On February 8, 2018, the Canadian Securities Administrators (the "CSA"), the umbrella organization of Canada's provincial and territorial securities regulators, published CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities (the "Revised Notice"), which sets out the CSA's latest disclosure requirements for issuers with U.S. marijuana-related activities.
Louis Morisset, CSA Chair, stated:
"In light of political and regulatory uncertainty surrounding the treatment of U.S. marijuana-related activities, CSA staff have updated our disclosure expectations for issuers in this space... Today's notice also follows CSA staff's consideration of the rescission of the Cole Memorandum and our conclusion that a disclosure-based approach remains appropriate in the current circumstances."
Previously, on October 16, 2017, the CSA released CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities (the "Original Notice"). The Original Notice set out the CSA's specific disclosure requirements for issuers that had, or were developing, marijuana-related activities in the U.S. At that time, the CSA noted that U.S. federal drug laws were not being generally enforced at the state level where states had legalized marijuana and implemented strong and effective regulatory programs. This policy of non-enforcement was set out in a memorandum issued by former Deputy Attorney General James M. Cole (the "Cole Memorandum").
Canada utilizes a disclosure-based system for securities regulation. Generally, disclosure must provide timely and accurate information that will allow investors to make informed decisions. In October of 2017, the CSA stated that the legal and regulatory environment in which issuers operated was of critical importance. As a result, the CSA expected disclosure about how an issuer with U.S. marijuana-related activities complies with state level regulatory frameworks, and related risks.
Cole Memorandum Rescinded
At the time the Original Notice was released, the CSA stated it would re-examine its views in the event that the U.S. federal government's approach deviated from what was set out in the Cole Memorandum. On January 4, 2018, U.S. Attorney General Jeff Sessions rescinded all previous guidance on federal law enforcement relating to marijuana, including the Cole Memorandum. In response, the CSA advised that it would review whether its disclosure based approach for issuers with U.S. marijuana-related activities remained appropriate.
Revised Disclosure Requirements for All Issuers with U.S. Marijuana Related Activities
The Revised Notice now requires all issuers with U.S. marijuana-related activities to clearly and prominently disclose specific information in prospectus filings and other required disclosure documents under applicable securities laws. These issuers must:
- describe the nature of the issuer's involvement in the U.S. marijuana industry;
- prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk;
- 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. marijuana-related activities;
- 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.;
- 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. marijuana-related activities; and
- disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law.
Involvement-Specific Disclosure Requirements
The Revised Notice also introduces additional requirements based on the extent of an issuer's U.S. marijuana involvement.
"Direct involvement" arises where an issuer, or a subsidiary that it controls, is directly engaged in the cultivation or distribution of marijuana in accordance with a U.S. state licence. Issuers with direct involvement must:
- 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; and
- promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations.
"Indirect involvement" arises when an issuer has a non-controlling investment in an entity who is directly involved in the U.S. marijuana industry. Issuers with indirect involvement must:
- outline the regulations for U.S. states in which the issuer’s investee(s) operate(s);
- 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; and
- 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.
However, in circumstances where an issuer with indirect U.S. marijuana exposure holds one or more investments which are in the aggregate significant to the issuer, staff may consider whether negative statements (for example, indicating that the issuer is not aware of non-compliance) are sufficient.
"Ancillary involvement" arises when an issuer provides goods and/or services not limited to financing, branding, recipes, leasing, consulting or administrative services to third parties who are directly involved in the U.S. marijuana industry. U.S. marijuana issuers with material ancillary involvement must:
- 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.
In circumstances where an issuer only has ancillary involvement, these negative statements may include statements indicating that the issuer is not aware of non-compliance.
Those with direct, indirect, or ancillary involvement in U.S. marijuana activities should take note and draft applicable disclosure documents, including marketing materials, in compliance with the Revised Notice. These disclosure requirements also apply to issuers that enter the Canadian capital markets by way of reverse takeovers or spinoff transactions and such disclosure should be included in listing statements and other applicable documents.
Staff expect that the above disclosures and any related risks will be evaluated, monitored and reassessed by U.S. marijuana issuers on an ongoing basis and will be supplemented, amended and communicated forthwith to investors in public filings as required in the event of changes to existing laws or regulations.
Issuers that do not provide appropriate disclosure, including how they comply with applicable regulatory frameworks, may be subject to regulatory actions such as: i) receipt refusal in prospectus offerings; ii) requests for restatements of non-compliant filings and iii) enforcement action. Care should also be exercised in complying with additional requirements of various Canadian stock exchanges.
The Revised Notice is excellent news for U.S. marijuana businesses (and their investors) as the CSA will not prohibit financings in Canada by those operating in the U.S. marijuana industry as long as the prescribed disclosure requirements are adhered to.
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