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In recent months, the CSE and the TSX have taken different approaches to the listings of cannabis companies with exposure to the United States.

John Lehmann/The Globe and Mail

A small Canadian medical-marijuana company that generates some revenue from the United States is slated to go public on Monday amid growing concerns over the legal risks of growing and selling pot in that country, where marijuana is illegal under federal law.

Based in Vaughan, Ont., CannTrust Holdings Inc. will list its shares on the Canadian Securities Exchange (CSE), a small marketplace that competes for listings with the bigger and more well-known Toronto Stock Exchange (TSX).

In recent months, the CSE and the TSX have taken different approaches to the listings of cannabis companies with exposure to the United States. The CSE is welcoming them, as long as they have proper disclosure of the legal risks their businesses could face. The TSX, which is owned by industry leader TMX Group Ltd., has been turning them away as it conducts an internal regulatory review, helping the CSE emerge as a hotbed for marijuana stocks.

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Read more: Stock-trading policy change looms over cannabis industry

TMX also operates the only platform that is used in Canada to finalize stock trades. That platform, called the Canadian Depository for Securities Ltd. (CDS), is likewise reviewing the legal risks of handling trades in these stocks, with one alternative being banning these buy and sell orders from being processed by the system.

Such a move could disrupt trading in the shares of all pot companies with U.S. assets that are listed on any exchange in Canada.

In a statement last week, TMX said it's discussing the CDS issue with securities regulators, adding "this is a complex matter" that "requires close examination and careful consideration."

Uncertainty around what CDS will do has clouded the market for marijuana stocks in August. It has left the shareholders of these cannabis companies, many of whom are ordinary retail investors, confused about what is an acceptable investment and what isn't.

While the provincial securities regulators have been virtually silent on the matter in public, they have spoken in more subtle ways. On Aug. 11, the Ontario Securities Commission gave its stamp of approval on CannTrust's prospectus to go public on the CSE, days after The Globe and Mail first reported that CDS was considering a ban on clearing pot stocks with U.S. assets.

CannTrust chief executive officer Eric Paul says he hit a wall when he tried to list the company's shares on the Toronto Stock Exchange. When he met with the TSX earlier this summer, he says TMX was wrestling with whether it would permit cannabis companies with interests in the United States to be listed on its senior exchange or its junior TSX Venture Exchange.

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He said the TSX wouldn't consider listing CannTrust's shares until it made a final decision on its policy.

"They couldn't advise us on what they were going to do because they had not created a policy yet," Mr. Paul added. "They didn't know when they were going to come out with it. We decided that we would list on the CSE, not knowing what the TSX was going to do."

But Lou Eccleston, CEO of TMX, said this month that there would be no new cannabis policy coming and the TSX's existing listings policies were clear enough around disallowing any issuer from participating in illegal activities. Yet, TMX's two stock exchanges list at least two cannabis companies with U.S. assets, including Aphria Inc. of Leamington, Ont., and Calgary's Maple Leaf Green World Inc.

"There has to be a level playing field for the sector," Mr. Paul said. "You can't have some listed and some not listed. I think they have to make some kind of policy decision."

A spokesperson for TMX declined to comment on CannTrust, citing confidentiality. "We evaluate every listing application on a case-by-case basis, in accordance with our published policies," Shane Quinn said on Sunday in an e-mail.

The CSE is a small exchange that has made a name for itself by becoming a magnet for pot stocks. The venue has attracted almost 50 listings – most of them small – in the nascent cannabis sector, including 11 with exposure to the United States. It counts on these companies to propel its trading business: During the first half of this year, 52 per cent of its trading volume was in cannabis stocks.

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By comparison, there are 23 issuers in the cannabis business on the Toronto Stock Exchange and the junior TSX Venture Exchange, as of June 30. Those companies have a total market value of about $5.2-billion.

CannTrust is a licensed producer of medical marijuana in Canada. It sells dried cannabis and oil extracts to thousands of patients across the country.

In six U.S. states and globally, CannTrust also collects a royalty on the sale of Brewbudz, cannabis-infused coffee pods for patients. Through a joint venture, the company is licensing its patented technology into these regions, but says it doesn't contribute capital or product towards these sales.

CannTrust disclosed in its prospectus that there is a key risk that its shares may become difficult to trade should CDS, the country's only clearinghouse for equities, make a move to refuse to clear and settle trades for cannabis issuers with U.S. assets.

Cannabis firms with U.S. investments are listed today on the TSX, the TSXV and the CSE. If CDS moved to ban these stocks from its platform, it could put future trading of these shares in jeopardy and make it difficult for these firms to raise money in the future.

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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