Namaste Technologies is between a rock and a hard place. The Vancouver-based company, which sells vaporizers used by medical-marijuana patients, hasn't broken any laws. Until recently, it was just another company listed on the Canadian Securities Exchange, minding its own business.
Then, in October, Canada's largest exchange operator, the TMX Group, suddenly threatened to kick any company that violates U.S. federal drug laws off its exchanges—and all hell broke loose. Even though Namaste isn't listed on a TMX exchange, some of the company's sales come from the United States, so the review effectively killed the company's prospects of ever being acquired by any company that is. The rule change also spooked institutional investors, including American hedge funds, which don't want to touch the company with a 10-foot pole.
The only solution for Namaste is to pull out of the U.S. altogether, halting its growth in a lucrative market. "We've decided that for now, it's better to spin off those divisions," says CEO Sean Dollinger. "Until it's legally 100% accepted over there, that's what we've decided to do."
Namaste isn't the only company hurt by TMX's sudden flip-flop. News that any cannabis company with American operations could be booted off its exchanges has chilled the whole industry, and TMX has done a lousy job of clarifying which companies could be caught in its review. Investors are being punished, and critics say it's unprecedented for an exchange to retroactively change the rules on publicly traded companies. These businesses were all vetted and approved before they were listed. Now regulations are being amended on the fly, setting a dangerous standard for Canada's capital markets.
Keep in mind that there's no suggestion the companies affected have actually done anything wrong. Twenty-nine states and the District of Columbia have legalized marijuana in some form. But the drug remains illegal under U.S. federal law, creating a bit of a grey area. The former Obama administration said the federal government wouldn't target businesses operating in marijuana-friendly states, but TMX is worried that policy, known as the Cole Memorandum, doesn't have the force of current law and could be revoked.
It looks like TMX, which has operations south of the border, is being overly cautious, perhaps trying to avoid a crackdown from the U.S. Department of Justice. But here's the rub: That legal risk always existed, even when TMX first approved the listings of cannabis companies on its exchanges.
The listing reversal isn't the only curveball TMX has thrown the cannabis sector in recent months. In August, it raised the prospect that one of its subsidiaries, the Canadian Depository for Securities Ltd., could stop clearing and settling trades in stocks of marijuana companies that have U.S. assets. At press time, no decision had been reached. But since CDS is Canada's national clearing and settlement hub, such a move would gum up the trading of certain cannabis stocks not only on TMX-owned exchanges but on rival stock markets too.
Canadian regulators, of course, have done nothing to help. In October, the Ontario Securities Commission refused to intervene in the controversy, arguing every exchange is entitled to make its own decisions. The Canadian Securities Administrators, meanwhile, see this as a simple disclosure issue. Cannabis companies, the CSA says, will just have to do a better job informing investors about their U.S. exposure and legal risks in that country.
It's not enough. Rather than sitting on the sidelines and fiddling with the fine print, securities regulators should be setting uniform standards for listings and post-trading services that aren't subject to the changing whims of exchanges. The Competition Bureau, meanwhile, should force TMX to divest CDS. After all, the bureau flagged the risk of anti-competitive behaviour on clearing and settlement back in 2011, when it was assessing the Maple Group's bid to acquire the TMX Group, including CDS. But the bureau eventually backed down and opted not to challenge the deal.
Investors and companies deserve better. Predictable regulations ensure orderly capital markets. Billions are at stake, so regulators need to step up and cut through the haze. After all, if TMX is allowed to pull the rug out from under the cannabis sector, what will stop it from doing the same to companies in other industries?