On October 16, 2017, the Canadian Securities Administrators (CSA), the Toronto Stock Exchange (TSX), and the TSX Venture Exchange (TSXV and together with the TSX, the TMX Group), issued long-sought guidance on disclosure requirements for issuers engaged in activities related to the cultivation, distribution or possession of marijuana in the United States (U.S.-based cannabis-related activities).
The TMX Group Bulletins
The TMX Group's guidance on listing requirements for applicants and issuers engaged in U.S.-based cannabis-related activities (Bulletins), clarifies a long-standing policy that issuers must comply with all applicable laws in the jurisdictions in which they operate. The Bulletins make clear that, at least with respect to the cannabis sector, the TMX Group is of the view that federal law takes priority over state law. Consequently, the TMX Group's listed issuers and listing applicants engaged in U.S.-based cannabis-related activities do so in violation of the TMX Group's policies.
As provided in the Bulletins, issuers and applicants with ongoing business in U.S.-based cannabis-related activities are viewed as non-compliant with the TMX Group's policies on minimum listing requirements, management, and the halting of trading, suspension and delisting of securities. At issue are business activities that include direct or indirect investments in entities engaged in U.S.-based cannabis-related activities, and commercial interests or arrangements that are similar in substance to ownership, with entities engaged in U.S.-based cannabis-related activities. Ancillary business arrangements, including providing services or products targeted at cannabis related activities in the United States, or investments in entities that provide such services or products, are likewise viewed as violating the TMX Group's requirements. Importantly, issuers listed on the TMX Group's exchanges that are engaged in activities contrary to exchange policies are subject to delisting reviews.
The TMX Group also noted that it is undertaking an industry-focused continued listing review that will concentrate, first, on listed issuers with direct interests in U.S. cannabis-related operations. The TMX Group's review is also expected to capture U.S. ancillary service providers in the cannabis industry.
The announcements do not restrict cannabis listings that operate legally within a federal framework, like Canada, and emerging international markets. Of note, listed issuers on the TMX Group's exchanges have successfully partnered with groups in Germany, Brazil, and Australia, among others.
CSA Staff Notice 51-352 - Issuers Engaged in Cannabis-Related Activities
CSA Staff Notice 51-352 (Staff Notice) provides specific disclosure obligations for issuers engaged in cannabis-related activities. All issuers engaged in cannabis-related activities are expected to disclose the following information in prospectus filings, annual information forms, management discussions and analyses, as well as in any other filings where material risks are disclosed:
- A description of the nature of the issuer's cannabis related activities.
- An explanation that cannabis related activities are illegal under U.S. federal law and that federal law enforcement policies are subject to changes that could result in significant risks for investors.
- A description of whether and how the issuer's cannabis related activities are consistent with any U.S. federal enforcement priorities.
- A discussion about the issuer's ability to access public and private capital in the United States given that cannabis is illegal under U.S. federal law.
Additional disclosure requirements are mandated by the Staff Notice for those issuers that: (i) are directly engaged in the cultivation or distribution of cannabis in accordance with a U.S. state license; (ii) have a non-controlling investment in an entity that is directly involved in cannabis related activities; or (iii) provide goods or services (including, among other things, financing, leasing and consulting) to third parties who are directly involved in the U.S. marijuana industry. Issuers who enter into Canadian capital markets through reverse takeovers or spinoff transactions must also include the required disclosures in their listing statements and other applicable documents. Failure to provide the required disclosures set out in the Staff Notice may result in significant regulatory actions, including receipt refusal for prospectus offerings, requests for restatements of non-compliant filings, and referrals to applicable agencies for enforcement actions.
The Staff Notice reinforces a disclosure-based approach for issuers engaged in cannabis-related activities, rather than an outright ban. The Staff Notice suggests that this will remain the case, provided that issuers engaged in U.S.-based cannabis-related activities maintain robust risk disclosures set out in the Staff Notice, the issuer's U.S. activities are lawful at the state level, and that the U.S. Department of Justice continues to follow guidance issued in 2013, suggesting that it generally will not enforce U.S. federal prohibitions on cannabis in states that have authorized the conduct, so long as a strong and effective state regulatory program is in place.
CSE Announcement Lauds the Staff Notice
The Canadian Securities Exchange (CSE) provided a statement in full support of the Staff Notice, adding "we are grateful to the CSA for issuing timely and carefully considered guidance regarding current and prospective reporting issuers focused on the U.S. cannabis sector . . . [and] significant comfort to these issuers that their Canadian listings will remain in good standing as long as they provide the disclosure that is rightly required by regulators." The CSE's announcement did not outline any exchange specific requirements.