A New York hedge fund manager moved to Canada and started the first marijuana company to be listed on a major US stock exchange — here’s how he did it

• Cronos Group last month became the first marijuana company to trade on a major US stock exchange.
• CEO Michael Gorenstein started his career on Wall Street and later worked as a hedge fund manager. He set out to find investment opportunities in marijuana.
• Gorenstein didn’t find much. He moved to Canada, where he is hoping to build a marijuana empire.

Cronos Group, a Canadian company that grows and sells marijuana, just became the first marijuana company to list on a major US stock exchange. In February, the company began trading on the Nasdaq.

The event marked a major milestone for the fledgling marijuana industry. American companies that process the plant have been sidelined from major US stock exchanges because marijuana is still federally illegal. But Nasdaq admitting a Canadian marijuana company suggests institutional investors will not let opportunities in the marijuana sector pass them by.

It could also encourage other marijuana companies based in countries where the drug is legal to list in the US, creating new opportunities for investors.

The CEO got his start on Wall Street

Before launching a $1 billion marijuana company, Cronos Group CEO Michael Gorenstein began his career on Wall Street as a corporate mergers-and-acquisitions attorney.

He later joined Alphabet Partners, a small New York hedge fund, where he managed an $830 million volatility fund. The goal was to find investment opportunities across industries and asset classes that the fund thought were not properly valued by the market.

“It was really about finding value where other people for whatever reason saw some flaw,” Gorenstein said.

In 2014, Colorado and Washington state began selling legal recreational marijuana. Gorenstein looked to those markets to create new opportunities for investors in the fund.

“It was a no-brainer,” he said.

In marijuana, “you’ve got an industry where there’s a stigma keeping the most sophisticated operators and deep-pocketed investors away, but there’s hundreds of billions of dollars of actual business going on,” Gorenstein said. “So you know people want the product.”

Global spending on legal marijuana is expected to reach $57 billion by 2027. This figure doesn’t include the billions more spent on the black market.

In spite of these impressive numbers, Gorenstein struggled back in 2015 to find companies the fund deemed investable.

Too many people were focused on short-term solutions to short-term problems, like cash management and credit-card processing, he said. Marijuana cultivators faced barriers scaling outside their states. Federal prohibition made it risky to invest in any cannabis company based in the US.

That’s when Gorenstein turned his attention to Canada.

Canada’s legal marijuana industry is booming

The medical-marijuana market is legal and regulated in Canada, and the federal government is expected to legalize recreational sales later this year.

Gorenstein, who was born in the US but has dual citizenship in Canada, said he was excited about the prospect of investing in Canada because — while US marijuana companies were trying to avoid being “shut down by the federal government” — Canadian marijuana companies were free to build their brands, recruit top talent, and develop intellectual property.

In 2015, Gorenstein came across PharmaCan, a company based in Toronto that owns and operates brands in the business of marijuana cultivation and distribution.

He was impressed by the diversity of its assets and their potential for scale. Gorenstein and three other people pooled together $2 million for a private investment in the company. At the time, his contribution made up half of his net worth, Gorenstein told Business Insider.

In 2015, Gorenstein moved from New York to Toronto and took a board seat at the company. PharmaCan became Cronos Group, and Gorenstein stepped into the role of CEO in 2016.

Cronos Group owns the same few brands that PharmaCan did: Peace Naturals, Original BC, and part of Whistler Medical Marijuana Company. These assets produce and sell mostly flower — the green stuff you smoke — and oils derived from marijuana. Products come in a variety of strengths, intended effects, and even patented varieties to suit customers’ needs.

Patients can legally buy products from Cronos Group’s medical-marijuana brands in Australia, Israel, and Germany. An exclusive distribution agreement with the pharmaceutical manufacturer Pohl-Boskamp gives the company access to more than 12,000 pharmacies in Germany alone.

Now Cronos Group is diversifying. The company is developing new brands that will target recreational users once the adult-use market opens up in Canada later this year.

Gorenstein said the company was on an annual run rate of $400 million. He added that this figure didn’t take into account certain formulated products or any other business expansion plans under consideration.

Cronos Group marks a major milestone for marijuana

In February, Cronos Group made history when it became the first company touching the marijuana plant to trade shares on a major US security exchange.

Gorenstein said he began a relationship with Nasdaq last year. The company was approved for an over-the-counter listing— a type of security that trades on an exchange dedicated to small companies. When Gorenstein wanted to move to the Nasdaq, the company spent six months being audited and reviewed by independent committees before filing an application.

Gorenstein said he couldn’t be sure whether the Securities and Exchange Commission applied any more rigor in its review of Cronos than it would to a company operating in another industry.

Sean Stiefel, a cofounder of Navy Capital, a New York hedge fund that focuses on marijuana, said allowing Cronos Group to list was “a logical decision by Nasdaq.”

“Cronos runs a legal business in their federal jurisdiction,” Stiefel told Business Insider. He said it was no different from allowing offshore internet gambling companies to list on a US stock exchange, even though gaming exists in a legal gray area in the US.

Tom Adams, the managing director of the strategic-research division at BDS Analytics, said the listing showed that even continuous threats of federal crackdowns couldn’t stop the marijuana industry from growing.

“The only one in Washington that would like to see the United States cede the economic benefits of [the marijuana industry] to Canada and other countries is Jeff Sessions,” the US attorney general, Adams told Business Insider.

He cited projections from BDS Analytics that the North American marijuana industry would create about $40 billion in legal sales and 414,000 jobs by 2021.

Adams said Nasdaq’s listing showed that Wall Street “may not stand for” prohibition.