Written By Aaron E. Sonshine, Ranjeev S. Dhillon, Rami Chalabi and Kathleen Devlin

On February 8, the Canadian Securities Administrators (CSA) issued an updated Staff Notice on the treatment of issuers with U.S. marijuana-related activities. While Canada works toward a July 2018 deadline for the rollout of its national regulatory framework for recreational cannabis, the U.S. cannabis industry remains fragmented, as cannabis continues to be treated as a controlled substance under U.S. federal law despite many U.S. states now permitting its use and sale (both medically and recreationally). The Notice provides guidance about the disclosure expectations for Canadian issuers with U.S. marijuana-related activities in recognition of the uncertainty, and political and regulatory tensions, currently surrounding the industry. Importantly, the CSA has expressed that it will continue to permit financings in Canada by U.S. cannabis operators, provided that certain disclosure standards are met. See below for a summary of the specific disclosure obligations outlined in the Notice.

In parallel, the Canadian Securities Exchange expressed that it would continue to encourage new listings by U.S. cannabis operators (TMX continues to restrict U.S. cannabis listings, particularly those that are “plant-touching”), and the Canadian Depository for Securities announced that it would continue to clear trades in the securities of publicly traded U.S. cannabis operators.

Prior to the release of the revised Notice, there was concern among industry participants that the CSA would stray from its permissive, disclosure-focused approach and restrict future financings by U.S. cannabis operators, following recent statements by U.S. Attorney General Jeff Sessions stating that the U.S. government would no longer adhere to the Obama-era policy of non-enforcement (reflected in the so-called “Cole Memorandum") of U.S. federal laws in states where cannabis had been legalized. It is noteworthy that the revised Notice no longer references the Cole Memorandum. As a practical matter, there has been only a modest increase in U.S. federal enforcement activities since AG Sessions announced the rescission of the Cole Memorandum in early January 2018. Presumably, a more meaningful increase in U.S. federal enforcement activity in future would require even more robust risk disclosure by U.S. cannabis operators.

Summary of CSA Disclosure Obligations

All Issuers with U.S. Marijuana-Related Activities must:

• describe the nature of the issuer’s involvement in the U.S. marijuana industry;
• prominently state that marijuana is illegal under U.S. federal law and that enforcement carries significant risk;
• outline potential risks including possible suspension of services by third-party providers or imposition of restrictions by a regulatory body on issuer’s ability to operate in the U.S.;
• outline statements and guidance provided by federal authorities or prosecutors relating to risk of enforcement;
• explain the difficulty of accessing public and private capital given the illegality of marijuana;
• quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities; and
• disclose whether legal advice, in the form of a legal opinion or otherwise, was provided about compliance with applicable state regulations and/or implications as a result of the federal law.

U.S. Marijuana Issuers with Direct Involvement in Cultivation or Distribution must:

• outline applicable state regulation and how the issuer complies with licensing and regulatory requirements of the state;
• provide positive statement indicating compliance with applicable state law and licensing requirements;
• discuss issuer’s ongoing program for monitoring compliance with state law; and
• promptly disclose any non-compliance, citations or violations of state law and any impact on the issuer’s license, business or operations.

U.S. Marijuana Issuers with Indirect Involvement in Cultivation or Distribution must:

• outline applicable state regulation in which issuer’s investee(s) operate;
• provide either positive or negative statements indicating compliance with applicable state law and licensing requirements; and
• promptly disclose any non-compliance, citations or violations of state law and any impact on the issuer’s license, business or operations

U.S. Marijuana Issuers with Material Ancillary Involvement must:

• provide assurance, either through positive or negative statements, that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and regulatory framework enacted by the applicable state.

Disclosure by issuers must be monitored and updated on an on-going basis as risks are evaluated and reassessed by U.S. Marijuana Issuers. Further, it is important to note, that each exchange continues to have its own listing requirements outlined in their rules and may make their own judgements in the application of their listing requirements.

Download the full document: CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities

The Bennett Jones Cannabis team are the leading professional advisors to provide legal and strategic guidance to all cannabis participants as well as provide connectivity to our network as the Canadian cannabis industry continues to evolve.