Following the initial notice discussed in our October MarketCaps, Canadian securities regulators recently released updated guidance to public companies with marijuana-related interests in the United States - guidance that outlines enhanced disclosure obligations.
In providing this update, Canadian securities regulators resolved uncertainty with respect to securities trading in companies involved in the U.S. marijuana sector in the wake of the recent rescission of the Cole Memorandum. The Toronto Stock Exchange, TSX Venture Exchange and Canadian Securities Exchange have not yet released statements addressing the updated framework.
Gowling WLG Focus
The regulatory landscape governing marijuana in the United States is complex, with various states enacting legislation permitting medical or recreational uses. However, marijuana remains illegal under U.S. federal law.1 In early 2018, U.S. Attorney General Jeff Sessions rescinded the 2013 Cole Memorandum which deferred prosecution of marijuana offences where states had enacted "strong and effective" regulatory programs. The rescission of the Cole Memorandum eliminated guidance to U.S. Attorneys on the prosecution of federal drug laws, creating further uncertainty and greater risk of prosecution for companies engaging in marijuana-related activities in the U.S. Canadian securities regulators issued a statement in response to the rescission of the Cole Memorandum announcing that they would consider whether a disclosure-based regulatory approach remained appropriate for companies engaged in marijuana-related activities in the U.S.
Canadian securities regulators' updated guidance to issuers with U.S. marijuana activities builds on the disclosure requirements originally released in October 2017, providing clarity to Canadian public companies as to their expectations of marijuana industry participants, despite legal and political uncertainty with respect to marijuana in the United States. The revised guidance requires that companies acknowledge the risks associated with their U.S. marijuana-related activities and provide investors with information to make informed decisions.
In conjunction with the updated guidance, the Canadian Depository for Securities Limited announced the signing of a memorandum of understanding with the Toronto Stock Exchange, TSX Venture Exchange, the Canadian Securities Exchange and the Aequitas NEO Exchange outlining their understanding and interpretation of the Canadian securities regulators' guidance. The MOU with CDS confirms that securities of issuers with U.S. marijuana-related activities will continue to trade with no disruption.
Enhanced disclosure requirements
Canadian securities regulators have endorsed a disclosure-based approach to regulating Canadian companies engaged in or developing marijuana-related activities in the United States. Public companies must address the points outlined below in offering documents, including prospectuses, listing statements and marketing materials, as well as continuous disclosure documents including the annual information form and management's discussion and analysis. The revised guidance enhances the disclosure in prospectuses and listing statements, requiring that a bolded box be included on the cover page addressing the illegal nature of marijuana under U.S. federal law and the potential associated risks, including prosecution and asset seizure.
Canadian regulators developed and clarified the disclosure requirements applicable to various categories of issuers, building on the items included in their initial guidance. In addition to the disclosure previously required, all public companies with U.S. marijuana-related activities must:
- prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk to the company;
- discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities;
- outline related risks including the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could restrict the company's ability to operate in the U.S.;
- quantify the company's balance sheet and operating statement exposure to U.S. marijuana-related activities; and
- disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding compliance with applicable state regulatory frameworks and potential exposure and implications arising from U.S. federal law.
Public companies engaged, directly or through controlled subsidiaries, in cultivating or distributing marijuana in the U.S. in accordance with a state license must state in disclosure documents that the company is in compliance with U.S. state law and the related licensing framework. The company must promptly disclose any non-compliance, citations or notices of violation which may impact the license, business activity or operations.
Similarly, issuers with indirect involvement in cultivating or distributing marijuana in the U.S. through a non-controlling investment in an entity directly involved in the U.S. marijuana industry must promptly disclose any non-compliance, citations or notices of violation the issuer is aware of, that may impact the license, business activities or operations of the investee business.
Public companies with U.S.-based marijuana-related activities may be refused receipts for prospectuses, be required to restate non-compliant filings, or face enforcement proceedings where disclosure documents do not comply with securities regulators' enhanced disclosure framework.
Next steps
In contrast to Canadian securities regulators' October 2017 announcement, the TSX, TSXV and CSE did not immediately issue directives in response to the regulators' enhanced disclosure framework. The TSX and TSXV's current policy requires issuers with U.S. marijuana-related activities to spin out or sell assets based in the United States to comply with minimum listing requirements. The CSE has not required listed companies to dispose of U.S.-based assets.
Gowling WLG is monitoring regulatory developments in Canada and the United States and is advising TSX, TSXV and CSE listed companies on compliance with the enhanced disclosure framework.
The authors would like to thank Stephen Franchetto for his contributions to this article.
[1] As a Schedule I drug under the U.S. federal Controlled Substances Act.