On October 16, 2017, the Canadian Securities Administrators ("CSA") set out specific disclosure expectations for issuers that currently have or are in the process of developing cannabis-related activities in the U.S. ("U.S.-Related Cannabis Issuers"). The CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities ("CSA Staff Notice") indicates that they will require U.S.-Related Cannabis Issuers to disclose key risks in their public disclosure documents. This approach is premised on the assumption that U.S.-Related Cannabis Issuers are complying with current U.S. State laws and regulations.
Primary among the risks is that while some U.S. States have authorized the use and sale of cannabis, it remains illegal under U.S. federal law. Notably, U.S. federal law relating to cannabis could be enforced at any time, which consequently puts U.S.-Related Cannabis Issuers at risk of being prosecuted and having their assets seized.
As a result of the CSA Staff Notice U.S.-Related Cannabis Issuers are expected to ensure that they meet the CSA's disclosure expectations (described below) and evaluate, monitor, and reassess any related risks on an ongoing basis. Such disclosure is expected to be provided in prospectus filings and other required documents, such as their Annual Information Form and Management's Discussion and Analysis. Any issuer that fails to provide appropriate disclosure may be subject to regulatory action.
All Issuers with U.S. Cannabis Related Activities must:
- explain that cannabis remains illegal under federal U.S. laws and that the approach to enforcement of U.S. federal laws is subject to change. The resultant risks, including the risk of adverse enforcement action, must be discussed;
- state whether and how their activities are conducted in a manner consistent with any U.S. federal enforcement priorities; and
- discuss their ability to access both public and private capital, and indicate whether financing options are available in order to support continuing operations, given the illegality of cannabis under U.S. federal law.
Issuers with direct involvement in U.S. cannabis cultivation or distribution must:
- outline the regulations in the U.S. States in which they operate, and confirm how they are complying with applicable licensing requirements and the regulatory framework enacted by the applicable State; and
- discuss their program for monitoring compliance with U.S. State law on an ongoing basis and outline internal compliance procedures. Further, they must disclose any material non-compliance as well as material citations or notices of violation.
Issuers with indirect involvement in cultivation or distribution must:
- outline regulations in the U.S. States in which their investee(s) operate;
- provide reasonable assurance that the investee's business is in compliance with the applicable licensing requirements and regulatory framework enacted by the applicable U.S. state. (A similar requirement also applies to issuers with material ancillary involvement in the U.S. cannabis sector, as defined by the CSA.)
In the event that the U.S. federal government changes its approach to enforcement of cannabis, the CSA staff would re-examine the views outlined in their recently released staff notice.
TSX's Delisting Review of Issuers with U.S. Cannabis-Related Operations
On the same day as the release of the CSA Staff Notice, the TSX released Staff Notice 2017-0009 ("TSX Staff Notice") which contrasts the CSA's disclosure-based approach. The TSX Staff Notice makes it clear that issuers engaged in cannabis-related activities in the U.S. poses serious policy concerns for the TSX over illegality and exposure to fraudulent financial transactions. In other words, any issuer operating in cannabis-related activities in the U.S. are now considered not in compliance with the TSX requirements. Consequently, any issuer that is directly or indirectly involved in such activities in the U.S. is in violation of U.S. federal laws and may be delisted.
The TSX Staff Notice listed examples of business activities that concern the TSX and TSX Venture Exchange:
- Direct or indirect ownership or investment in U.S.-Related Cannabis Issuers
- Commercial interests or arrangements with U.S.-Related Cannabis Issuers that amount in substance to ownership or investment
- Providing services or products that are designed for, or targeted at, U.S.-Related Cannabis Issuers
- Commercial interests or arrangements with entities engaging in any of the foregoing businesses.
The TSX encourages listed issuers to proactively work to address any gaps in their compliance with any TSX listing requirements. Further, the TSX expects to conduct a listing review of all listed issuers in the cannabis sector and will contact said issuers by the end of 2017 for a more comprehensive review.
CSE Supports the CSA's Disclosure-Based Approach
On October 16, 2017, the Canadian Securities Exchange ("CSE"), a competitor of the TSX and a major venue for cannabis listings stated that the CSA has provided "significant clarity for all stakeholders in the cannabis sector" and is "fully supportive" of the CSA's Staff Notice.
On August 4, 2017 the CSE released Notice 2017-017 ("CSE Notice") to address the uncertainty about U.S.-Related Cannabis Issuers obtaining a listing in Canada. Similar to the CSA's Staff Notice, the CSE Notice required U.S.-Related Cannabis Issuers to disclose the risks by including a comprehensive discussion of U.S. federal law and the conflict with State laws.
Commentary on CSA Staff Notice and TSX Staff Notice from Issuers
Most companies listed on the TSX or TSXV have praised the CSA's approach. Some have stated that the CSA Staff Notice is providing a balanced framework for the Canadian capital markets and that the disclosure approach is representative of the existing U.S. legislative, regulatory and political environment.
That being said, there is an uneasiness in the capital markets regarding the TSX Staff Notice in that it does not properly apportion the weight and context that must be applied to the current conflict between U.S. federal and State laws. A major consequence of the TSX Staff Notice is in regards to investor protection for those who have already invested in these companies. The TSX Staff Notice has caused uncertainty as to how its approach will affect investors and businesses in the cannabis sector.
Conclusion
U.S.-Related Cannabis Issuers should ensure that they meet all the CSA staff's expectations regarding disclosure requirements. Additionally, U.S.-Related Cannabis Issuers should address any potential gaps concerning TSX's listing requirements. In the meantime, any U.S.-Related Cannabis Issuer should continue to monitor any changes to the current legislation, regulations, as well as CSA and TSX notices.
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