Canada: CSA, TSX Address Treatment Of Canadian Reporting Issuers With U.S. Cannabis-Related Business Activities

On October 16, 2017, the Canadian Securities Administrators (CSA) and the Toronto Stock Exchange (TSX) released staff notices regarding their respective treatment of issuers with cannabis-related activities in the United States.

Canadian reporting issuers with U.S.-related cannabis activities have long been uncertain of their treatment by the CSA and the TSX given the conflict between U.S. federal and certain state laws regarding the regulation of cannabis and related business activities. While a number of U.S. states have legalized cannabis-related activities to various degrees, such activities remain illegal under U.S. federal law, where cannabis continues to be a Schedule I drug under the U.S. federal Controlled Substances Act. Confusing the matter further, the U.S. Department of Justice previously issued guidance indicating that it will generally not enforce federal prohibitions in any U.S. state that has authorized this conduct so long as such states have implemented a strong and effective regulatory program. This guidance is also contrary to the current U.S. administration's view and statements regarding cannabis. This confusing state of affairs is illustrated by the varied approaches taken by the CSA and TSX, as further described below.

CSA DISCLOSURE REQUIREMENTS

In CSA Staff Notice 51-352 – Issuers with U.S. Marijuana-Related Activities, the CSA endorsed a disclosure-based approach and set out their expectations regarding disclosure for issuers that currently have, or are in the process of developing, cannabis-related activities in U.S. states where such activities have been authorized within a state regulatory framework. This approach is premised on the assumption that issuers' cannabis-related activities are conducted in compliance with the current laws and regulations of a U.S. state and the understanding that the U.S. federal government's forbearance approach (despite not having the force of law) to the enforcement of federal laws remains in place. Again embedding a level of regulatory uncertainty, the CSA explicitly added that they reserve the right to re-examine their view if the U.S. federal government's forbearance approach were to change.

The CSA expect that the disclosure will be "clearly and prominently" disclosed in prospectus filings and continuous disclosure filings such as annual information forms and management's discussion and analysis. In addition, the CSA state that the same disclosure should be included in an issuer's listing statement or other documents related to a reverse takeover or spinoff transaction that allows such issuer to enter the capital markets. Issuers that do not provide the disclosure may be subject to regulatory action, including refusal of a receipt in the context of prospectus offerings, request for restatements of non-compliant filings, and referral for appropriate enforcement action.

All Issuers with U.S. Cannabis-Related Activities

All issuers with U.S. cannabis-related activities are expected to:

  • Describe the nature of the issuer's involvement in the U.S. cannabis industry and, based on the nature of such involvement, provide the supplemental disclosure noted in the subheadings below
  • Explain that cannabis remains illegal under U.S. federal law and that the approach to enforcement of U.S. federal laws against cannabis is subject to change
  • Discuss the resultant risks of cannabis remaining illegal under U.S. federal law, including the risk of adverse enforcement action
  • State whether and how the issuer's U.S. cannabis-related activities are conducted in a manner consistent with any U.S. federal enforcement priorities
  • Discuss the issuer's ability to access both public and private capital and indicate what financing options are available and unavailable in order to support continuing operations given the illegality of cannabis under U.S. federal law.

Issuers with Direct Involvement in Cannabis Cultivation or Distribution in the U.S.

Issuers that directly engage in the cultivation or distribution of cannabis in accordance with a U.S. state licence will be required to:

  • Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state
  • Discuss the issuer's program for monitoring compliance with U.S. state law on an ongoing basis and outline internal compliance procedures
  • Disclose any material non-compliance as well as material citations or notices of violation.

Issuers with Indirect Involvement in Cannabis Cultivation or Distribution in the U.S.

Indirect involvement may be considered to arise where an issuer has a non-controlling investment in an entity that is directly involved in the U.S. cannabis industry. Such issuers are required to:

  • Outline the regulations for the U.S. states in which the issuer's investees operate
  • Provide reasonable assurance, through either positive or negative statements, that the investees' business complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.

Issuers with Material Ancillary Involvement in Cannabis Cultivation or Distribution in the U.S.

Issuers that provide goods or services, including financing, branding, recipes, leasing, consulting or administrative services, to third parties who are directly involved in the U.S. cannabis industry are required to provide reasonable assurance, through either positive or negative statements, that the applicable customers' or investees' business complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.

