Issuers Deemed in Violation of U.S. Laws Could Face Delisting Review
On October 16, 2017, the Toronto Stock Exchange (“TSX”) issued a staff notice (the “October Notice”), providing guidance on and clarification regarding the application of certain of its existing policies governing listed issuers (collectively, the “Requirements”) engaging in activities related to the cultivation, distribution, or possession of marijuana in the United States (“Subject Entities”).
Under the Requirements, TSX listed issuers must conduct business: (i) with integrity and in the best interests of the issuer’s security holders and the investing public and (ii) in compliance with the rules and regulations of the TSX and all other regulatory bodies having jurisdiction. The October Notice makes it clear that, given the current state of the law in the United States, TSX listed issuers engaging in marijuana-related activities in the United States may be viewed by the TSX as not satisfying its continued listing requirements.
In the context of its continued listing review of issuers in the marijuana sector, the TSX has stated that it expects to group issuers into two categories. The first category is composed of issuers with business activities that involve the cultivation, distribution or possession of marijuana in any jurisdiction. The second category is composed of issuers that do not cultivate, distribute or possess marijuana, but that appear to be engaging in Ancillary Services Activities (as defined below). TSX expects to contact listed issuers identified in its continued listing review by the end of the year for a more comprehensive review.
The October Notice states that listed issuers should proactively work to address any gaps in their compliance with the Requirements. The October Notice also states that if a listed issuer is engaging in activities that are contrary to the Requirements, the TSX has the discretion to initiate a delisting review under Part VII of the TSX Company Manual.
The U.S. Legal Landscape is Currently Unclear
The October Notice noted that marijuana is a Schedule 1 drug under the U.S. federal Controlled Substances Act and stated that issuers that contravene US federal marijuana laws will not be in compliance with the Requirements. The TSX acknowledged that several U.S. states have legalized cultivation, distribution, and possession of marijuana and that guidance from the Obama administration currently remains in place to restrict the enforcement of federal drug laws at a state level. However, the TSX expressed concern that the guidance was non-binding and subject to change at any time. The TSX further warned that transactions involving proceeds generated by, or intended to promote, marijuana-related business activities in the U.S. could result in prosecution under U.S. Federal money laundering legislation
Canadian Focused Compliant Issuers Not Affected by the October Notice
The TSX continues to welcome all issuers that are in compliance with the Requirements. This means that issuers in the marijuana sector operating solely within Canada and compliant with applicable Canadian law, are not affected by the October Notice.
The October Notice Casts a Wide Net to Include Issuers that Engage in Ancillary Services Activities
The activities addressed by the October Notice may include, in order of concern to the TSX:
(i) direct or indirect ownership of, or investment in, Subject Entities;
(ii) commercial interests or arrangements with Subject Entities that are similar in substance to ownership of, or investment in, Subject Entities;
(iii) providing services or products that are specifically designed for, or targeted at, Subject Entities; or
(iv) commercial interests or arrangements with entities engaging in the business activities described in (iii). The business activities in (iii) and (iv) are referred to as “Ancillary Services Activities“.
Accordingly, the TSX has cast a wide net. While the October Notice clearly applies to Subject Entities, its application also extends to issuers that may not themselves be Subject Entities but provide Ancillary Services Activities as described above.
CSA Staff Notice Focuses on Disclosure Expectations
Also on October 16, 2017, the Canadian Securities Administrators (“CSA”), a group of Canada’s provincial and territorial securities regulators, released Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities. The CSA outlined specific disclosure expectations for issuers that have, or are developing, marijuana-related activities in the U.S. The CSA has stated:
“We expect issuers with marijuana-related activities in the U.S. to address the current legal and regulatory environment in their disclosures, including any risks that result from changes in the approach to enforcement of U.S. federal law.”
Notably, the CSA did not indicate that violating U.S. federal drug laws, in and of itself, would be a breach of any provincial or territorial securities regime. However, issuers would still be required to address the risks in prospectus filings, Annual Information Forms, and MD&A.
Canadian Securities Exchange Currently Remains Open to Marijuana Issuers with U.S. Business
In response, the Canadian Securities Exchange (the “CSE”), another Canadian exchange not affiliated with the TSX, stated that it was “very pleased” with the notice provided by the CSA. Unlike the TSX, the CSE did not signal any intention to delist issuers for carrying on marijuana activities in the U.S.