On October 17, 2018, Canada is set to become the first G7 economy to fully legalize recreational cannabis with the implementation of Bill C-45. As this date approaches, compliance risks loom for cross-border entities with a stake in the cannabis industry.
Divergence between U.S. and Canadian policy
As Canada moves to legalize cannabis, its marijuana laws are set to sharply diverge with those of the United States. Though marijuana has been legalized for medical or recreational use by many U.S. states, it remains a Schedule I drug under the federal Controlled Substances Act (21 U.S.C. § 811), and its cultivation, distribution and possession is prohibited by federal law. On January 4, 2018, U.S. Attorney General Jeff Sessions rescinded all previous guidance to federal law enforcement which had adopted a policy of non-interference in states which had decriminalized or legalized cannabis use (the “Sessions Memo”). This order represented a rollback of an Obama-era policy which directed the federal government to adopt a “hands-off” approach to cannabis. The enforcement of federal marijuana law could have serious implications for industry issuers operating in the United States, including seizure of assets or prosecution.
U.S.-Canada border issues
Due to the legislative divergence between the two countries, Canadians and Americans involved in the cannabis industry may notice heightened scrutiny when crossing at the U.S. border. The U.S. Customs and Border Protection Agency has noted that involvement in the legal marijuana industry – whether in Canada or in U.S. States where cannabis is legal – may affect an individual’s ability to enter the United States. As the sale, possession, production and distribution of marijuana continue to be illegal under U.S. federal law, the Agency has noted that crossing the border or arriving at a U.S. port of entry in violation of this law may result in seizure, fines, arrest, and/or impact admissibility. Market participants should be proactive in anticipating these issues.
Accessing Canadian capital markets
While the major U.S. stock exchanges do not list securities of cannabis companies, Canadian securities regulators do not have similar restrictions. Consequently, Canadian capital markets have become central to financing the growth of the global cannabis industry. Canadian securities exchanges have reached different decisions as to whether companies with U.S. cannabis operations may be listed. The TMX Group Ltd. – which owns the Toronto Stock Exchange and the TSX Venture Exchange – has decided that, due to concerns about the legality of cannabis in the United States, companies with cannabis operations in the United States may not be listed on its exchanges. The smaller Canadian Securities Exchange (CSE), however, has allowed the listing of cannabis companies with U.S. operations. Given the barriers to accessing capital in the United States, American marijuana companies are increasingly enticed to list securities on the CSE.
Canadian securities regulations
As American marijuana policy has shifted, Canadian securities regulators have been swift to respond. As we have previously written, the Canadian Securities Administrators (CSA) issued “CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities” in October 2017, setting out specific disclosure expectations for cannabis companies with investments in the United States. Following the issuance of the Sessions Memo on January 4, 2018, the regulatory framework applicable to U.S. issuers became uncertain. Accordingly, the CSA issued a revised Staff Notice 51-352 on February 8, 2018. The revised notice expands disclosure requirements that apply to all issuers with direct or indirect marijuana activities in the United States.
If navigated properly, Canadian cannabis legalization presents significant opportunity, such as Constellation Brands’ recent $5.1 billion investment in Canopy Growth, allowing the latter to establish global scale in the nearly thirty countries pursuing a federal medical cannabis program and new recreational cannabis markets. The upcoming policy change, however, may also entail significant risk and uncertainty, particularly for cross-border industry members whose businesses straddle Canada and the United States.