As cannabis companies prepare to transition from the ACMPR to the Cannabis Act, a lack of clarity around “key investor” provisions in the new federal regulations is becoming a concern for some.
Under the new regulations, privately-owned licensed cannabis companies have to keep records pertaining to “key investors” and periodically disclose these to Health Canada. It appears that key investors, based on the definition in the regulations, may also need to go through a security clearance, a process that can take months.
“The tricky thing is the definition of key investors is a little bit unclear still,” said Eric Foster, a partner at Dentons, who runs the law firm’s cannabis practice. "The biggest concern a lot of the licensed producers and the industry have in general is...that the Cannabis Act effectively gives the minister the discretion to exercise his or her power to require additional security clearance from these key investors.”
Figuring out exactly who is a key investor – so as to proactively start collecting disclosure material – comes down to interpreting what Health Canada means by the word “control,” as it pertains to someone with control over a company.
“They're trying to capture indirect control,” explained Victor Liu, a Goodmans LLP partner and head of the firm’s cannabis division. “If you’re some sort of highly leveraged company that can have lots of covenants in your agreement that governs the control of the license holder, you may potentially be caught.”
This situation, however, is fairly unlikely, said Mr. Liu, as “most of these guys are financed by equity, and no one is really doing any sort of highly leveraged transaction.”
When it comes understanding whether someone has control from an equity standpoint, both Mr. Foster and Mr. Liu said that it's best to look to existing securities law as an analogue.
"Anyone who controls 50 per cent plus one of the company is clearly in control. But in a situation where it's a bit more widely held... it comes to a question of fact,” said Mr. Lui.
“So you look at a combination of factors to say, well two people each control 40 per cent and then there's another 10 per cent holder, is that enough to say there is control? Maybe based on perhaps a shareholders agreements that's in place that governs how people work. So it's that kind of nuance," he added.
In order get clients ready for increase disclosure rules, Mr. Lui is advising clients to collect the necessary information up front when doing private equity raises.
"It's kind of nice when you have the excuse of saying, 'listen I'm not asking for this information for my own personal use, it's a requirement for the business, and this is what it is. If you want to play in the business this is what you've got to do."
For Mr. Foster it’s about getting your house in order so you have all the necessary documentation on hand so, "when they have to prepare these reports, it's very easy, and they’re not all of sudden looking in 10 different files.”
So far the disclosure rules have not proved to be a deterrent for would-be investors, said Mr. Foster and Mr. Lui. But it has added an administrative burden for companies wanting to play in the space.
For Jason Moscovici, a lawyer with the Montreal firm ROBIC, there are still important privacy questions that need to be answered when it comes to how the key investor data will be managed. This is particularly true for commercially sensitive information that key investors may have to disclose when explaining how they came to have a non-equity controlling interest.
"A lot of people go to great lengths to make their letters of intent and contractual terms public. But some of these companies or individuals really don’t want that.
“Just the other day we had to stop a transaction,” he added, over concerns from a European investment fund about information having to be disclosed to Health Canada. “They made it clear to my clients, we do not want the people behind this money to have their names associated with it.”