Canada: ‘Weeding’ Out Non-Compliant Disclosure: A Review Of CSA Staff Notice 51-342

On April 1, 2014, the Marijuana for Medical Purposes Regulations ("MMPR"), which govern the production, distribution and use of medical marijuana, were substantially effected in Canada. Following the implementation of the MMPR, the Canadian Securities Administrators ("CSA") observed that a substantial number of reporting issuers had announced an intention to participate in the medical marijuana industry. Further, the CSA observed that the share price for these reporting issuers often experienced an immediate increase after such announcement, despite the reporting issuers having provided scant disclosure regarding their prospective plans to the public.

On February 23, 2015, the CSA released CSA Staff Notice 51-342 Staff Review of Issuers Entering Into Medical Marijuana Business Opportunities (the "Notice"). The Notice summarizes the results of the CSA's recent review of public disclosure from 62 reporting issuers who had announced an intention to enter into the medical marijuana industry. The purpose of the review was to determine whether these reporting issuers were meeting the requirements of National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102") and National Instrument 51-201 Disclosure Standards ("NI 51-201").

NI 51-102 and NI 51-201, respectively, govern the timing and content of the continuous disclosure record of reporting issuers and provide guidance on 'best disclosure' practices. These instruments require that reporting issuers, among other things, provide balanced and sufficient disclosure relating to material changes, such as a change of business into the medical marijuana industry, and avoid selective, promotional, and unbalanced public disclosure.

In the Notice, the CSA reports that the original announcements issued by a majority of the reporting issuers under review were deficient and, consequently, these reporting issuers were required to issue subsequent clarifying disclosure. The CSA also notes in the Notice that the public disclosure of 40% (or 25) of these reporting issuers raised serious consumer protection concerns.

The 25 reporting issuers of concern identified by the CSA were in the early stages of entry into the medical marijuana industry, such as: (a) reporting issuers conducting general due diligence on the medical marijuana industry and related opportunities, but not having committed to or disclosed any specific plans in such regard; (b) reporting issuers that had applied, or invested in or acquired a company that had applied, to Health Canada for a license under the MMPR; and (c) reporting issuers that had announced an agreement (such as a non-binding letter of intent) to acquire a medical marijuana business, subject to certain terms.

The CSA found that the public disclosure of these reporting issuers was often unbalanced and promotional, and focused on the benefits while ignoring the risks, uncertainties, cost implications and barriers to entry (financial, regulatory and legal) of moving into the medical marijuana industry. The CSA specifically identified the following disclosure deficiencies:

  • unclear discussion of the reporting issuer's stage of entry in the medical marijuana industry, including the status of license applications and steps required before producing revenue;
  • no discussion of the timeline and costs required before producing revenue;
  • lack of any discussion of the MMPR licensing requirements, in order to help investors understand the processes and resources required for a change of business;
  • no discussion of the approvals obtained (or that must be obtained) from shareholders, the board of directors and stock exchanges in order to give effect to the change of business; 
  • failure to acknowledge that: the reporting issuer will be unable to grow or sell medical marijuana without a license under the MMPR; the reporting issuer must have a facility that meets the requirements under the MMPR before a license will be granted under the MMPR; and there is no guarantee that any venture into the medical marijuana industry will be successfully completed; and
  • often unbalanced and overly promotional language.

Similarly concerned with the effect on investors of the recent flood of investment opportunities relating to the medical marijuana industry, the British Columbia Securities Commission ("BCSC") issued a notice to investors on October 7, 2014. The notice warns investors to "not let extravagant promotions for new sectors or novel investing opportunities lead them into an unsuitable, unsustainable or fraudulent investment." More specifically, the notice warns of flashy headlines about medical marijuana, 'green' energy and digital currencies. The BCSC notice also offers tips for prospective investors, including the following:

  • learn more about the reporting issuer's business, including its strategy, timelines, product market and stage of development and commitment of resources (such as licenses, permits, personnel and cash);
  • identify the risks of the investment; and
  • determine whether the investment meets your own investing criteria, such as the minimum investment amount, the risk profile and the type of investment.

While the discussion in the Notice relates primarily to the medical marijuana industry, the public disclosure principles apply across all industries. When contemplating a change of business, reporting issuers should consider and incorporate into their public disclosure: the processes required to effect the change of business and the current stage of the reporting issuer in those processes; the obstacles associated with entering the new industry, including financial, political and regulatory obstacles; and the risks and uncertainties of pursuing the change of business, particularly if the pursuit is unsuccessful. This public disclosure should clearly communicate the reporting issuer's plans, present a balanced view of positive and negative variables and factors, and avoid promotional language.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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