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Cannabis How Canopy is pushing into the U.S. cannabis market while staying onside of TSX rules

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Officially, Canopy Growth Corp. is steering clear of investments in the United States. Over the past year, however, Canada’s largest cannabis company and its affiliates have been quietly securing U.S. exposure through a series of legal manoeuvres that stay onside of Toronto Stock Exchange rules but position Canopy for a rapid move into the U.S. market.

Since October, 2017, TMX Group Ltd., the exchange’s parent, has not let TSX-listed cannabis firms operate in the United States, where marijuana remains federally illegal. That has forced companies to think creatively, spinning off subsidiaries, swapping shares and lining up conditional warrants, which allow them to acquire future positions in U.S. companies.

One of Canopy’s moves became clear at the end of November when Slang Worldwide Inc., a company run by long-time Canopy allies, filed a preliminary prospectus to list on the Canadian Securities Exchange. Toronto-based Slang is in the process of acquiring a handful of U.S. assets, including Denver-based Organa Brands, owner of several popular vaporizer, edibles and concentrate brands.

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What the prospectus shows is that Canopy owns conditional warrants in Slang, giving it the ability to acquire 20 per cent of the company, “following the day that cannabis and cannabis-related products are legalized under applicable federal laws in the United States.”

Exercising these warrants would give Canopy instant exposure to established marijuana-related brands in several U.S. states. (It had previously licensed Organa Brands’ intellectual property for Canada.) More importantly, “what it becomes is shelf space [in U.S. dispensaries], it becomes channel access," said Bruce Linton, co-chief executive of Canopy.

These kinds of conditional investments – which hinge upon U.S. federal reform or a change to TSX policy – are becoming increasingly popular among cannabis companies, said Eric Foster, head of Dentons Canada LLP’s cannabis practice and the legal architect behind the Slang warrants.

"Licensed producers that are focused on cultivation in Canada and who have a lot of capital because they accessed capital markets earlier in the year … they’re looking to deploy that capital, and increasingly they’re going to look south,” Mr. Foster said.

“There’s a general perception that the U.S., at the end of the day, is going to be the biggest market in the cannabis industry, and the time to get in is sooner rather than later," he said.

In September, Aurora Cannabis Inc. belatedly spun off its U.S. assets into a separate company called Australis Capital Inc., distributing Australis shares to Aurora shareholders, similar to a dividend. The company retains a buy-back option, allowing it to reacquire 40 per cent of Australis upon a change to TSX policy or U.S. federal cannabis laws – 20 per cent at the market rate and 20 per cent at the spin-off price.

"We had to divest our U.S. assets, and so we decided to do that in a strategic way that also created opportunities for the company,” said Cam Battley, Aurora’s chief corporate officer.

Australis is “viable in its own right,” he said, and free to pursue “assets that are undervalued because of the fragmented nature of the U.S. system." So far it’s invested in a Nevada cannabis producer, a rolling-machine company and a firm that designs smartphone apps.

Several other Canadian companies, notably Aphria Inc. through its former subsidiary Liberty Health Sciences, are pursuing similar strategies. None, however, is approaching the United States from as many angles as Canopy – freshly financed with $5-billion from Constellation Brands Inc.

Both Canopy and Canopy Rivers Corp. – a partly owned subsidiary that acts as Canopy’s venture capital arm – recently rejigged their investment in an Ontario company called TerrAscend Corp., swapping common shares for exchangeable shares that would automatically revert back to common stock if and when U.S. federal law changes. TerrAscend is now pursuing retail, extraction and cultivation assets in the United States, Mr. Linton said.

Canopy is also lining up U.S. greenhouses. When it acquired a stake in several B.C. greenhouse properties in 2017, it gained an option to buy a large greenhouse in California, Mr. Linton said.

Canopy Rivers has likewise teamed up with Ontario tomato-grower Paul Mastronardi to retrofit a 1.3-million-square-foot greenhouse in Leamington, Ont.

The joint venture, called PharmHouse Inc., is designed to be replicated internationally. Canopy Rivers and a numbered company directed by Mr. Mastronardi – the chief executive of Sunset brand vegetable-grower Mastronardi Produce Ltd. – have signed a non-compete agreement giving Canopy Rivers the first right of refusal to participate in any future cannabis plays the numbered company pursues internationally.

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“These guys are very substantial, top-tier producers of the sorts of products that end up in Costcos throughout the world. And they have assets in four, five, six countries,” Mr. Linton said.

“Any greenhouse they have, or will create, or invest in, that converts to the production of cannabis, we’re a 50-per-cent partner," he said.

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