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Financing

Private

What private financing options are available for cannabis businesses in your jurisdiction, and what are their respective advantages and disadvantages?

Until recently, private (and public) equity financing has been the primary form of financing for cannabis businesses as historically it has been difficult for many cannabis businesses (in particular those without substantial securable assets) to obtain debt financing from Canada’s primary lenders.

Any direct participation in the US cannabis market will make it difficult for a cannabis business to obtain financing from a Canadian bank. One reason for this is because US banks that serve as correspondent or intermediary banks to Canadian banks (to facilitate the international movement of funds) are reluctant to provide such a service to Canadian banks that serve the cannabis industry given the federal illegality of cannabis in the United States. There are also major Canadian banks that operate internationally, which are therefore directly exposed should they provide banking services to businesses in breach of such US laws.

The Canadian cannabis sector has also seen some deal flow being driven by stream financing, which is most commonly seen in the mining sector. This financing option sees major Canadian cannabis producers financing smaller Canadian cannabis companies. The debt obligations incurred in this type of financing arrangement may be repayable in product or product equivalents, with repayment contingent on actual production.

Public

What rules and restrictions govern cannabis businesses’ listing and admission to trading on recognised equity securities exchanges? What are the advantages and disadvantages of public listing?

Currently, the Canadian Stock Exchange (CSE) is the only exchange in Canada that will permit the listing of a cannabis company doing business in the United States. Both the Toronto Stock Exchange and the TSX Venture Exchange refuse to accept new listings of companies with ties to the US cannabis market. To list on the CSE, the issuer must not be in breach of any securities legislation in any Canadian jurisdiction and, in addition to other more technical requirements, the issuer must have filed a preliminary prospectus and a prospectus in a Canadian jurisdiction and be a reporting issuer or the equivalent in a Canadian jurisdiction.

Some of the potential advantages of public listing are the capital that can be raised, liquidity gained, higher valuation and greater publicity. However, when companies choose to go public they must also make extensive disclosure and comply with stringent rules and regulations of the applicable exchanges, all of which can be costly.