Carlo Di Carlo practises corporate/commercial law at Stockwoods LLP in Toronto
Regulatory upheaval under the Trump administration in the U.S. cannabis industry is providing Canadian companies with the chance to be global leaders. However, disagreement between the different gatekeepers of Ontario's financial markets may squander this opportunity.
In 2013, the U.S. Department of Justice under the Obama administration issued a memorandum indicating it would not enforce federal prohibitions on marijuana in states that authorized its use. This was referred to as the "Cole Memorandum" (after then-deputy attorney-general James Cole). It essentially allowed marijuana producers in certain states to operate their businesses despite the federal laws that technically made the production of marijuana illegal.
This uneasy détente seemed in danger after the 2016 election, and threats to the peace materialized last month, when current U.S. Attorney-General Jeff Sessions rescinded the Cole Memorandum, allowing federal prosecutors to individually decide how to prioritize enforcing these laws against marijuana producers.
Before Mr. Sessions's rescission, regulatory uncertainty had led many U.S.-focused companies to look to Canadian public exchanges to raise funds. However, after the January rescission of the Cole Memorandum, it was not clear whether U.S. marijuana businesses would continue to have this access.
The answer appears to be "yes" – but with a caveat. On Feb. 8, the Canadian Securities Administrators (CSA), a body made up of securities regulators from all of the provinces and territories in Canada, released a staff notice confirming it will continue to permit companies with U.S. operations to raise funds in Canada.
In order to continue to have access to these funds, these companies must disclose information regarding regulation in the states in which they operate, as well as their compliance (or lack thereof) with those regulations.
The staff notice essentially reaffirmed the position of the CSA when the Cole Memorandum was in effect. However, it provided needed clarity and comfort to marijuana companies with U.S.-facing businesses. It also seemed to spur other Canadian gatekeeper entities to similarly issue their support for U.S. cannabis companies. The Canadian Securities Exchange stated that it would continue to host new listings from U.S. marijuana companies, and the Canadian Depository for Securities (a securities clearing house) released a document confirming it would continue to clear trades for such companies.
However, not all gatekeepers have been equally as supportive. Since October, 2017, the TSX, Canada's largest stock exchange, has been unwilling to list cannabis companies with exposure to the United States.
This includes Canadian companies with assets in the United States. There is no sign that the CSA's recent staff notice has affected this decision. Given the size of the TSX relative to the CSE (market cap of $3-trillion for the former compared with $8.5-billion) this creates a disadvantage for marijuana companies with U.S. aspects to their business. They are presented with a stark choice: participate in the U.S. cannabis market at the cost of being prevented from access to the deeper well of financing available on the larger exchange.
This creates an incentive that is damaging to the prospect of Canadian companies holding a leadership position in the cannabis industry. It may tempt these companies to give up a U.S. business in order have the security of access to the TSX. One company, Aphria Inc., has already announced that it has sold part of its stake in a U.S. company. The company's comments regarding the deal suggest that access to the TSX was an important consideration in the decision. Given the potential size of the U.S. market (some estimates put it at US$21-billion by 2021) this would mean giving up on significant opportunities.
Because of our more permissive regulatory environment, Canadian marijuana producers have been given a head-start. Recent regulatory confusion in the United States provides these companies with a chance to consolidate these gains and occupy leadership positions in the industry. But this inconsistent treatment by financial market gatekeepers threatens to undermine this head-start. It jeopardizes the opportunity for Canadian companies to become global players in the industry. Canadian gatekeepers should look to learn lessons from their neighbours to the south and strive for consistency in their regulatory approach.