Four Takeaways from the CSA on the Public Disclosure of Medical Marijuana Companies

February 26, 2015

On February 23, 2015, the Canadian Securities Administrators (CSA) released Staff Notice 51-342 Staff Review of Issuers Entering Into Medical Marijuana Business Opportunities in which it was made clear that the CSA is not satisfied with the level of detail in the disclosure of public companies in the medical marijuana industry. Of the 62 companies reviewed, 40 percent raised "serious investor protection concerns" with their public disclosures. Here are four key takeaways from the CSA's report in order to help companies understand the CSA's concerns and make the right decisions about their public disclosure going forward.

1. Everyone wants a Piece of the Action (and the CSA is Watching)

Due to the overwhelming popularity of Canada's medical marijuana industry, the CSA has taken a heightened interest in protecting Canadian investors in this sector. This first became clear on June 16, 2014, when the CSA issued an alert urging investors to be cautious when considering investing in Canadian medical marijuana stocks. Since the enactment of the Marihuana for Medical Purposes Regulations (MMPR), the CSA has observed a significant number of public companies announcing their intention to explore opportunities in the medical marijuana industry. In many of these instances, just the announcement of intent to develop a medical marijuana business has resulted in an immediate rise in a company's stock price. The CSA feels that the disclosure backing these announcements is not detailed enough for investors to make educated investments. In light of the growing number of public market entrants in the medical marijuana sector and some recent high-profile and negative press related to public entities pursuing an MMPR license, you can expect that the CSA will continue to take a proactive approach to reviewing companies' disclosure in order to protect Canadian investors.

2. Provide Context about Your Position in the Medical Marijuana Industry

While it may be clear to an applicant applying for a license under the MMPR, an investor is unlikely to understand all of the steps involved in the MMPR licensing process or the operational risk of conducting business in the medical marijuana industry. The CSA noted an obvious lack of disclosure regarding a company's stage of entry into the medical marijuana industry, including facility development progress and steps that remain to be completed before a revenue-generating medical marijuana business can begin (these include the status of any licence application and whether or not an application has even been submitted). In particular, the CSA wants any unlicensed company to indicate that it cannot grow or sell medical marijuana without a licence from Health Canada.

3. Disclose Both the Good and the Bad

The CSA found that the disclosure reviewed was unbalanced and overly promotional in nature. A public company must openly report bad news as well as good news. Press releases should avoid including unnecessary details, exaggerated reports or promotional commentary and stick to information that provides investors with enough relevant information to understand the substance and importance of the change being disclosed. The reviewed disclosure provided few estimates on the time and nature of costs required to realize the proposed new businesses nor did it asses the competitive landscape or address the barriers associated with entering the industry.

4. Investors are the Most Important

The essence of the CSA's report is that investment decisions cannot be made in a vacuum and, therefore, investors need enough information to understand the whole picture. For instance, a company disclosing that it has signed an agreement for a new production facility is likely to have investors react positively to such information. However, the investor needs to:

1. understand whether this facility still needs to meet any of the many requirements under the MMPR;
2. appreciate the costs associated with any necessary development or conversion of the facility;
3. know whether the facility been inspected by Health Canada and, if so, whether there is a reasonable estimation of how long until the facility is approved; and
4. understand that, besides an approved facility, there are other conditions to be satisfied before a company receives a license to cultivate and sell marijuana from Health Canada.

Public companies wishing to enter Canada's medical marijuana industry must ensure their public information is sufficiently detailed to satisfy Canadian securities laws. Getting this right from the start helps companies avoid the unnecessary expenses of fixing deficient disclosure and will protect them from the penalties associated with misrepresenting their public information.

The above update is a general overview of issues to consider and it is important to remember that each company's public disclosure will be based on its own facts and circumstances. At Bennett Jones we have a team of professional advisors that can provide guidance to companies regarding their public disclosure and best practices as the Canadian medical marijuana industry advances.

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