Canopy Rivers Corp (CVE:RIV) and TerrAscend Corp (CNSX:TER) (OTCMKTS:TRSSF) rose sharply in early trade today, as news of a proposed re-structuring filtered through the marketplace. We take a closer look into announcement’s salient and material details.

The announcement, at its core, is about TerrAscend’s intentions to pursue strategic transactions in the cannabis sector internationally—including select opportunities in the United States. To accommodate their pursuits, Canopy Rivers—a material TER investor with 11,285,456 common share ownership, including 9,545,456 in-the-money warrants—will restructure its investment and waive certain restrictive covenants granted in the original investment.

To accomplish this objective, Canopy Rivers will exercise its warrants for no cash consideration, resulting in the net issuance of 8,159,456 Common Shares based on the five day volume weighted average. All common shares thereafter will be exchanged pursuant to the Arrangement for new, conditionally exchangeable shares in the capital of TerrAscend. The exchangeable shares will then become convertible into common shares following changes in U.S. federal laws regarding the cultivation, distribution or possession of marijuana. The exchangeable shares are not transferable or monetizable until exchanged into regular common shares, nor entitled to voting rights, dividends or other rights upon dissolution of TerrAscend.

In essence, Canopy Rivers is placing its current TerrAscend investment on ‘hold’—thus complying with Canadian Securities Administrators Staff Notice 51-532—while maintaining optionality in its original investment without actually holding it. If and when Terrascend decides to purchase U.S. assets; and the legality of cannabis becomes legal on the federal level, Canopy Rivers will re-acquire its original investment. By then, TerrAscend’s enterprise value would presumably be priced at much higher valuations, giving Canopy Rivers a super-sized ROI versus current levels.

As Canopy Growth CEO Bruce Linton put it:

“We are optimistic regarding the continued evolution of global cannabis regulations… the restructuring of our investment in TerrAscend is intended to create long-term value for our shareholders as it positions the Company with optionality and conditional future exposure to a significant new market…”

In a sense, Canopy Rivers is following the playbook Aphria Inc. used when it divested its 64.11 million common share holdings in Liberty Health Services Inc. in August. But instead of holding shares in escrow and receiving coupon interest from the acquirer, Canopy Rivers is changing the common share structure into exchangeable shares. The net effect is the same: both Rovers and Aphria can re-acquire its original holdings should cannabis obtains federally legal status in the United States. The main difference is that Aphria is being paid for the next five years for its right to maintain the common.

Big picture, the move is notable in a couple of ways. First, it shows confidence that Canopy Rivers—and by extension, Canopy Growth—believe that federal legality is inevitable within a reasonable time frame. Secondly, it bolsters the recognition that Canopy Rivers is positioning itself as a significant player in the U.S. cannabis market right now. Remember, that TerrAscend is by far Canopy Rivers’ biggest investment; this wasn’t some arm’s length incubator investment with a couple million dollars thrown its way.

RIV is peering into the future—one that views the U.S. market as a cornerstone of its future business operations.

The reaction to both RIV and TER this morning has been decidedly positive. Currently, the former is higher by $0.64 to $5.95/share (↑12.05%), while the latter has increased $1.27 to $9.39/share (↑15.64%).

Update 7:46 pm EST

While the article specifically focuses on Canopy Rivers investment restructuring of its TerrAscend holdings, Canopy Growth and entities controlled byJason Wild, Chairman of the Company (“JW Asset Management”) will also partake in the restructuring of its material TerrAscend holdings. We apologize for any confusion this omission may have caused.