Cannabis and the capital markets: Q&A with Canadian Securities Exchange CEO Richard Carleton

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Image of Richard Carleton

Richard Carleton (Courtesy photo)

The Canadian Securities Exchange (CSE) was founded in 2003 as an alternative to the much older Toronto Stock Exchange.

Twenty years later, the CSE lists more than 800 securities, predominantly mining companies, including more than 100 listings for the securities of cannabis and ancillary businesses.

Canadian medical cannabis companies started listing on the exchange in 2014, and the CSE’s first U.S. plant-touching cannabis company (Golden Leaf Holdings, later Chalice Brands) began trading in 2015.

Other U.S. marijuana firms followed, and some are now the CSE’s biggest issuers by market capitalization.

Cresco Labs, Green Thumb Industries and Trulieve Cannabis are the top three constituents of the CSE 25 Index, which tracks the exchange’s top 25 listings by market cap. Several other MSOs are also in the index.

On the other hand, a number of high-profile U.S. marijuana companies left the CSE in 2023 for competing exchanges:

Asked to make his pitch to cannabis companies considering listing on the Canadian Securities Exchange, CEO Richard Carleton touts the exchange’s “tremendous body of expertise” in working with cannabis companies.

“As the disruptor in the Canadian marketplace, we had to come in – and continue to come in – at an attractive price point for companies,” he told MJBizDaily.

“With money hard to raise, the less money that you have to surrender to the stock exchange means more money to invest in your business.”

Carleton sat down with MJBizDaily to discuss the CSE’s place in the capital markets, the tough landscape for publicly traded cannabis companies and the potential impact of U.S. marijuana rescheduling.

You have argued against the perception that the CSE is a more “junior” exchange than others in Canada. Why is that inaccurate, in your view?

Simply put, there’s no such thing as a tier one exchange, tier two exchange, junior exchange, senior exchange. That’s all marketing bunk.

We are exchanges. We are all regulated on the same basis. We have the opportunity to address the same markets, from a regulatory perspective.

We are the disruptor exchange, and any business has to look at what their addressable market is. … Where we’ve had success is, generally speaking, in earlier-stage companies.

Cannabis is a little different in that we’ve obviously had some of the companies that came to us between 2016 and 2018, who have grown to tremendous size at this point.

And they are our largest companies by market capitalization, by revenues, essentially by any measurement.

In 2023, more marijuana companies delisted from the CSE than listed on the exchange.

What does that tell you about the relationship between the CSE and the cannabis industry?

What it explains to you is the challenges the cannabis industry faces.

A number of these companies – whether they’re Canadian, U.S. or international – have obviously had tremendous challenges, both building out businesses … and also extreme difficulties in raising additional capital, whether it’s in the form of share offerings or debt or whatever.

We’re seeing a natural cycle that happens in any new industry, where the expectation is that a significant number of the startups … (will) not be able to sustain themselves in the longer run.

CSE-listed cannabis accessories distributor Humble & Fume is in creditor protection and intends to go private.

The CEO said investors have become less interested, in part due to increasing interest rates, and the company has trouble getting the “benefits of the public listing” despite the costs.

Does that concern you, in terms of the CSE’s ability to maintain marijuana listings?

The CEO’s comments could be applicable to just about any segment of the economy that accesses the public capital markets.

In the small cap space last year, it was extremely difficult for companies of all kinds to raise money.

I think interest rates had a significant impact on both the ability to raise money (and) on liquidity.

I’ve done some correlation analysis between increases in the Bank of Canada and the U.S. (Federal Reserve) overnight rate and trading turnover on the marketplace, and it’s almost immediate: The increase in the overnight rate led to a drop in overall trading activity, not just on the Canadian Securities Exchange but on markets generally in Canada.

The challenge, as always, is: If we’re not in a position to offer the lowest cost of capital to a particular industry sector, then we’re just not going to see companies from those sectors.

Do we worry about it? Absolutely. We watch it very carefully. And we have to tailor our service offerings, our pricing.

What gives me hope is that there’s obviously a wide expectation in North America that interest rate policy will soften this year. I happen to be in that camp.

And that should lead to more opportunities for companies to access capital through the public markets.

Several big-name U.S. marijuana MSOs left the CSE for other Canadian exchanges last year. Does that have you worried?

It does. Of course, we have to understand why those moves are made, and we do understand the background here.

The reality is that for the U.S. (marijuana) operators, they’ve had an extremely difficult time broadening their shareholder base from the predominantly retail holding that they have had to include a broader representation of institutional investors on their (capitalization) table.

One of the key things that has prevented that development for them is the stance taken by the share custodians in the United States.

They’ve taken the same attitude toward the industry as the national securities exchanges in the U.S.

If you are an institutional investor and somebody pitches you from one of the big MSOs … the (institution’s) trading desk will say, “The problem is, we can’t keep the shares at our usual share custodian.”

It basically means, if you’re listed on the Canadian Securities Exchange and you’re perceived by the marketplace as a plant-touching U.S. operator, you’re going to have a very difficult time being able to expand your shareholder base to, in particular, the U.S. institutional community.

That was one of the key drivers behind, frankly, all of those moves (to other exchanges).

(Such moves) are complicated. They are expensive. And they involve some accounting – “tricks” is the wrong word – but some accounting treatment; it’s a matter of record, but it’s controversial.

I don’t think it’s an avenue that all of the companies are likely to follow.

The argument is, “This is a path to listing (in) the U.S.

No. When the U.S. exchanges are in a position to change their stance on the (cannabis) industry, I would expect that the companies are going to take advantage of that opportunity immediately.

The U.S. marijuana industry has its eye on federal rescheduling this year, which could open the door to plant-touching cannabis companies listing on U.S. exchanges.

Does that pose a risk for the CSE?

Our sensitivity analysis is, we’re talking about a relatively small number of companies.

It’s a lot of market cap, but it’s a relatively small number of companies.

So it’s not going to harm the overall business of the Canadian Securities Exchange.

That said, these are the highest-profile companies that we list, along with some very successful mining companies in recent times.

I can’t change – or I can’t dictate or predict – what the rate of legislative change in the United States is going to be. What I will say is that we are here for the industry as long as they need us.

We are delighted to work with these management teams.

I think what many of them have been able to achieve, with all of the barriers and issues that have been put in their way, is one of the most inspiring entrepreneurial stories I’ve had the benefit of seeing in the course of my career.

So, I have enormous respect for these folks.

But, if and when that day arrives, then certainly I would expect them to move to the United States, with our best wishes.

This interview has been edited for length and clarity.

Solomon Israel can be reached at