As the marijuana sector has boomed in response to liberalization measures in Canada and some U.S. jurisdictions, Canadian securities regulators and stock exchanges are refining their positions on public companies with interests in marijuana-related activities. Canadian securities regulators recently published guidelines establishing a disclosure-based approach that sets out robust standards for public companies that currently conduct or are contemplating marijuana-related activities in U.S. states. The Toronto Stock Exchange, the TSX Venture Exchange and the Canadian Securities Exchange have been quick to issue advisories of their own, outlining their interpretations and ongoing treatment of public companies engaged in cross-border marijuana-related activities.
Gowling WLG Focus
The current complex regulatory landscape in the U.S. considers marijuana illegal under U.S. federal law1. However, the U.S. Department of Justice went on record in 2013's Cole Memo stating that it will not enforce federal prohibitions where U.S. states have authorized activity through "strong and effective" regulation. There is an inherent degree of uncertainty with such an approach, as the U.S. federal government could change its stance at any time, leading to significant consequences for public companies with current or contemplated operations or investment in U.S. markets.
As discussed below, the TSX and TSXV, collectively, and the CSE have been taking contrasting approaches to managing the risks associated with such regulatory ambiguity. We believe that the regulatory guidance from Canadian securities regulators detailed below delivers the message that issuers with marijuana-related activities in the U.S. should be eligible to participate in Canada's capital markets as long as they are willing to put extensive information in the hands of the investment community.
This added clarity from Canadian securities regulators will help to further entrench one of the country's fastest-growing industries as it navigates an evolving cross-border regulatory regime. Equipping public companies and investors with clearly defined expectations will aid informed decision-making and minimize risk. As public companies grow comfortable and accustomed to the broadened scope of disclosure of their operations, and specifically their interests in the U.S., this and subsequent guidance should quell concerns stemming from a developing legal picture.
New Standards from Canadian Securities Regulators
Canadian securities regulators endorse an approach requiring detailed disclosure from public companies on specific points of emphasis for marijuana-related activities. There is an expectation that public companies will provide the following information in offering documents such as prospectuses and listing statements, as well as continuous disclosure filings such as annual information forms and management's discussion and analysis.
All public companies with U.S. marijuana-related activities are expected to:
- Describe the nature of the public company's involvement in the U.S. marijuana industry and include the disclosures indicated based on the nature of such involvement as either direct, indirect or ancillary (as discussed below);
- Explain that marijuana remains illegal under U.S. federal law and that the approach to enforcement by the U.S. federal government is subject to change, as well as a discussion of resultant risks of such change including the potential for adverse enforcement action;
- State whether and how the public company's marijuana-related activities are conducted in a manner consistent with any U.S. federal enforcement priorities; and
- Given the illegality of marijuana under U.S. federal law, discuss the public company's ability to access both public and private capital markets and indicate what financing options are available to support continuing operations.
For public companies directly engaged in the cultivation or distribution of marijuana in the U.S. in accordance with a state license, the following disclosure is required:
- An outline of the regulations for the U.S. state(s) in which the public company operates and confirm how the public company complies with applicable licensing requirements and the applicable regulatory framework;
- A discussion of the public company's program for monitoring compliance with U.S. state law on an ongoing basis and its internal compliance mechanisms; and
- Disclosure of any material non-compliance, as well as material citations or notices of violation.
For public companies with indirect involvement in cultivation or distribution of marijuana by way of a non-controlling investment in an entity who is directly involved in the U.S. marijuana industry, Canadian securities regulators will require disclosure:
- Outlining the regulations for the U.S. states in which the public company's investee(s) operate; and
- Providing reasonable assurance that the investee's business is in compliance with applicable licensing requirements and regulatory framework in the states in which it operates. These assurances may be described through either positive or negative statements (as an example of the latter, "the issuer is not aware of non-compliance").
Finally, for public companies with material ancillary involvement in marijuana cultivation or distribution in the U.S. by providing goods and services including financing, branding, recipes, leasing, consulting or administrative services to third parties directly involved in the U.S. marijuana industry, Canadian securities regulators will request reasonable assurance, through either positive or negative statements, that the applicable customer's or investee's business is in compliance with applicable licensing requirements and regulatory framework in the U.S. state(s) in which it operates.
Where a public company fails to include the above information in its disclosure documents, Canadian securities regulators have latitude to refuse receipts for prospectus offerings, require restatements of non-compliant filings, or take enforcement action.
Canadian Stock Exchange Response
Even with the new disclosure obligations, each exchange applies its own listing requirements and may make its own judgement on public companies with U.S. marijuana-related activities. The TSX, the TSXV and the CSE issued immediate directives outlining their positions with respect to the new disclosure obligations.
TSX and TSXV
The TSX and the TSXV have upheld their historical positions that the illegal status of marijuana under U.S. federal law automatically puts public companies with U.S. marijuana-related activities in breach of minimum listing requirements and exposes financial transactions involving proceeds from marijuana-related activities to prosecution under U.S. federal money laundering laws. This reiteration of their previous position is provided in response to inquiries regarding entities engaging in activities related to the cultivation, distribution or possession of marijuana in the U.S. (referred to by the exchanges as "Subject Entities"). The TSX and the TSXV have offered the following list of focal points, in order of concern:
(i)direct or indirect ownership of, or investment in, Subject Entities;
(ii)commercial interests or arrangements with Subject Entities that are similar to ownership of, or investment in, Subject Entities;
(iii)providing services or products that are specifically designed for, or targeted at, Subject Entities; and
(iv)commercial interests or arrangements with entities engaging in the business activities described in (iii).
The TSX and the TSXV have also noted that they will be contacting public companies by the end of the year for in-depth reviews based on continuous disclosure records, grouping public companies into categories based on whether they (i) directly cultivate, distribute or possess marijuana in any U.S. jurisdiction; or (ii) indirectly participate in marijuana-related activities by providing services or products tailored to Subject Entities or have commercial arrangements with entities doing so.
The TSX and the TSXV have suggested that public companies take proactive steps to address any activity that could run afoul of minimum listing requirements. Considering that their bulletins fall in line with their previous guidance, there may not be a significant number of affected public companies but those who may be subject to potential sanctions should immediately address any activity that would attract negative attention from the TSX and the TSXV.
In contrast to the TSX and the TSXV, the CSE has effectively declared its exchange open for business to public companies that may not meet the requirements of the TSX or the TSXV. The CSE has applauded the heightened disclosure expectations as "timely and carefully considered", assuring public companies that listings will remain in good standing provided their disclosures meet the new standards. The CSE has also emphasized that it is working with CDS to ensure that there is no interruption to services for public companies affected by the new guidelines.
For TSX- and TSXV-listed marijuana companies with marijuana-related activities in the U.S., the exchanges reaffirm their acute concern with the prospect of prosecution under U.S. federal laws. The guidance from these exchanges is a call to action for affected public companies to spin out or sell any assets based in U.S. jurisdictions ahead of upcoming reviews.
CSE-listed marijuana companies will continue operating in the normal course, cooperating with regulatory guidance to ensure listing statements, offering documents and continuous disclosure satisfy the latest guidance from Canadian securities regulators.
At Gowling WLG, we are currently assisting TSX- and TSXV-listed marijuana companies with U.S. assets, and companies with U.S. assets considering a new listing, to restructure their affairs in response to the above stock exchange notices.
 As a Schedule I drug under the U.S. federal Controlled Substances Act.