We noted in our post of January 18, 2018 that the Canadian Securities Administrators (CSA) were reconsidering whether the CSA’s disclosure-based approach for issuers with U.S. marijuana-related activities remained appropriate. The CSA’s reconsideration was triggered by an announcement on January 4, 2018 by Jeff Sessions, Attorney General of the United States, which expressly rescinded previous nationwide guidance from the Obama-era specific to marijuana enforcement (or forbearance therefrom) in the United States, including a “Memorandum for All United States Attorneys” dated August 29, 2013 from James M. Cole, then-Deputy Attorney General of the United States. As we noted, while medicinal marijuana is legal in numerous American states and recreational marijuana is legal in several states, marijuana remains illegal at the federal level in the United States, thus creating a dilemma for the CSA with respect to Canadian issuers with marijuana-related activities in the United States.
On February 8, 2018, the CSA published CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities (Revised 51-352), setting out the expectations of CSA staff with respect to disclosure for specific risks faced by issuers with marijuana-related activities in the United States. In short, the CSA have maintained their disclosure-based approach for Canadian issuers with marijuana-related activities in the United States, as opposed to prohibiting such issuers from raising funds in Canada or listing on a Canadian stock exchange. Issuers will continue to be able to raise funds and list in Canada, notwithstanding the fact that their operations may be illegal under United States federal law and that they may face prosecution at any time, as long as such risks are adequately disclosed.
Revised 51-352 replaces the prior version of CSA Staff Notice 51-352 issued on October 16, 2017 and sets out specific disclosure requirements for such issuers. The disclosure is required for prospectus filings, and in continuous disclosure documents such as an annual information form (AIF) and management’s discussion and analysis (MD&A).
Specifically, Revised 51-352 recognizes the uncertainty with respect to the political and regulatory circumstances surrounding the treatment of marijuana-related activities in the United States, given the disconnect between U.S. federal law and the laws of several states. Revised 51-352 notes that should U.S. federal law against marijuana be enforced, as Attorney General Jeff Sessions clearly wishes to be the case, there could be “material consequences for any issuer with U.S. marijuana-related activities, including prosecution and asset seizure”, an understatement to say the least. Revised 51-352 expects issuers to “carefully consider” any legal or regulatory actions or changes in light of the requirement to disclose material changes under National Instrument 51-102 Continuous Disclosure Obligations. In other words, if federal prosecutors in the United States follow the January 4, 2018 directive from Attorney General Sessions and commence prosecutions of marijuana businesses in the United States, Canadian issuers will have to consider whether a press release and material change report are required under their continuous disclosure requirements.
Revised 51-352 adjusts the specific risk disclosure requirements to be included in prospectus filings, AIFs, marketing materials and MD&A (collectively, Disclosure Documents). The adjustments set out in Revised 51-352 include the following, for all issuers with U.S. marijuana-related activities:
- for a prospectus, there must be “bold boxed cover page disclosure” of the illegal nature of marijuana under U.S. federal law and the potential risks associated with this circumstance, as in: “We operate in violation of United States federal law regarding marijuana and may be subject to prosecution at any time. Any such prosecution may have a material adverse effect on our operations and financial results.”
Under new requirements of Revised 51-352, Disclosure Documents must:
- prominently state that marijuana is illegal under U.S. federal law and that enforcement of such laws is a significant risk for the issuer;
- discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction in which the issuer conducts U.S. marijuana-related activities. In other words, Disclosure Documents should address the statement made on January 4, 2018 by Attorney General Sessions and any subsequent similar statements;
- “quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities”. Quantification of this exposure may be a challenge and lead to statements such as “During our last fiscal year, approximately 75% of our revenues were generated from marijuana-related activities in the United States. Should we be forced to stop such activities as a result of enforcement of United States federal law, it would have a material adverse effect on our financial results”; and
- disclose if legal advice “has not been obtained”, either in the form of a legal opinion or otherwise, regarding compliance with applicable state regulatory frameworks and potential exposure and implications arising from U.S. federal law. In other words, disclose a negative. If legal advice has been obtained, there does not seem to be a requirement to disclose what it says.
For issuers with direct involvement in cultivation or distribution of marijuana in the United States, Revised 51-352 requires that Disclosure Documents include a “positive statement” to the effect that the issuer is in compliance with U.S. state law and the related licensing framework. There is no qualification as to materiality – issuers must confirm that their operations comply with applicable state laws and licences.
For issuers with indirect involvement in cultivation or distribution of marijuana in the United States (e.g., through an investee business), Revised 51-352 requires that issuers promptly disclose any non-compliance citations or notices of violations, of which the issuer is aware, that may have an impact on the license, business activities or operations of the investee business. This will require issuers to monitor compliance with state laws and regulations by their investee businesses in the United States.
The CSA press release issued on February 8, 2018 announced (in one sentence) that “CDS will continue to clear the securities of issuers with U.S. marijuana-related activities.” CDS is Canadian Depository for Securities Ltd., the clearing house which processes all Canadian equity trades, owned by TMX Group. This statement removes market uncertainty which had existed since an announcement by TMX Group in August 2017 with respect to the clearing by CDS of securities of Canadian-listed issuers with marijuana-related activities in the United States and is a very positive development for Canadian issuers with marijuana-related activities in the United States.
Finally, Revised 51-352 has no effect on companies listed on the Toronto Stock Exchange (TSX) or TSX Venture Exchange (TSXV), which remain subject to TSX Staff Notice 2017-0009 and the equivalent TSXV Notice to Issuers. As we previously noted, listed companies with ongoing business activities that violate United States federal law regarding marijuana are not in compliance with the requirements of the TSX/TSXV and will not be listed or, if already listed, will face the possibility of delisting. The Canadian Securities Exchange has no such policy.