The Latest from the TSX, the CSA and the CSE on Marijuana-Related Activities in the United States
On October 16, 2017, the Toronto Stock Exchange (the "TSX") issued a staff notice (the “TSX Notice”) providing guidance to currently listed issuers and applicants wishing to list on the TSX that are engaged in activities related to the cultivation, distribution or possession of marijuana in the United States and related ancillary services.
The notice points out that regardless of the industry in which an issuer operates, it is incumbent on the TSX to satisfy itself that the business of any applicant for listing or of a listed issuer is conducted (i) with integrity and in the best interests of the issuer's security holders and the investing public, and (ii) in compliance with the rules and regulations of the TSX and all other regulatory bodies having jurisdiction.
Currently, notwithstanding the legalization in a number of U.S. states of certain activities in the marijuana sector, the TSX is of the view that the cultivation, distribution or possession of marijuana in the United States remains illegal pursuant to applicable U.S. federal legislation and that “financial transactions involving proceeds generated by, or intended to promote, marijuana-related business activities in the U.S. may form the basis for prosecution under applicable U.S. federal money laundering legislation”.
As such, the TSX concludes that issuers with ongoing business activities that violate U.S. federal law regarding marijuana are not complying with its listing requirements (effectively prohibiting an applicant from listing on the TSX and causing existing listed issuers to face potential delisting). Such business activities include: the direct or indirect ownership of, or investment in, and/or similar commercial interests or arrangements with, entities engaged in activities related to the cultivation, distribution or possession of marijuana in the United States; the provision of services or products designed for the U.S marijuana industry; and commercial interests or arrangements with entities that provide such products or services.
The TSX Notice also makes clear that listed issuers that have been selected for a continued listing review that operate in the marijuana sector will be subject to a more comprehensive review likely before the end of 2017. TSX requirements require a listed issuer in the marijuana sector to ensure that material information concerning such issuer’s business and affairs is disclosed. Listed issuers are expected to actively address any gaps in complying with TSX requirements.
Accordingly, the notice recommends that applicants and listed issuers considering engaging in marijuana-related activities in the United States consider the guidance in the TSX Notice and consult with the TSX accordingly. The TSX Notice does not affect issuers that operate in the marijuana sector within Canada to the extent such issuers comply with TSX and applicable Canadian legal requirements.
On the same day, the Canadian Securities Administrators (the “CSA”) issued a staff notice (the “CSA Notice”) setting out its disclosure expectations for an issuer that is engaged, or wishes to engage, in marijuana-related activities that are legal in a U.S. state, assuming that U.S. federal law is not enforced pursuant to the U.S. Department of Justice’s 2013 guidance.
In essence, the disclosure requirements relating to compliance with U.S. state law varies depending on the type and level of involvement (direct or indirect) of the issuer in the U.S. marijuana industry. However, all issuers involved with U.S. marijuana related activities must describe, among other things, the nature of the issuer’s involvement in such industry; explain that marijuana remains illegal under U.S. federal law and that the forbearance approach to enforcement of U.S. federal laws is subject to change and discussing the resultant risks including the risk of adverse enforcement action; state whether and how the issuer’s marijuana-related activities are conducted in a manner consistent with U.S. federal enforcement priorities and discuss the issuer’s access to financing given the illegality of marijuana at the U.S. federal level. Further disclosure requirements arise for a U.S. marijuana issuer depending on whether such issuer is directly or indirectly involved in the cultivation or distribution of marijuana or provides goods and/or services not limited to financing, branding, recipes, leasing, consulting or administrative services to third parties who are directly involved in the U.S. marijuana industry.
The CSA expects U.S. marijuana issuers to remain proactive in their disclosure obligations and to supplement, amend and communicate forthwith to investors in public filings such as in a prospectus filing or continuous disclosure document such as an AIF or MD&A. Issuers not in compliance may be refused a receipt for a prospectus or required to restate a deficient filing. Issuers should also remain mindful of any legal or regulatory change to determine whether such change or changes would result in a material change triggering timely disclosure obligations under applicable Canadian securities laws.
In response to the CSA Notice, the Canadian Securities Exchange (the “CSE”) which had, in an earlier CSE Notice issued in August 2017, acknowledged that there are risks related to the conflict in the U.S. marijuana industry between U.S. federal law but confirmed its position that it would continue to accept applications from companies involved in the U.S. marijuana sector that meet its listing requirements and provide appropriate risk disclosure to investors, commented in a news release that it welcomed the CSA Notice for the clarity provided to issuers having U.S. cannabis exposure in terms of their disclosure obligations and for effectively providing comfort for those issuers listed or wishing to list on the CSE that so long as such issuers comply with their disclosure obligations relating to their U.S. marijuana business such issuers remain welcome on the CSE.
In light of such pronouncements, the CSE has now issued a CSE Notice providing additional details for CSE-listed issuers in applying the principles of the CSA Notice. For example, a CSE Listing Statement will need to include the specific disclosure for the type of marijuana-industry involvement described in the CSA Notice. It should also include a description of the issuer’s policies or procedures, if any, the issuer will implement to reassess the risks, and the relevance and adequacy of existing disclosure. With respect to ongoing CSE disclosure requirements, the CSE Notice provides guidance as to when certain disclosure may be more appropriate in a CSE Form 7 Monthly Report where a news release is not necessitated. With respect to acquisitions and transactions resulting in a CSE-listed issuer conducting cannabis-related activities in the U.S. disclosure thereof must include a discussion of the risks in relation to the proportion of business the acquisition will represent to the issuer. For reverse-takeover type transactions known as transactions resulting in a “fundamental change” under CSE additional disclosure will be required in the Listing Statement filed for the fundamental change. Otherwise, the required disclosure should appear in the next Monthly Progress Report, MD&A and Annually Updated Listings Statement or AIF, as applicable.