Canada: Canadian Securities Regulators Refine Position On Marijuana Sector

Last Updated: October 31 2017
Article by Josh Rosen, Jason Saltzman and Peter Simeon

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.

CSE

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.

Next Steps

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.

Footnote

1 As a Schedule I drug under the U.S. federal Controlled Substances Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
7 Nov 2019, Seminar, Birmingham, UK

Providing content specifically tailored to the needs of GCs and Heads of Legal working in government organisations and their affiliates.

14 Nov 2019, Seminar, London, UK

Providing content specifically tailored to the needs of GCs and Heads of Legal working in government organisations and their affiliates.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions