Canada: Cannabis IPO Checklist

Last Updated: February 21 2019
Article by Darrell R. Peterson

Canada's Capital Markets for Cannabis

With their access to local and global investors and finance opportunities for companies at all stages, Canada's world leading cannabis capital markets offer a wealth of opportunity.

While Canada has several public listing platforms, Toronto Stock Exchange ("TSX") and TSX Venture Exchange ("TSXV") are the principal and most well known exchanges.

  • Global Leader - TSX and TSXV are home to 45 cannabis companies with a total market capitalization of $32 billion.
  • Access to Capital - Over $7.4 billion in equity capital raised through 62 financings in 2018.
  • Liquid Trading Market - Nearly $167 billion of equity traded in 2018.
  • Analyst Coverage - Cannabis companies listed on TSX and TSXV are covered by 40 equity research analysts with an average of 7 analysts covering TSX listed companies.
  • Global Visibility - 40% of daily trading on TSX and TSXV originates outside of Canada.

Source: TMX Group Limited and S&P Capital IQ.

Note for Issuers with Non-Canadian Assets

At the current time, neither the TSX nor the TSXV will list any company involved in the cannabis industry in any country which does not legally permit the research, cultivation and/or sale of cannabis products – including the United States.

The TSX and the TSXV are aware that a number of U.S. states have legalized the cultivation, distribution or possession of marijuana to various degrees and subject to various conditions. Nevertheless, marijuana remains a Schedule 1 drug under the U.S. federal Controlled Substances Act. This means it is illegal under U.S. federal law to cultivate, distribute or possess marijuana in the United States. Furthermore, financial transactions involving proceeds generated by, or intended to promote, marijuana-related business activities in the U.S. may form the basis for prosecution under applicable U.S. federal money laundering legislation. While the TSX and TSXV are aware of the federal guidance concerning the enforcement of these legislative provisions, the TSX and the TSXV note that such guidance does not have the force of law and can be revoked or amended at any time. Companies with business activities that violate or may violate U.S. federal law are prohibited by exchange rules from listing on either the TSX or TSXV.

The TSX and the TSXV's approach is in contrast to the Canadian Securities Administrators(the "CSA") requirements. The CSA considers securities regulation to be primarily disclosure-based. The conflict between state and federal law means that issuers with marijuana-related activities in the United States assume certain risks, including the risk of prosecution or seizure of assets. Accordingly, the CSA does not prohibit U.S. backed cannabis companies from accessing the Canadian capital markets provided they disclose these risks and they are complying with U.S. laws at the state level.

Other public listing platforms, particularly, the Canadian Securities Exchange ("CSE"), do permit companies with cannabis operations in the United States to list, provided the issuer complies with the CSE's listing requirements and the rules promulgated by the CSA.

Except for the specific TSX/TSXV listing requirements set out herein, this Checklist is applicable to all issuers seeking to go public in Canada.

Participants in an Initial Public Offering (IPO)

Issuer

  • The issuer sells securities to the public (called a "New Issue IPO"), or a major shareholder sells to the public the issuer's existing shares that the shareholder owns (called a "Secondary Offering IPO"). To address both issuer financing and shareholder liquidity needs, an IPO can be a mixed New Issue IPO and a Secondary Offering IPO
  • Dual class share structure with one class having superior voting rights is permitted but stock exchanges and underwriters will require certain protections for shareholders, including "coat-tail" provisions to ensure equal treatment in the event of a take-over bid. Dual class structures may not be as attractive to investors, who may find them more difficult to value and understand, and such structures may be subject to greater scrutiny by institutional investors
  • There is flexibility in determining which type of entity to use as the issuer (i.e., corporation, limited partnership, trust, etc.)
  • Issuer need not be Canadian, but cross-border tax and securities law implications for non Canadian issuers should be considered early in the process
  • If using a non-Canadian issuer, stock exchanges and underwriters will require certain shareholder protections that match Canadian or Delaware law, principally:

    • control over election of board of directors and ordinary shareholder matter–usually requires majority of shares voted at shareholders meeting
    • control over fundamental changes, such as a sale or merger of the issuer or a sale of all or substantially all of the assets of the issuer–usually requires two-thirds of shares voted at shareholders meeting

Exchanges

  • The Canadian marketplace is dominated by two securities exchanges:

    • Toronto Stock Exchange
    • TSX Venture Exchange
  • An issuer effecting an IPO will likely apply to have its securities listed on one of those Exchanges
  • During the listing process, the Exchange reviews key minimum business parameters, including working capital, financial resources, number of shareholders, market capitalization and suitability of management and directors
  • Each Exchange has different listing requirements; the TSX, being the senior exchange, has the most stringent listing requirements
  • Canadian provincial securities regulators also recognize this division; "Venture Issuers" listed on the TSXV are subject to simpler continuous disclosure requirements
  • Exchange listing categories:

    • The TSX has two categories of listing for cannabis issuers:

      • TSX Exempt Issuers and TSX Non-Exempt Issuers
      • These requirements are geared toward the stage of development of the issuer at the time of listing
      • Exempt issuers are more advanced and so subject to less stringent reporting requirements
  • The TSXV has two categories of listing requirements for cannabis issuers:

    • TSXV Tier 1 Issuers and TSXV Tier 2 Issuers
    • Tier placement depends on historical financial performance, stage of development and financial resources of the issuer at the time of listing
    • Tier 1 Issuers are more advanced, with more significant financial resources; they are subject to decreased filing requirements

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Darrell R. Peterson
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