On October 16, 2017, the Toronto Stock Exchange (TSX) issued Staff Notice 2017-0009 regarding listed companies engaged in the marijuana business, whether directly or indirectly, in the United States. At the same time, the TSX Venture Exchange (TSXV) issued a Notice to Issuers virtually identical to the TSX Staff Notice. It is well-known that recreational cannabis has been legalized in certain American states (in alphabetical order, Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington) yet remains illegal at the federal level in the United States. The TSX Staff Notice and TSXV Notice to Issuers clarify the position of the two Exchanges in light of this legal conundrum. In short, marijuana, the United States and listing on the TSX/TSXV do not mix.
The TSX Staff Notice states the general rule that a TSX-listed company must act in compliance with the rules and regulations of all regulatory bodies having jurisdiction over it. The Staff Notice notes that marijuana remains a Schedule I drug under the United States Controlled Substances Act, such that it is illegal under United States federal law to cultivate, distribute or possess marijuana, and that financial transactions involving proceeds generated by, or intended to promote, marijuana-related business activities in the United States may form the basis for prosecution under applicable U.S. federal money-laundering legislation.
According to the Staff Notice, companies listed on the TSX with ongoing business activities that violate United States federal law regarding marijuana are not in compliance with the requirements of the TSX. These business activities may include, among other things, (i) direct or indirect ownership of, or investment in, businesses engaged in the cultivation, distribution or possession of marijuana in the United States (which the Staff Notice refers to as “Subject Entities”), (ii) other commercial arrangements with Subject Entities (presumably, a joint venture, a “streaming” deal, or other similar contractual arrangement), (iii) providing services or products that are specifically designed for, or targeted at, Subject Entities, or (iv) commercial interests or arrangements with entities (CSA) engaging in the business activities described in (iii).
The Staff Notice sets out that the TSX will contact its listed companies by the end of 2017 for a comprehensive review of their marijuana-related activities (if any) in the United States. If a listed company engages in activities that are contrary to TSX requirements, the TSX has the discretion to delist that company. In short, if a TSX-listed company grows or distributes marijuana in the United States, invests in another business that grows or distributes marijuana in the United States, or provides services or products for businesses that grow or distribute marijuana in the United States, the company faces the prospect of being delisted from the TSX.
However, it’s not all bad news for companies in the marijuana industry. The Staff Notice concludes by stating that the TSX continues to welcome listing applicants in the marijuana sector that operate within Canada and comply with applicable Canadian law. Presumably, the TSX will also welcome listing applicants engaged in the marijuana business in other countries in which such activities are legal, provided that the listing applicant can demonstrate to the TSX that it is in compliance with all applicable laws of those jurisdictions. However, until further notice, companies listed or applying for listing on the TSX or TSXV will have to stay away from either marijuana or the United States.
For those Canadian companies with marijuana activities in the United States (for example, a company listed on the Canadian Securities Exchange), the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities on October 16, 2017. Similar to TSX Staff Notice 2017-0009, the CSA Staff Notice notes the discrepancy between U.S. federal and state law as it relates to the use and sale of marijuana. In short, CSA staff believes that how a company with U.S. marijuana activities ensures compliance with U.S. state-level regulatory frameworks forms an important part of that company’s continuous disclosure record.
The CSA Staff Notice sets out specific disclosure requirements for issuers with marijuana-related activities in the United States, which will apply to continuous disclosure documents such as an annual information form or management’s discussion and analysis (MD&A), and to a prospectus in the event of a public offering. For example, CSA staff expects that an issuer will explain in these documents “whether and how the issuer’s U.S. marijuana-related activities are conducted in a manner consistent with any U.S. federal enforcement priorities”. For those issuers with direct involvement in the cultivation or distribution of marijuana, CSA staff expects in particular that the issuer will outline the applicable regulations of the U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the state regulatory framework. This is more than boilerplate disclosure. Canadian issuers with marijuana-related activities in the United States will have to take cognizance of, and comply with, these specific disclosure requirements. Failure to do so could lead to a request from CSA staff for re-filing of the disclosure document (e.g. annual information form or MD&A) or appropriate enforcement action.