Different Approaches

The CSA acknowledge that different exchanges, such as the Canadian Securities Exchange and the TSX, apply different listing requirements but note that investors should be aware that a successful listing does not have a cleansing effect on the legality of an issuer's U.S.-related cannabis activities under U.S. federal law.

TSX WARNS OF POSSIBLE DELISTING OF ISSUERS WITH U.S. CANNABIS- RELATED BUSINESS ACTIVITIES

In contrast to the CSA's central focus on disclosure, TSX Staff Notice 2017-0009 makes clear that TSX listing of issuers that are engaged in activities relating to the cultivation, distribution or possession of cannabis in the U.S. (U.S.-Related Cannabis Entities) raises serious policy concerns for the TSX over illegality and potential exposure under U.S. federal money laundering legislation. In short, the TSX has formally concluded that issuers operating in violation of U.S. federal law regarding cannabis are not acting in compliance with the TSX's listing requirements and such issuers should proactively address any gaps in compliance with the TSX requirements. The TSX notice also stresses that it has the discretion to initiate a delisting review of issuers engaged in activities that are contrary to the TSX requirements.

The TSX identified the following subject business activities as examples that may violate U.S. federal law, in order of concern:

  1. Direct or indirect ownership or investment in U.S.-Related Cannabis Entities
  2. Commercial interests or arrangements with U.S.-Related Cannabis Entities that amount in substance to ownership or investment
  3. Providing services or products that are designed for, or targeted at, U.S.-Related Cannabis Entities
  4. Commercial interests or arrangements with entities engaging in any of the foregoing businesses.

While the TSX recognized the U.S. federal government's forbearance approach to the enforcement of federal laws, it also emphasized that such guidance does not have the force of law and can be revoked or amended at any time.

The TSX intends to select issuers for in-depth reviews based on their continuous disclosure records. In the context of reviews of listed issuers in the cannabis sector, the TSX expects to group issuers into two categories: (i) U.S.-Related Cannabis Entities and (ii) issuers that engage in ancillary service activities for U.S.-Related Cannabis Entities. The TSX expects to contact any listed issuers identified for a more comprehensive review by the end of 2017, which provides affected issuers with a short grace period to correct any non-compliance (for example, through divestiture or spin-off of U.S. assets or commercial arrangements) in order to avoid a formal delisting review.

Issuers that may potentially become subject to delisting, or other regulatory action such as a halt or suspension, are strongly encouraged to assess the materiality and timing of becoming subject to a formal or informal review process by the TSX. Issuers should diligently evaluate each stage of discussion with the regulators to continuously assess the appropriate time to provide investors with disclosure of a material change, if any, as well as assess possible breaches or adverse triggers that any imposed regulatory action may cause under existing debt, streaming or other financing arrangements, material leases and contracts, supply and distribution agreements, joint ventures and acquisition agreements. Delisting may also lead to adverse consequences for existing investors, including loss of liquidity, potential disqualification of securities as investments qualified for registered plans, negative impacts on stock price and potential exclusion from institutional portfolios or investment fund and exchange-traded fund holdings. While the TSX strongly recommends that applicants and listed issuers considering engaging in cannabis-related activities in the United States consult with the TSX, we also advise that potentially affected issuers proactively contact the TSX to commence discussions in short order.

CONCLUSION

Given the changes adopted by the CSA and the TSX, issuers would be well advised to seek legal advice to understand the relevant rules and new disclosure requirements and to determine the relevant securities law considerations.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
6 Sep 2018, Seminar, Toronto, Canada

Blakes invites you to attend a seminar focused on successfully managing high-stakes litigation and arbitration. An esteemed client panel consisting of Erica Young (Executive Vice President, Regulatory and Chief Legal Officer, ENMAX)

12 Sep 2018, Seminar, Calgary, Canada

Blakes invites you to attend a seminar focused on the development and implementation of effective intellectual property strategies in the oil and gas sector.

27 Sep 2018, Speaking Engagement, Toronto, Canada

Blakes is pleased to introduce a new program in our continued partnership with Women General Counsel Canada. Stepping Beyond is directed to women general counsel who are preparing for opportunities beyond their GC role.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions