On February 8, 2018, the Canadian Securities Administrators (CSA) released a highly anticipated notice clarifying the CSA's position regarding issuers with cannabis-related activities in the United States. The revised staff notice reaffirms the CSA's disclosure-based approach and sets out additional disclosure expectations for issuers with U.S. cannabis-related activities. The notice follows the CSA's previously released statement on January 12, 2018, which advised that it was considering whether its disclosure-based approach for issuers with U.S. cannabis-related activities remained appropriate in light of the U.S. Attorney General rescinding all previous guidance specific to federal law enforcement relating to cannabis, including the prior approach under the Cole Memorandum, resulting in market uncertainty.
For information regarding the October 16, 2017, CSA staff notice, including the CSA's initial guidance for its disclosure-based approach for issuers with U.S. cannabis-related activities, please see our October 2017 Blakes Bulletin: CSA, TSX Address Treatment of Canadian Reporting Issuers with U.S. Cannabis-Related Business Activities.
CSA REVISED DISCLOSURE REQUIREMENTS
In CSA Staff Notice 51-352 (Revised) – Issuers with U.S. Marijuana-Related Activities, the CSA continues to endorse a disclosure-based approach and provides further guidance on the CSA's disclosure expectations 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. The guidance recognizes that the political and regulatory circumstances surrounding the treatment of U.S. cannabis-related activities are uncertain and in the event that U.S. federal law against cannabis is enforced, there could be material consequences for any issuer with U.S. cannabis-related activities, including prosecution and asset seizure.
The revised notice includes an additional requirement for all issuers with U.S. cannabis-related activities requiring their prospectuses to include bold boxed cover page disclosure about the illegal nature of cannabis under U.S. federal law and the potential risks associated with this circumstance. The CSA has also updated its list of specific disclosures that are necessary in its view to fairly present all material facts, risks and uncertainties, which must be "clearly and prominently" disclosed in prospectus filings (including marketing materials) and continuous disclosure filings such as annual information forms and management's discussion and analysis. A summary of the revised disclosure expectations for applicable issuers is set out below.
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.
- State prominently that cannabis is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk (new requirement)
- Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. cannabis-related activities (new requirement)
- Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer's ability to operate in the U.S. (new requirement)
- Given the illegality of cannabis under U.S. federal law, discuss the issuer's ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations
- Quantify the issuer's balance sheet and operating statement exposure to U.S. cannabis-related activities (new requirement)
- Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (i) compliance with applicable state regulatory frameworks and (ii) potential exposure and implications arising from U.S. federal law (new requirement).
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, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework (positive statement is a new requirement)
- Promptly disclose any non-compliance, citations or notices of violation that may have an impact on the issuer's licence, business activities or operations (new requirement).
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 investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state
- Promptly disclose any non-compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee's licence, business activities or operations (new requirement).
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 customer's or investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.
The CSA made no change to its view that different exchanges may apply different listing requirements to entities with U.S. cannabis-related activities.
The CSA advised that it will continue monitoring industry developments and in the normal course, will consider the facts and circumstances of each issuer. In this context, fact patterns and novel business models may exist in the U.S. cannabis industry, or in other industries engaged in U.S. cannabis-related activity, which may give rise to public interest concerns that cannot be addressed by disclosure. In these circumstances, the CSA advised that consideration will be given as to whether regulatory action is appropriate or warranted.
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