On October 16, 2017, the Canadian Securities Administrators (the CSA) published CSA Staff Notice 51-352 Issuers with Marijuana-Related Activities (the CSA Notice) clarifying the CSA's disclosure expectations for issuers carrying on marijuana-related activities in US states where such activities are authorized under regulatory frameworks in such states (US Cannabis Issuers). On the same day, the Toronto Stock Exchange (the TSX) published Staff Notice 2017-0009 (the TSX Notice), the TSX Venture Exchange (the TSXV) published a bulletin (the TSXV Notice), and the Canadian Securities Exchange (the CSE) published a press release (the CSE Press Release) providing similar guidance on the application of their respective exchange requirements with respect to US Cannabis Issuers.

CSA Notice

The CSA Notice highlights that US Cannabis Issuers face unique regulatory risks based on the conflict between state and federal laws in the US with respect to cannabis. While the cultivation and sale of cannabis remains illegal under US federal law, US Cannabis Issuers rely on the guidance from the "Cole Memo" published by the US Department of Justice on August 29, 2013, which characterized enforcement of federal marijuana prohibitions under the Controlled Substances Act as an inefficient use of federal resources where state regulatory and enforcement regimes were robust and effective. However, while the Cole Memo provides guidance with respect to the application of federal laws, it does not amend them, and remains subject to revision, amendment and revocation, thus exposing US Cannabis Issuers to greater regulatory and enforcement risks, including criminal sanctions.

Against such a backdrop, the CSA Notice sets out specific disclosure expectations for US Cannabis Issuers. It is important to note that the CSA has sought to tailor certain of the disclosure expectations depending on the nature of an issuer's business and its exposure to the cultivation and sale of cannabis in the US. In particular, the CSA divides the US cannabis industry into three types of participants:

• US Cannabis Issuers with direct involvement in cultivation or distribution: This type of market participant has direct exposure to the cultivation or sale of cannabis in accordance with a US state license. The CSA has confirmed that such US Cannabis Issuers have the greatest disclosure obligations in light of their direct involvement.
• US Cannabis Issuers with indirect involvement in cultivation or distribution: This type of market participant may, for example, have a non-controlling investment in an entity with direct exposure to the cultivation or sale of cannabis in the US.
• US Cannabis Issuers with material ancillary involvement: This type of market participant may, for example, provide services, financing, real estate or products that are marketed to entities with direct exposure to the cultivation or sale of cannabis in the US and will have less stringent disclosure requirements.

The CSA Notice reiterates that securities regimes across Canada "are primarily disclosure-based" thereby seeking to educate investors and market participants in respect of the risks associated with US Cannabis Issuers. Rather than seeking to prohibit certain activities, the CSA has taken the position that US Cannabis Issuers need to "fairly present all material facts and risks", including:

• the nature of the issuer’s involvement in the US cannabis industry;
• disclosure that cannabis remains illegal under US federal law and that the approach to enforcement of US federal laws against cannabis is subject to change;
• an explanation as to whether and how the issuer’s US cannabis-related activities are conducted in a manner consistent with any US federal enforcement priorities;
• disclosure of the regulations for US states in which the issuer operates and a confirmation as to how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable US state; and
• details on the issuer’s program for monitoring compliance with US state law on an ongoing basis, and a description of internal compliance procedures.

In light of the uncertainty surrounding the application of the Cole Memo and its application, the CSA has confirmed that staff will re-examine its views on disclosure expectations for US Cannabis Issuers in the event that US federal laws respecting cannabis were amended.

Equally important, the CSA Notice also provides clear guidance on the listing of US Cannabis Issuers on Canadian securities exchanges. In particular, the CSA has confirmed that the Canadian exchanges retain broad discretion with respect to the determination as to whether to list US Cannabis Issuers, noting that "each exchange applies its own listing requirements as outlined in its rules, including rules related to compliance with applicable laws." As further described below, each of the TSX, the TSXV and the CSE provided an immediate response to the CSA Notice and the much needed clarity it provides.

TSX Notice and the TSXV Notice

The TSX Notice and the TSXV Notice note that US Cannabis Issuers whose activities violate US federal law respecting cannabis are not complying with the minimum listing and ongoing requirements set out in the TSX Company Manual and the TSXV Corporate Finance Manual, respectively, particularly the provisions which relate to an issuer's compliance with other regulatory bodies, and the requirement that an issuer's business is operated in the best interests of security holders. The TSX and the TSXV have confirmed that the types of business activities that are of concern include, in order of concern: (i) direct or indirect ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of marijuana in the US; (ii) commercial interests or arrangements with entities engaging in activities related to the cultivation, distribution or possession of marijuana in the US that are similar in substance to ownership of, or investment in, entities engaging in activities related to the cultivation, distribution or possession of marijuana in the US; (iii) providing services or products that are specifically designed for, or targeted at, entities engaging in activities related to the cultivation, distribution or possession of marijuana in the US; or (iv) commercial interests or arrangements with entities engaging in the business activities described in (iii).

