TSX and CSA Staff Notices, and the Unbreakable CSE
- The modest-sized conference room at King Street West and University Avenue is full of chairs, but nervous-looking assistants pack more along the sides as the clock ticks down to a special event about public cannabis issuers, put on by the Canadian Securities Exchange (CSE). At start time, it is standing room only and national media is in attendance. For a cannabis crowd, the mood is unusually sombre and attentive.
- With just over 300 listed issuers, the CSE is host to a staggering 49 companies involved in the cannabis industry, including about a dozen issuers with US cannabis activities. It has such a concentration of canna-businesses that it has attracted joking suggestions that its initials should actually stand for the Cannabis Stock Exchange or the “Cannadian” Securities Exchange.
- The TSX draws a line in the sand: These are long and important days for the CSE. Not least because its neighbour (literally) across the street, the TSX, took a definitive stand against cannabis companies with US marijuana industry involvement, and issued a Staff Notice last week announcing that issuers with ongoing business activities that violate US federal law regarding marijuana are not complying with its listed issuer requirements. The TSX further stated that it would conduct continued listing review of issuers in the marijuana sector to root out any with US operations, investments, or commercial arrangements having to do with cannabis – either recreational or medical. Back to this in a moment.
- The CSA dives in: The TSX Staff Notice coincided with a Staff Notice from the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, mandating specific types of disclosure for Canadian public issuers doing business in the US cannabis industry.
- The CSA set out disclosure expectations which are tied to the nature of the issuer’s industry involvement. All issuers with US marijuana-related activities are expected to, among other things, describe the nature of their involvement and discuss the issuer’s ability to access public and private capital to support its continuing operations, given the illegality of cannabis under US federal law. A rising bar of additional disclosure obligations applies based on how close a company gets to the plant: issuers with ancillary business involvement are differentiated from issuers with indirect involvement in marijuana cultivation and distribution, who are themselves distinct from issuers with direct cultivation or distribution involvement.
- (The Ontario Securities Commission, a member of the CSA, has produced its own guide to investing in the marijuana industry which reflects some of the risks identified by the CSA.)
- The CSA’s Staff Notice is significant for two reasons:
- First, it demonstrates that securities regulators have turned their mind to this issue, and in my view makes it a little more difficult for an entity like the Canadian Depository for Securities Limited, better known as CDS, to take additional steps to insulate itself or investors from such risks by refusing to settle trades of securities of such companies (which it has reportedly considered doing). It would now be extraordinary, although not impossible, for CDS, a mostly-computerized clearing system, to take steps beyond what the CSA have agreed is mandated under Canadian securities laws.
- Secondly, it confirms that stock exchanges can go beyond these expectations: “In determining whether to list entities with US marijuana-related activities, each exchange applies its own listing requirements”. Essentially, this statement is acknowledging and affirming the TSX’s ability to call its own shots.
- Sending in the reinforcements: And that’s exactly what the TSX has done. The TSX’s Staff Notice is the culmination of months of media leaks about its policy on marijuana issuers. “We’ve got a published policy which is transparent, clear, and is enforced,” said TMX Group CEO Lou Eccleston, who commutes regularly across the Canada-US border, in an August 10 BNN interview. However, the same day, Eccleston told the Globe and Mail that the TSX “might come out and reinforce our listings policy and be clear about it.”
- Some have felt like the TSX’s published policy was not so clear. Rather than requiring all listed issuers to comply with all laws, rules and regulations application to its business or undertaking, the way the TSX Venture Exchange’s (TSXV) Listing Agreement does, the TSX Company Manual requires issuers to conduct their business “with integrity and in the best interests of the issuer’s security holders and the investing public”, and in compliance with “the rules and regulations of TSX and all other regulatory bodies having jurisdiction.”
- But that’s not quite the same as saying “all laws”. Many US cannabis businesses in states where cannabis is legal for medical or recreational purposes would say that they are, in fact, in compliance with the “rules and regulations” of their respective states, and that the US federal government, in adopting the Cole Memorandum (the Obama-era Justice Department memo suggesting that state-legal marijuana businesses would not be high priorities for prosecution), has espoused a “rule” of withholding enforcement of federal law against state-compliant cannabis companies.
- The non-compliants: But, as confirmed by the CSA, the TSX has discretion to set its own listing requirements. In this case, the TSX made it clear that it would view as non-compliant any issuers with business activities including (in order of concern):
- (i) direct or indirect ownership of entities engaged in activities related to the cultivation, distribution, or possession of marijuana in the US (“Subject Entities”);
- (ii) commercial interests or arrangements with Subject Entities that are similar in substance to ownership of, or investment in, Subject Entities;
- (iii) providing services or products that are specifically designed for, or targeted at, Subject Entities; or
- (iv) commercial interests or arrangements with entities engaging in the business activities described in (iii).
- Flexing its muscle, the TSX ended the Staff Notice with a reminder that it had the discretion to initiate a delisting review of any issuers engaging in activities contrary to its requirements.
- By contrast, the CSE has no aversion to cross-border cannabis involvement by its issuers. As a result, it has been fielding a number of calls from TSX and TSXV-listed companies these days.
- Tangling with the big fish: Indeed, there was one company hit particularly directly by the TSX’s statement: mammoth TSX-listed licensed producer Aphria. Aphria has made the news for its significant cross-border investment: it has poured around $30 million into a 37% stake in Liberty Health Sciences Inc., an investor and operator in Florida’s medical cannabis industry; an 11% stake in Copperstate Farms, LLC, an Arizona-based licensed producer and seller of medical cannabis; and various other non-material minority equity positions in other US marijuana companies.
- Just hours before the TSX’s Staff Notice was released, with its market capitalization hovering around $900 million, Aphria announced a bought deal – that is, a prearranged financing where underwriter brokerages fully commit to buying, and reselling, a new batch of the company’s shares to their clients – worth $80 million, or $7.25 per share. Shares of Aphria dropped from close to $8.00 down to about $6.50 in the days following the Staff Notice. (They have since recovered to around $7.29 on the open market at press time.) Obviously, the timing of the TSX Staff Notice was less than ideal.
- It’s unclear how Aphria will proceed here. These US investments have been part of Aphria’s corporate development strategy for quite some time; in fact, the company announced last spring that Liberty was to license Aphria’s brand name to become “Aphria USA”. And regardless of their size, it’s clear that these assets are important to the company: Aphria issued a spirited press release just hours after the TSX’s Staff Notice was released, calling the Notice “extremely broad in its application”, and stating that it “does not properly apportion the weight and context that must be applied to the current split between US Federal and state laws governing medical cannabis.”
- Barely pausing for breath, the press release went on to state that Aphria has raised over $216 million while being listed on the TSX and TSXV, and noting that the company’s Copperstate transaction was approved by the TSXV prior to its closing. It’s hard to escape the conclusion that Aphria feels misled. As of October 23, Aphria announced that it was engaging in positive dialogue with the TSX, and had not yet received notice of a continued listing review.
- As the dust settles: Where does all this leave the CSE? At the very least, they have got to be earning some goodwill from their listed companies for their courage in continuing to list and welcome issuers with US cannabis activities.
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