Is the Toronto Stock Exchange Paranoid About Its Marijuana Stocks?

The looming pressure being placed on legal marijuana businesses in the United States by the federal government is palpable, even Canada is feeling it. Canada has a very different perspective on cannabis than the U.S. currently does. There will be eight recreational weed states come next year, but Canada will be a recreational weed nation. Justin Trudeau, the Canadian prime minister, is all for legalized recreational marijuana throughout the country. Their economy is thriving on cannabis business, even exporting it to Germany and other nations. If you are interested at all in trading or investing in marijuana businesses, then the Toronto Stock Exchange is a good place to begin your search.

The schedule 1 status in the U.S. makes marijuana as illegal as a drug can get. In fact, the only thing that keeps federal authorities from cracking down on the medical marijuana industry is the Rohrabahcer-Farr Amendment that strips federal authorities of the funding they would use to pursue cannabis businesses. The Toronto Stock Exchange recently warned any Canadian cannabis business that is being publicly traded and has operations in the U.S., it would be delisted if they did not provide proper disclosure to investors of what would happen financially if the United States suddenly shutdown their operations. If the U.S. did take actions suddenly shutting down Canadian marijuana operations, huge amounts of a company’s listed assets could suddenly vanish. Are you willing to take the risk of investing in Canadian marijuana businesses?

The Toronto Stock Exchange is the largest exchange in Canada, and like U.S. markets, disclosure is important up north too. Canada does a lot of business in the United States, in particular, our northern neighbor has embraced the legal marijuana business and is leading the world industry.

Canada is well aware of the United States’ federal stance on marijuana. The Toronto Stock Exchange is threatening to delist any cannabis company doing business in the U.S. that does not clearly warn investors of the risks that would be involved if the U.S. government decided to crack down on state legal marijuana. Does the ruining of state legal marijuana businesses in the United States seem imminent?

An alliance of Canadian securities regulators said Monday that it expects domestic companies with marijuana dealings in the United States to give their investors a good idea of the potential risks of doing drug business south of the border, which could now include the possibility of being delisted from the Toronto Stock Exchange.

“We expect issuers with marijuana-related activities in the U.S. to address the current legal and regulatory environment in their disclosures, including any risks that result from changes in the approach to enforcement of U.S. federal law,” Louis Morisset, chair of the the Canadian Securities Administrators, said in a press release.

Cannabis sales are legal in some states, but illegal at the federal level in the U.S. Furthermore, the Toronto Stock Exchange, Canada’s biggest, warned Monday that issuers conducting business in violation of U.S. federal laws around cannabis are not in compliance with the exchange’s own requirements.

Those not complying with the requirements could face a delisting review, the TSX said.

The TMX Group Ltd., owner of the Toronto Stock Exchange and the Canadian Depository for Securities, a clearing house that processes trades, said in August it had been in talks with the CSA about the thorny subject of Canadian issuers with marijuana-related operations in the U.S., calling it “a complex matter which touches multiple aspects across our capital market system.”

The notice for Canadian issuers with marijuana interests in the U.S. outlines the expectations for disclosure, including a description of any U.S.-based operations.

“They’ll also be required to provide disclosure in terms of what happens if the legal framework changes,” Richard Carleton, chief executive of the smaller Canadian Securities Exchange, said Monday. “So, if the U.S. federal government decides to make life difficult for companies operating legally at the state level, what would the impact on the company’s business be.”

The CSA said its disclosure expectations apply to all issuers with U.S. marijuana-related activities, “including those with direct and indirect involvement in the cultivation and distribution of marijuana, as well as issuers that provide goods and services to third parties involved in the U.S. marijuana industry.”

Even if a listed company has only indirect involvement with production or distribution, they must still explain what the rules are around cannabis in the state or states they aim to operate in.

Unlike Canada, the U.S. federal government currently has no plan to legalize recreational cannabis. Nevertheless, several states have still legalized or intend to legalize medical and recreational marijuana.

“The federal law relating to marijuana could be enforced at any time, and this would put issuers with U.S. marijuana-related activities at risk of being prosecuted and having their assets seized,” the CSA press release said.

“Disclosure is the foundation for fair and efficient markets for public companies,” Huston Loke, director of corporate finance at the Ontario Securities Commission, said in an interview. “And this is a sector that’s seen a lot of growth, it’s seen a lot of interest, there’s articles on it all the time, and we thought it was the right time to clarify our disclosure expectations.”

Meanwhile, Carleton said his exchange has 12 marijuana companies that have operations in the U.S. The largest of those, Carleton said, is Vaughan-Ont.-based CannTrust Holdings Inc., with an approximately $450-million market capitalization, he said.

“There’s been a fair amount of uncertainty, I think it’s fair to say, in the industry over the last two, three months,” said Carleton “I think the industry was looking for a clear statement of specifically what are the expectations from the regulators, and this is it.”

The CSA’s expectations are effective immediately, Loke said. Disclosures would be made in prospectus and other filings, including management’s discussion and analysis.

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Richard Lowe

Richard Lowe is a 14-year veteran of the financial sector with licenses as a commodity broker (Series 3) and investment advisor representative (IAR Series 65). Along with a focus on raising capital for the firms he was employed with, he also wrote and edited much of the content published by them. He holds a BA in Journalism from the University of Massachusetts. He has been a longtime advocate for marijuana legalization due to the social injustices associated with marijuana prohibition and the strong potential for the medicinal benefits of cannabis.

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