On February 8, 2018, the Canadian Securities Administrators (the "CSA") published Staff Notice 51-352 (Revised) (the "Notice") setting forth disclosure obligations applicable to issuers ("U.S. Cannabis Issuers") engaged in the cultivation, possession or distribution of cannabis in the United States ("U.S. Cannabis Activities") in light of the uncertainty resulting from cannabis being legalized in certain U.S. states while remaining a controlled substance under U.S. federal law. The Notice updates the CSA's previously issued guidance by clarifying, expanding upon and detailing additional disclosure obligations for U.S. Cannabis Issuers, particularly with respect to describing the U.S. regulatory framework and disclosing matters related to regulatory compliance.
The Notice provides guidance on the "specific disclosure necessary to fairly present all material facts, risks and uncertainties" for all U.S. Cannabis Issuers. Such issuers are required, among other things, to:
- describe the activities of the issuer as "direct", "indirect", or " ancillary" (as discussed below);
- prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk;
- discuss the risks related to enforcement actions, service providers suspending or withdrawing services, and regulatory bodies imposing restrictions on U.S. operations;
- quantify the issuer's balance sheet and operating statement exposure to U.S. Cannabis Activities; and
- disclose if legal advice has not been obtained with respect to state regulatory compliance and the potential exposure and implications arising from U.S. federal law.
As noted above, the Notice outlines a framework for characterizing the involvement of U.S. Cannabis Issuers in the cultivation or distribution of cannabis in the U.S. as "direct", "indirect" or "ancillary" and identifies corresponding disclosure requirements. An issuer is "directly" involved in cultivating or distributing if it or one of its subsidiaries cultivates or distributes cannabis under a license granted pursuant to state laws. Issuers having non-controlling interests in entities that are directly involved in cultivation and distribution are considered to have "indirect" involvement. An issuer has "ancillary" involvement if it provides of goods and/or services to third parties who are directly involved in the U.S. marijuana industry, including, without limitation, financing, branding, recipes, leasing, consulting or administrative services.
The Notice specifies that:
- issuers with "direct" involvement are required, among other things, to outline applicable state laws and regulations and their program for monitoring compliance, provide a positive statement that the issuer is in compliance with state law and regulations, discuss their ability to access public and private capital and promptly disclose any non-compliance with applicable law;
- issuers with "indirect" involvement must outline the regulations of states where direct operations occur and provide reasonable assurance, through positive or negative statements, that the operations are conducted in accordance with applicable laws and regulations (for example by stating that the issuer is in compliance or not aware of non-compliance); and
- issuers with "ancillary" involvement must provide reasonable assurance, through positive statements or negative statements, that the operations of their customers and partners are conducted in accordance with state laws and regulations.
The Notice indicates that the disclosure requirements it contains apply to all U.S. Cannabis Issuers and are to be satisfied by disclosure included in management's discussion and analysis, annual information forms, and marketing materials filed pursuant to securities laws. Additionally, the Notice provides that prospectuses must include cover-page disclosure that marijuana is illegal under U.S. federal law.
The CSA expects U.S. Cannabis Issuers to evaluate, monitor and reassess these disclosures on an ongoing basis and to supplement, amend and communicate them to investors as applicable, including in the event of change of laws, regulations, policy or guidance.
The CSA has cautioned that issuers who do not provide appropriate disclosure in line with the CSA's expectations (including with respect to regulatory compliance disclosure) may be subject to regulatory actions such as receipt refusal in the context of prospectus offerings, requests for restatements of non-compliant filings, and referrals for appropriate enforcement action.
The guidance in the Notice is in addition to the listing requirements outlined in the rules and regulations of any stock exchanges on which the issuers are listed. In particular, the Toronto Stock Exchange ("TSX") published TSX Staff Notice 2017-0009 in which the TSX announced that its staff would be conducting a listing review of listed issuers involved in the marijuana sector and cautioned that listed issuers with ongoing business activities that violate U.S. federal law regarding marijuana are not complying with the requirements of the TSX.
Issuers that are already engaged in, or that are considering pursuing, activities in the marijuana sector (and, in particular, U.S. Cannabis Activities) should consult with counsel on their disclosure obligations under securities law and, in certain circumstances, be prepared to engage in detailed interaction with securities regulatory authorities and stock exchanges.
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