NEW YORK (TheStreet) -- As more states move toward legalizing medical and recreational marijuana use, companies in the cannabis space have increasingly been taking their business to the public markets.
More than two years after Colorado and Washington became the first states to legalize recreational marijuana, the number of publicly traded cannabis companies has grown to more than 50.
Of these, most are thinly traded companies that trade over the counter. A few, meanwhile, have graduated to Nasdaq, along with a handful of mid-cap companies that didn't start out in the marijuana business but now have activities in that space.
"People are rationally exuberant about the cannabis industry. They want to be part of the next great American industry," said Troy Dayton, CEO of ArcView, a legal cannabis-focused investor network and market research firm. ArcView estimates that the U.S. legal cannabis market grew from $1.5 billion in 2013 to $2.7 billion in 2014. It projects sales will hit $3.5 billion this year. There's potential for more supercharged growth ahead as well, particularly if voters in California approve a proposed initiative that could make it to the 2016 ballot to legalize recreational marijuana use.
To date, most accredited investor activity in the cannabis space has involved funding private companies. However, as more small companies list on exchanges, more dealmaking is moving to public markets. Since last year, more than a dozen companies with cannabis-related business activities have raised money through private-investment-in-public-equity offerings, according to PrivateRaise, The Deal's data service that tracks the PIPE market.
The sums invested in companies with cannabis businesses tend to be on the small side for PIPE transactions, with the vast majority below $15 million. So far this year, the list of PIPE investments includes $10.7 million for Medbox (MDBX) , a provider of vaporizer products and consulting services to cannabis businesses that trades over the counter under the symbol MDBX; $2 million for Terra Tech (TRTC) , a provider of hydroponic equipment for produce and cannabis cultivation traded over the counter as TRTC; $1.8 million for GrowBlox Sciences (GBLX) , a developer of cannabis-based medical treatments traded over the counter as GBLX; and $1.1 million for MassRoots (MSRT) , which operates a mobile platform for cannabis content and commerce and is traded over the counter as MSRT.
Generally, it's easier for legal cannabis companies to raise smaller rounds than larger ones, Dayton says, as the pool of investors is dominated by high-net-worth individuals and small funds focused on the space. Large institutional investors commonly still shy away from cannabis businesses, due to concerns about reputation and the fact that marijuana is still illegal under federal law.
That said, a few companies with some cannabis-related activities have raised sums in the tens of millions. These tend to be companies for which cannabis is a component of the business, rather than the primary focus. One example is 22nd Century (XXII - Get Report) , which is best known as a purveyor of low- and high-nicotine cigarettes, but also operates a cannabis-focused subsidiary called Botanical Genetics. Since 2011, the Clarence, N.Y., company has raised more than $24 million in at least five PIPE transactions, with the most recent deal, for $6 million from Empery Asset Management, closing in June.
Arena Pharmaceuticals (ARNA - Get Report) , a developer of treatments for obesity, vascular diseases and other ailments, also is pursuing researching medical cannabis applications and has repeatedly tapped the PIPE market. Since 2009, the San Diego-based company has raised more than $360 million through PIPEs, including most recently a $70 million transaction in 2012. Investors include Deerfield Management and Acqua Wellington Asset Management.
Recently, more highly capitalized investors with a heavy cannabis focus have been entering the market, including some active in the PIPE market.
Among the most prolific cannabis PIPE investors is Dutchess Capital Management, a manager of investment funds providing capital to private and publicly traded companies that lists cannabis as one of its key focus industries. Recently, the firm backed a $30 million February equity line for Affinor Growers (RSSFF) , a Montreal company involved in medical marijuana cultivation traded over the counter in the U.S. as RSSFF, and a $25 million January equity line for Abattis Bioceuticals (ATTBF) , a biotechnology company focused on the medicinal marijuana markets in North America that is traded as ATTBF over the counter. A year before that, Dutchess provided a $10 million equity line for EHouse Global (EHOS) , a San Diego nutraceutical company that last year began formulating a line of products derived from cannabis. It is traded over the counter as EHOS.
Another emerging player is Lizada Capital, a private equity firm that specializes in the legal cannabis industry. The firm announced in March that it purchased $15 million worth of shares in Medbox, the vaporizer developer, from its majority shareholder. The transaction, with six separate closing over 18 months, would make Lizada Medbox's largest shareholder.
Tuatara Capital, a New York-based private equity firm, is also making waves in the legal cannabis industry, although it has yet to make a disclosed PIPE investment. This week, the firm garnered headlines after announcing it will lead an investor group financing the development of singer Willie Nelson's namesake cannabis brand, Willie's Reserve.
That deal follows another foray into the celebrity-themed cannabis market earlier this year when the Founders Fund, a venture firm co-founded by Paypal Holdings (PYPL - Get Report) and Facebook (FB - Get Report) billionaire Peter Thiel, led a multimillion-dollar investment in Privateer Holdings, an early industry venture capital fund that has signed with Bob Marley's estate to launch a national cannabis brand called Marley Natural.
Still, it's lower-profile ventures that account for most of the dealmaking -- as well as the risk. The number of public cannabis companies has skyrocketed over the past two years. And while some of these are promising companies, Dayton estimates that "somewhere between 70% and 90% of the cannabis public stocks are fonsense." He's confident investors will learn to distinguish the leaders from the laggards, however, and sees signs that this is already occurring.
"The market is already starting to get wise," he says, "and only highly values the companies that are legit and real and have solid business operations beneath their press releases."