Friends - in the continuing examination of my prior prognostications, it looks like I got another one half right. Back in early January, I predicted that “… a multinational consumer products company … will take the risk of making a direct investment in a plant-touching business” this year based on a risk-reward analysis. (link) Well, I don’t know Turning Point Brand’s risk-reward analysis (if I did, I almost certainly wouldn’t be discussing it in these Cannabis Musings), but I think it’s safe to assume that they thought about the point when making an $8 million convertible note investment into Old Pal Holding Company, a multi-state cannabis company.

In a deal announced on Tuesday, the publicly-traded tobacco products and accessories company “invested in the form of a convertible note which includes additional follow-on investment rights.” (link) So, you may be wondering, how did Turning Point, a highly-regulated, publicly-traded tobacco company, make an investment into a cannabis company?

The press release doesn’t provide any more information about the nature of Turning Point’s investment, or Turning Point’s legal analysis (which I wouldn’t expect). However, I think we can infer (as usual, none of this is legal advice, and I’m making many assumptions here, and this is a free newsletter, so take all of that into account as you read this) that the press release notes that Old Pal “operates a non-plant touching licensing model” for a reason. I presume that Old Pal’s “licensing model” means generally that it partners with state and local manufacturers to produce (or, “white label”) products with Old Pal’s marks, according to Old Pal’s standards, using Old Pal’s marketing resources, but Old Pal itself holds no licenses. Many companies in the industry operate on this model.

In other words, Turning Point Brands is merely lending to an ancillary business. The convertible feature of the note, together with the reported “follow-on investment rights”, presumably would allow Turning Point to convert the debt for equity in Old Pal once Turning Point Brands is comfortable under the law (or, “under law”, as lawyers like to say) directly owning an equity stake in an ancillary business. This is a way for a major tobacco products company to get a foothold in a national, branded cannabis company, while potentially boxing in its risk (again, not legal advice) by not transacting directly with a licensed, plant-touching company, and by not holding equity.

This gives me a new idea for my THC knish company.