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Aphria's medical marijuana plants are seen in the company’s greenhouse in Leamington, Ont.

GEOFF ROBINS/The Globe and Mail

The Ontario Securities Commission is refusing to wade into a controversial decision made by Canada's largest stock-exchange operator that could see some cannabis companies doing business south of the border kicked off of the country's two main stock markets.

TMX Group Ltd. is reviewing cannabis firms listed on either the Toronto Stock Exchange or the TSX Venture Exchange to determine if any are violating U.S. federal law, which prohibits the use and sale of the drug. The review, announced this week, stands counter to the framework Canada's securities regulators laid out for these firms around accurate and timely disclosure.

Even though the OSC, which is the country's largest securities regulator, says it's never contemplated an outright ban of these securities, it isn't prepared to intervene at this time.

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"We're really not in a position to comment on the processes that the exchange will be undertaking over the next few weeks," said Huston Loke, the director of corporate finance at the OSC. "Each exchange is entitled to make decisions and position itself from a branding perspective in a way it sees fit."

Meanwhile, stocks across the sector plunged on Tuesday. Aphria Inc., perhaps the most high-profile Canadian company with operations in the United States with shares on the TSX, saw its stock tumble 13 per cent. Shares of Maple Leaf Green World Inc. on the TSXV fell 12 per cent.

Canada's largest stock exchanges are not on the same page when it comes to this issue, adding to the confusion.

The Canadian Securities Exchange continues to welcome firms with links to the U.S. cannabis market, as long as they comply with state law where they operate and have told investors about the legal backlash they could face by earning revenue tied to a drug that is illegal under U.S. federal law.

TMX, however, is not allowing cannabis companies that could violate U.S. federal law to list on the TSX and TSXV, and has initiated a review of existing issuers to determine if any should be delisted.

Canada's securities regulators, for their part, laid out their rules for what, how and when public companies should disclose their exposure to the marijuana industry in the United States. The OSC expects that a company's next regulatory filing would include these details.

"It's disclosure that will bring additional facts to light," Mr. Loke said. "Both the securities commission, as well as investors, will be able to determine what the risks really are and if the risks go beyond a certain threshold, then we will act accordingly."

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The CSE is adopting this framework spelled out by The Canadian Securities Administrators, which represents the 13 provincial and territorial securities regulators. TMX, conversely, is saying that disclosure of a possible violation of U.S. federal law is not enough.

"If you're violating federal law, you're out," said Ungad Chadda, the head of the listings business for equities at TMX. "We've never been about disclosure only. That's not what makes a world-class stock exchange."

By the end of the year, the TSX and TSXV will make contact with the roughly 25 marijuana issuers listed on their markets. TMX will also reach out to those that have previously disclosed that they sell ancillary goods and services to the U.S. marijuana space. From there, TMX will identify which companies' listing status should be under review.

Issuers removed from the TSX or TSXV may be able to find a new home on the CSE.

"We obviously have a starkly different opinion when it comes to this space," said Richard Carleton, the CEO of CNSX Markets Inc., which runs the CSE. "This is clearly one of the biggest growth spaces in the public capital markets. We are ready and willing to work with these companies."

The CSE has identified 12 companies listed on its exchange that do business in the U.S. cannabis market. These firms are only 4 per cent of the total issuers on the exchange but their combined market capitalization is 25 per cent of the entire market at $1.4-billion, according to CSE data.

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In the last three months until the end of September, buying and selling in these cannabis stocks with U.S. assets accounted for roughly 10 per cent of all trading volume on the CSE. The most-actively traded of the dozen by volume has been Friday Night Inc., which operates in Nevada, with 104 million shares traded on the CSE over these three months.

Last month, activity in these 12 stocks made up 8.2 per cent of the volume on the CSE, 15 per cent of the number of trades executed and 21 per cent of the total dollar value that changed hands.

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