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Toronto Stock Exchange Threatens Delisting of Cannabis Businesses

Since the U.S. Federal Government Threatens State Legal Marijuana Businesses, The TMX is Warning Canada

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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