Is The Marijuana Market In The U.S. To Much Of a Risk For Canadian Firms

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Canada’s security regulators are waving red flags about Canadian marijuana companies doing business in U.S. states which have legalized use of marijuana, and legal experts have pointed out such companies that could risk being delisted from the nation’s stock exchanges if they started or continued to operate on the other side of the map

The Canadian Securities Administrators (CSA) issued a staff notice Oct. 16 which goes over a series of disclosure expectations for those who have concerns with U.S. marijuana-related activities.

Noting marijuana use is still illegal under U.S. federal law, these expectations include a much more stern approach to disclosing rules that present all material facts, risks, and uncertainties with regard to U.S. operations, including stating whether or not the operations are conducted in a manner consistent with U.S. federal enforcement policies and discussing the issuer’s ability to access both private and public capital given the illegality of marijuana under U.S. federal law.

Huston Loke, director of corporate finance at the Ontario Securities Commission (OSC), noted: “companies with marijuana-related activities in the U.S. assume certain risks due to conflicting state and federal laws.”

“We expect companies to clearly and prominently disclose these risks to investors, including risks that result in changes in the approach to enforcement of U.S. federal law,” he said. “To ensure companies are clear on the level and type of disclosure we expect, the CSA published a staff notice that sets out our disclosure expectations.”

The marijuana market is an “emerging and high-risk industry and it was the right time to publish our disclosure expectations as more companies seek access to capital,” stated Loke.

“We expect all such companies to disclose information about their compliance with state regulatory frameworks and discuss the risk of enforcement of U.S. federal laws relating to marijuana,” he said. “We will review issuers’ disclosure and if the risks that are disclosed go beyond an acceptable level then we will consider additional regulatory action, including on certain grounds refusing receipt of prospectus.”

James Munro, a Vancouver-based lawyer who works as co-chair of the cannabis group at McMillan LLP, called the requirements “common sense guidance that offers clarity for operators who are working in [the marijuana] industry.”

“They give a very good framework for exactly the type of disclosure the CSA expects issuers in this industry to include in its continuous disclosure,” he said. “A key takeaway for me is I think this is going to be very similar to the mining industry, where the security regulators do periodic compliance checks with the issuer’s disclosure.”

Anita Anand, professor and J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto’s faculty of law, said she is in favor of the CSA taking an active approach with regard to marijuana-related companies.

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