Canada's largest stock exchange operator is threatening to delist marijuana companies that are operating in violation of federal drug laws in the United States.
TMX Group Ltd. said late on Monday in a staff notice, a document that clarifies existing policy, that it is launching a review of cannabis firms listed on its markets to determine if any are doing business in the United States, where several states have either legalized or decriminalized marijuana. However, U.S. federal law still prohibits the drug.
With the move, any such firms could be delisted from the Toronto Stock Exchange or the TSX Venture Exchange, the two main stock markets in Canada – forcing them to find another stock exchange and creating uncertainty for investors, as well as others in Canada's burgeoning marijuana industry.
"If you're violating federal law, you're out," said Ungad Chadda, the president of capital formation for equities at TMX.
Separately on Monday, the group representing Canadian securities regulators spelled out how firms from any industry will have to disclose their ties to the U.S. marijuana market.
The announcements come after Globe and Mail reports on the discrepancy in how listing requirements for TMX's exchanges were being applied to cannabis companies that already had a listing versus those seeking one.
At the heart of the staff notice issued on Monday by TMX is a declaration that U.S. federal law takes precedence over the laws passed by states that allow marijuana to grown and sold.
"The staff notice is very clear that we are of the view that federal law is the jurisdiction that matters," Mr. Chadda told reporters. "Our view is, clearly, that the federal law applies here, meaning that there may be some issuers on our markets that are not in compliance with the requirements."
Issuers whose listings on the TSXV or TSX will be subject to a more thorough review will be identified and contacted before the end of 2017.
TMX will assess those that cultivate, distribute or possess the drug directly, as well as those that sell goods or services to the sector.
The sector has grown as Canada and several states south of the border have eased restrictions on the drug, spurring investor interest and speculation.
Dozens of companies have gone public on the TSX, TSV and on the lesser-known but fledgling Canadian Securities Exchange.
But the TSX and TSXV have clarified in their notices that "issuers with ongoing business activities that violate U.S. federal law regarding marijuana are not complying with the requirements" outlined in the two exchanges' listings manuals.
While the tension between U.S. federal and state laws has long existed, the former Obama administration said in 2013 that the federal government would not interfere with marijuana businesses in states that have legalized or decriminalized the drug, as long as those businesses would abide by a series of guidelines. The document that outlines the policy is known as the Cole Memorandum.
However, "such guidance does not have the force of law and can be revoked or amended at any time," both exchanges say in their notices. It is far from certain whether U.S. President Donald Trump's administration will abide by the policy.
"The Cole Memorandum was under the Obama administration," Lou Eccleston, chief executive of the TMX, said in an interview in August. "There's a very different administration now in place, and it creates uncertainty around where it's going to go."
The Canadian securities regulator's guidelines released on Monday detail the legal risks that must be disclosed to investors for companies doing business in the U.S. cannabis sector. The Canadian Securities Administrators (CSA), which represents the 13 provincial and territorial securities regulators, said cannabis companies will have to clearly disclose their U.S. involvement, and make clear to investors that the United States could become more aggressive about its enforcement of federal laws.
These firms must also make clear what financing options they do and do not have access to for their operations, the CSA said.
"We expect issuers with marijuana-related activities in the U.S. to address the current legal and regulatory environment in their disclosures, including any risks that result from changes in the approach to enforcement of U.S. federal law," Louis Morisset, the chair of the CSA, who is also the chief executive officer of the Autorité des marchés financiers, said in a statement.
The move is expected to offer some clarity to the dozens of marijuana-focused businesses that have turned to the Canadian public markets for capital. While the legal uncertainties of the U.S. market have created some opportunities for better-capitalized Canadian firms to build their companies, some have expressed confusion about the consistency of stock exchange rules and guidelines on U.S. investments.
"This is something the industry was hoping to get, now they got it and we can get back to work," said Richard Carleton, the CEO of CNSX Markets Inc., which operates the CSE.
Mr. Carleton added that prospective issuers have been looking for guidance on what they should disclose to investors in the most recent prospectus that has been approved.
"There was no such thing as clarity," he said. "People were reading the tea leaves."
In recent months, the CSE and TMX have taken different approaches to the listings of cannabis firms that generate revenue in the U.S. market.
The CSE has been welcoming them, as long as they provide disclosure around the legal risks they face. On the other hand, the TMX-owned equities exchanges have been turning them away, helping the CSE emerge as a hotbed for marijuana stocks.
The CSA's latest notice set out some specific requirements for issuers with direct involvement in growing or distributing marijuana in the United States, as well as those with indirect participation. It also stated that any action taken by the U.S. federal government to alter its approach to enforcement regarding marijuana could result in a re-examination of the group's views.
With a report from Jacqueline Nelson