By Matt Lamers
A fog of uncertainty hanging over Canada’s cannabis sector was lifted this week after a securities regulator and the operator of the country’s largest stock exchange clarified the listing rules for marijuana companies doing business in the United States.
Marijuana industry executives said the new guidelines remove much of the uncertainty over whether publicly traded cannabis companies would lose their listings because of U.S. business interests.
“It was paramount,” Marc Lustig, CEO of Ottawa-based CannaRoyalty – which invests in U.S. cannabis companies – said of the two announcements. “People were at the edge of their chair as to whether companies were allowed to be on Canadian exchanges in this scenario, and the answer is ‘yes.’”
Here’s what happened:
- The Canadian Securities Administrators (CSA), an umbrella organization for stock markets, announced that companies could participate in the U.S. marijuana industry if they spell out the potential risks for investors who invest in those stocks. But the CSA left specific listing requirements up to Canada’s individual stock exchanges.
- TMX Group – parent of the Toronto Stock Exchange (TSX) and TSX Venture (TSXV) Exchange – soon after announced that marijuana companies that do business in the United States could face a review and be delisted. The TMX announcement, in effect, levels the playing field for MJ companies by treating them all equally, executives said.
Another Canadian stock exchange, meanwhile, applauded the CSA’s announcement.
The Canadian Securities Exchange (CSE), home to most of Canada’s marijuana companies with U.S. ties, said the regulator provided “significant clarity.”
The CSA and TMX announcements formalize a status quo that had developed over the course of the past year. In particular, they spell out what had once been a hazy patchwork of extrapolations from media interviews and terse press releases from regulators.
The written guidelines and announcements boil down to the following:
- The CSA’s commentary gives investors more clarity by requiring marijuana companies to spell out the risk of doing business in the United States.
- Companies on the TSX and TSXV, by contrast, are barred from participating in the U.S. marijuana industry.
- And companies listed on the CSE can continue to participate in the U.S. marijuana industry – provided they meet the CSA’s disclosure requirements.
Still some questions
That said, some lingering questions remain.
For example, it’s unclear whether any cannabis companies will be delisted if they undergo a review by the TMX. The stock market operator hasn’t yet spelled out the standards it would use.
Analysts also said issues involving the Canadian Depository for Securities (CDS) – a clearinghouse owned by the TMX – are largely, but not completely, resolved.
The CDS has been mulling whether to refuse to settle trades involving a handful of marijuana firms with U.S. holdings.
“The overhang for the CDS issue is largely removed,” said Canaccord Genuity research analyst Matt Bottomley. “We’re still waiting for the CDS to give their commentary. They effectively asked for guidance from regulators, and the regulators have said they expect the exchanges to make their own decisions.”
Toronto-based Beacon Securities analyst Vahan Ajamian said CSE-listed companies with U.S. assets should see their prospects improve now that the CSA has come out with specific disclosure rules.
“The more clarity the better,” he said. “Companies on the CSE with U.S. operations had a regulatory cloud hanging over them. As that cloud continues to dissipate, their prospects should improve, broadly speaking.”
Boosting investor confidence
Industry executives said the new clarity should give marijuana companies better access to capital and eliminate investor fears over their listing status.
CannaRoyalty, for example, was one of the companies in the crosshairs of that confusion because of its extensive assets in the United States.
“Confidence and clarification to investors means a better cost of capital and more options in terms of raising capital,” said Lustig. “It’s really all about disclosure, and that’s the way it should be.”
Canaccord’s Bottomly said that “overall this has a de-risking element for the 30 or so companies that are listed on the CSE that have a U.S. reach in cannabis.”
Those at risk of being delisted
Only cannabis companies based in Canada and traded on the TSX or TSX Venture with operations in the United States would appear to face the possibility of delisting.
Two companies with operations in the United States are Aphria and Maple Leaf Green World.
By contrast, a number of TMX companies engaged in cannabis-related activities in the United States would appear less likely to face problems. That’s because they are not involved directly in the U.S. market.
Organigram, traded on the TSX Venture Exchange as OGI, has the exclusive rights to sell Colorado-based TGS International’s line of cannabis extract and derivative products in Canada. The company has no plans to generate revenue in the U.S.
Canopy Growth, traded on the TSX as WEED, has a number of partnerships with U.S.-based companies, such as Skinvisible in Nevada, that see intellectual property developed in the United States brought into Canada. But Canopy is not involved in any U.S. activities respecting cannabis that would generate revenue south of the border. The IP being developed in the U.S. would be commercialized in Canada.
CanniMed Therapeutics, traded on the TSX as CMED, has a wholly-owned subsidiary in White Pine, Michigan, that owns a piece of real estate that could play a role “in the company’s longer-term strategy” to serve the U.S. medical marijuana market, according to CanniMed’s website.
In a news release this week, CanniMed said it “does not carry on any marijuana related activities in the United States.”
Matt Lamers can be reached at [email protected]
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