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Uncertainty in the cannabis sector intensified after the Canadian Depository for Securities, the clearing house for equities, could disrupt trading of stocks of cannabis companies with U.S. investments.

GEOFF ROBINS/The Globe and Mail

The Canadian Securities Exchange tried to quell growing concerns in the country's cannabis sector over legal risk, reiterating Friday that its market welcomes new stock listings of pot companies with assets in the United States should they meet its disclosure rules and other listings standards.

The CSE, which is operated by Toronto-based CNSX Markets Inc., is a little-known marketplace but one that has become a hotbed for pot companies that are looking to go public in order to raise cash. The marijuana listings are also a key force behind the CSE's trading business: So far in 2017, 52 per cent of the volume on the CSE is in trading of cannabis stocks.

Ten of the 46 cannabis issuers on its exchange have exposure to the U.S. market – and it wants to attract more of these companies to list on its market. But in the U.S., while marijuana is legal in some form in numerous states, it remains illegal under federal law.

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Now, the CSE isn't the only exchange in Canada that has listed issuers with U.S. operations. TMX Group Ltd., Canada's largest stock-market operator, also has these stocks on either the Toronto Stock Exchange or the TSX Venture Exchange. Aphria Inc., which has investments in Arizona and Florida, is listed on the TSX.

However, there has been a recent shift in posture at TMX, which has suddenly frozen the new listings of pot companies with U.S. ties.

TMX has not yet released a written policy on the matter, even after months of uncertainty has left investors and issuers on edge and in the dark. A TMX spokesperson did not immediately return requests on Friday asking when such a policy would be made public.

The level of uncertainty in the sector intensified this week after The Globe and Mail reported that Canada's only clearing house for equities – the Canadian Depository for Securities Ltd. (CDS) – is also considering a move that could disrupt trading of stocks of cannabis companies with U.S. investments.

CDS, which is owned by TMX, operates key back-office functions that ensure when investors trade any stocks in Canada, the cash and securities wind up in the right hands. If CDS prohibits these cannabis stocks from being cleared and settled, it would become virtually impossible to trade these shares and it would potentially make it difficult for those firms to raise cash on any market in the country, including on the CSE.

It is still uncertain whether CDS will decide to ban these stocks from being handled on its platform – or whether it has the authority to do so. But the option is one alternative being discussed, as is potentially maintaining the status quo.

The CSE told private cannabis companies with U.S. assets on Friday that it is still open for business, saying in a press release that "there are no significant 'unwritten rules' at the CSE," referring to its listing requirements.

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It also urged pot companies and their advisers to review recent prospectus filings "for examples of appropriate disclosure" around communicating legal risk to investors.

"There are particular risks related to the conflicting U.S. federal and state laws surrounding both medical and recreational use of cannabis," Mark Faulkner, vice-president of listings and regulation at the CSE, said in the release.

"CSE maintains the position that appropriate risk disclosure for existing and potential investors should include a comprehensive discussion of the current legal framework, including the federal law and current enforcement initiatives, as well as the state and municipal laws pursuant to which an issuer will conduct its business."

On Friday, trading in shares of cannabis companies with U.S. exposure was mixed.

Aphria's stock on the TSX fell 3 per cent. On the CSE, meanwhile, shares of CannaRoyalty Corp. dropped 5 per cent and shares of Golden Leaf Holdings Ltd. declined 8 per cent. Shares of Vodis Pharmaceuticals Inc. and Friday Night Inc. rose 4 and 10 per cent, respectively.

Andrew Willis of Report on Business tells investors why they should be wary of buying into private pot businesses going public The Globe and Mail
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