that it pays off to be very clear about what we are doing. Seed CX can ignore most of the controversies surrounding legalization of marijuana because our members and partners are focused instead on the beneficial attributes of hemp extracts and products from low-THC sources, which are federally legal.”

“The growth and opportunity in hemp derived plant extract and hemp seed derivatives presents a huge opportunity and this clear focus is what our customers and investors expect from us. The commodity market regulator, the CFTC, has not indicated any qualms about our business being tied to industrial hemp, which after all has been legal for processing and consumption in the US for quite some time” continued Mr. Woodford.

“On an aside, as someone who follows markets, it is interesting to look at history. MassRoots’ market value is ~$40m right now. In a cursory glance of previous filings since MassRoots filed (June 2014) only 10 of the 275 IPOs were below this $41m in market cap. Funnily enough 9/10 of the companies under $41m have drastically lost value since their IPOs, by an average of 63%. Perhaps its in their best interest to not get approved” he concluded.

Distinction between listing on an exhange, and providing tradable products

SeedCX, based in Chicago, is a privately owned entity that provides a marketplace from which hemp can be traded as a commodity.

In Chicago last month, FinanceFeeds spoke to the firm’s co-founder and President, Brian Liston, who has substantial experience with regard to raw materials trading.

The United States government redefined the classification of hemp in 2014, with the classification being based on the chemical composition of the product. Within cannabis there are now two categories, hemp and marijuana.

Mr. Liston explained how this is defined and measured. “If you have 0.3% THC or less on a dry weight basis then it is classified as hemp which is legal for cultivation under the 2014 Farm Bill” he said.

“The ability to trade hemp has a certain appeal, which allows access to trading firms and groups that otherwise would be more hesitant to get involved in a new commodity, but it is important for us to define what is hemp and what is not” said Mr. Liston.

“We are going through the CFTC to become a federally recognized entity to allow people to trade industrial hemp” he said.

“If you talk to people in the hemp industry, they are very evangelical about the benefits of industrial hemp, but for big industry to adopt the product as a legitimate resource, you need consistent supply, easy access and grading standards that are adopted by the industry. That is what we are trying to help provide” explained Mr. Liston.

In this case, it is not as clear cut as a major exchange blocking a specific commodity on face value, but the reasons why this took place including the eligibility of MassRoots to list bearing in mind its balance sheet, as clearly other commodities based on the same source have been subject to the CFTC’s approval and are able to provide an exchange-based trading facility for industrial hemp.

Featured image courtesy of Brett Levin