From the Regulators

CSA says companies must tell investors about risks

By Aleksandra Sagan, Armina Ligaya |
Source: The Canadian Press

Companies with business activities that violate U.S. federal law regarding marijuana could undergo a delisting review at the Toronto Stock Exchange, says TMX Group Ltd., which operates the TSX and TSX Venture Exchange.

"Based on our quality control and standards that we have set for our market, our rules say that you cannot be in violation of applicable laws and regulations in the jurisdictions in which you run your business," said Ungad Chadda, president of capital formation, equity capital markets.

The group issued a staff notice Monday, saying U.S. federal law takes precedence over state laws, and issuers with ongoing business activities that violate the federal marijuana law are not complying with the requirements.

The clarification has been hotly anticipated by Canadian marijuana companies looking to get a foothold in the U.S. marijuana market as well as U.S. companies that want to access capital from Canada's public markets.

Canadian marijuana companies had largely handled the hazy legality by focusing on markets outside the U.S., or by listing on the smaller and less risk-averse Canadian Securities Exchange.

But after Canadian marijuana producer Aphria Inc., which is listed on the TSX, announced an investment in Florida in April of this year, questions about the official policy mounted and regulators took notice.

"Aphria is currently reviewing the details of the guidance," spokeswoman Nina Godard said in an email, adding the company will provide comment Tuesday morning.

The TMX noted Monday that while some states have legalized marijuana to varying degrees and conditions, under federal law it is illegal to cultivate, distribute or possess the drug in the United States. More than two dozen states have legalized medical marijuana, including eight states where marijuana is legal for recreational use.

The Obama administration had issued a guidance, known as the "Cole Memorandum," that suggested the federal government would not intervene in states where the drug is legal. But the situation has become more murky since U.S. President Donald Trump was elected and took over the Oval Office this year.

That has caused headaches for Canadian regulators, the country's stock exchanges and companies that want to invest in U.S. operations.

The TMX said in its release that such guidance is not law and can be revoked or amended.

The federal law relating to marijuana could be enforced at any time, and this would put issuers with U.S. marijuana-related activities at risk of being prosecuted and having their assets seized.

The TMX Group said that financial transactions involving proceeds generated by or intended to promote marijuana-related business activities in the U.S. could result in prosecution in the States.

It added that listed issuers should work to address any gaps in their compliance and if it notes any are engaged in any non-compliant activities, it has the discretion to initiate a delisting.

While Chadda wouldn't comment on any specific companies with possible U.S. ties, he did say "there is no such thing as a clear-cut case."

CSA says companies must tell investors about risks

Meanwhile Monday, even as Canada's main stock exchange cracked down on marijuana listings, the Canadian Securities Administrators, the umbrella organization for Canada's provincial and territorial securities regulators, appeared to take a much more lax approach.

The group issued a staff notice, saying that cannabis companies must tell investors about certain risks when they invest south of the border — where issuers with marijuana-related activities in the U.S. assume certain risks due to conflicting state and federal laws.

"We expect issuers with marijuana-related activities in the U.S. to address the current legal and regulatory environment in their disclosures, including any risks that result from changes in the approach to enforcement of U.S. federal law," said CSA chair Louis Morisset in a statement.

The Canadian Securities Exchange has been more permissive than the TSX, requiring that companies provide risk disclosure for investors.

Currently, about half the trading activity on the CSE involves marijuana-based businesses, said its chief executive Richard Carleton. Of the roughly 50 marijuana-based companies listed on the CSE, about a dozen have U.S. holdings, he added.

Carleton called the CSA's move an "extremely positive step."

"This is exactly what the industry has been looking for, and I think it will spur more companies involved in the U.S. cannabis space to look to Canada for growth capital," he said.

The CSA's disclosure expectations apply to all issuers with U.S. marijuana-related activities, including those with direct and indirect involvement in the cultivation and distribution of marijuana, as well as issuers that provide goods and services to third parties involved in the U.S. marijuana industry. Issuers are expected to provide these disclosures in prospectus filings and other required documents, such as their Annual Information Form and Management's Discussion and Analysis.

With files from David Hodges