It is important to note that both the TSX Notice and the TSXV Notice are consistent with the CSA Notice in so far as they divide the US cannabis industry into types of participants based on an issuer's exposure to the cultivation and sale of cannabis in the US. 

The TSX and the TSXV have confirmed that they expect to contact listed issuers identified in their continued listing review by the end of the year for a more comprehensive review. A potential consequence of non-compliance with the TSX or TSXV requirements is delisting from such exchanges.

This is consistent with both the TSX and TSXV's historical approach to US Cannabis Issuers, and such companies will remain ineligible for listing on such exchanges.

CSE Press Release

The CSE Press Release praised the CSA Notice for providing "significant clarity for all stakeholders in the [cannabis] sector". Moreover, the CSE Press Release suggests that the CSA Notice gives comfort to US Cannabis Issuers as, based on the policies of the CSE, their listings will remain in good standing provided adequate disclosure is made.

The CSE Press Release also addresses recent concerns regarding the continued availability of central clearing, depository and settlement services for US Cannabis Issuers. In particular, the CSE notes that they are committed to ensuring that there is no disruption to the central clearing, depository and settlement services provided for US Cannabis Issuers, and are working with the relevant stakeholders on this matter and are very confident that companies will continue to have trades in their securities cleared and settled.

Such statements are consistent with the CSE's historical approach to US Cannabis Issuers, as the CSE already has the highest aggregate number of listed US Cannabis Issuers as compared to any other Canadian stock exchange.

Dentons' analysis

The guidance provided by the CSA is beneficial to US Cannabis Issuers and the market generally, as it provides much-needed guidance and clarity on the CSA's approach to US Cannabis Issuers. While the CSA Notice details certain risks associated with cannabis operations in the US, in our view, it also reconfirms that US Cannabis Issuers are able to access and participate in the Canadian capital markets. Moreover, the disclosure framework provided by the CSA will allow US Cannabis Issuers to have a clear understanding of their disclosure requirements and how they are able to comply with applicable Canadian securities laws. Going forward, we expect that much of the disclosure by US Cannabis Issuers will become standardized as the CSA framework becomes increasingly well-established in the Canadian market. In addition, the guidance provided by the CSA will hopefully provide comfort to new market participants and institutional investors, allowing them to participate in an industry that has historically been a retail space.

The contents of the TSX Notice and the TSXV Notice come as no surprise as US Cannabis Issuers have historically been ineligible for listing on the TSX and the TSXV. As such, there are very few issuers who may be affected by the TSX Notice or the TSXV Notice; however, those TSX or TSXV-listed Canadian issuers that have contemplated expanding into the much-larger US markets will need to carefully consider the implications of the TSX Notice or the TSXV Notice for their ongoing listing. The Dentons’ Cannabis Team will closely monitor the actual implementation of the guidance from the TSX and the TSXV set forth in their notices, in particular whether they intend to pursue any delisting activities or require any listed US Cannabis Issuers to divest their US cannabis interests.

On the other end of the spectrum, the CSE clearly remains “open for business”. We concur with the CSE that the CSA Notice provides comfort that the listings of US Cannabis Issuers will remain in good standing as long as they provide appropriate disclosure and subject to changes in US federal law. 

It is interesting to note that the CSE Press Release referred to the ongoing clearing of trades by the Canadian Depository for Securities ("CDS"), as this was not addressed directly in the CSA Notice, but remains a point of concern for US Cannabis Issuers and investors. Given that CDS is regulated by certain members of the CSA, we expect that the CSA Notice is but the first step by the Canadian regulators to provide clear guidance and a framework for the ongoing listing, continuous disclosure and settlement of trades of US Cannabis Issuers, and view this as a very positive development for the rapidly-developing cannabis industry.

Contact us

As the Canadian securities and exchange regulatory environments continue to evolve and respond to changes in US federal and state law, Dentons' leading Cannabis team will continue to work closely with policy makers, US Cannabis Issuers and other key stakeholders, and provide frequent Insights on future developments.
If you wish to discuss the CSA Notice, its possible implications for your business or the Canadian cannabis industry, please contact Eric Foster or Andreas Kloppenborg.