TMX reviews marijuana companies with U.S. operations

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What will legalized cannabis mean for investors? We asked two analysts who have been watching Canada’s marijuana sector closely – both the companies that grow and sell medical cannabis, which is already legal, and those that are poised to serve the coming recreational market.


TMX Group Ltd. is reviewing cannabis companies listed on its two stock exchanges to determine which have exposure to the marijuana industry in the United States, where the drug is illegal under federal law.

The move by Canada’s largest stock exchange operator, announced late Monday, could result in some marijuana companies with U.S. operations being delisted from the Toronto Stock Exchange or the TSX Venture Exchange once the review wraps up. In a staff notice, the TMX Group said companies that list on its exchanges would have to comply with U.S. federal law. Although marijuana is illegal under federal law in the U.S., some states have legalized it in some form. But TMX has decided that federal law takes precedence as it seeks to shield itself from potential legal backlash by the U.S. Department of Justice.

Both the TSX and the TSXV said they can initiate a listing review of any companies engaging in activities contrary to those requirements. If this occurs, they can consider relocating their listing to another market like the Canadian Securities Exchange, the other main exchange in Canada for cannabis companies.

“The staff notice is very clear that we are of the view that federal law is the jurisdiction that matters,” Ungad Chadda, the president of capital formation for equities at TMX, told reporters on Monday. “Our view is, clearly, that the federal law applies here, meaning that there may be some issuers on our markets that are not in compliance with the requirements.”

While the tension between U.S. federal and state laws has long existed, the former Obama administration clarified in 2013 that the federal government would not interfere with marijuana businesses in states that have legalized the drug, as long as those businesses abide by a series of guidelines. The document that outlines the policy is known as the Cole Memorandum.

It is far from certain whether U.S. President Donald Trump’s administration will continue to abide by the same policy. His Attorney-General, Jeff Sessions, is a known skeptic on marijuana legalization; recently, he warned the governors of four states that he had “serious concerns” about their pot policies, according to The Los Angeles Times.

“The Cole Memorandum was under the Obama administration. There’s a very different administration now in place, and it creates uncertainty around where it’s going to go,” Lou Eccleston, chief executive of the TMX, said in an interview in August.

As part of its analysis, TMX is going to categorize these companies into two groups: those that cultivate, distribute or possess the drug directly; and those that sell other goods or services into the sector.  The goal is to identify and contact the companies that will have to undergo a review by the end of 2017. If it’s found that these companies are not complying with the rules, TMX can delist their shares from either market.

Separately on Monday, Canadian securities regulators released guidelines that detail the legal risks that must be disclosed to investors for companies doing business in the U.S., where the drug is still illegal under federal law. The Canadian Securities Administrators (CSA), which represents 13 provincial and territorial securities regulators, said cannabis companies will have to clearly disclose their involvement in the U.S., and make clear to investors that the U.S. could become more aggressive about its enforcement of federal laws.

These firms must also make clear what financing options they do and do not have access to for their operations, the CSA said.

“We expect issuers with marijuana-related activities in the U.S. to address the current legal and regulatory environment in their disclosures, including any risks that result from changes in the approach to enforcement of U.S. federal law,” said Louis Morisset, the chair of the CSA who is also the chief executive officer of the Autorité des marchés financiers, in a statement.

It’s a move that’s expected to offer some clarity to the dozens of marijuana-focused businesses that have turned to the Canadian public markets for capital. The sector has grown as the regulated legalization of cannabis in Canada and several states south of the border spurred investor interest and speculation. While the legal uncertainties of the U.S. market have created some opportunities for better-capitalized Canadian firms to build their companies, some have expressed some confusion about the consistency stock exchange rules and guidelines on U.S. investments.

“This is something the industry was hoping to get, now they got it and we can get back to work,” said Richard Carleton, head of the CSE, which lists some cannabis stocks.

Mr. Carleton added that prospective issuers have been looking for guidance on what they should disclose to investors in the most recent prospectus’ that have been approved.

“There was no such thing as clarity,” he said. “People were reading the tea leaves.”

In recent months, the CSE and TMX have taken different approaches to the listings of cannabis firms that generate revenue in the U.S. market. It has resulted in confusion for companies and investors over what’s acceptable.

The CSE has been welcoming them, as long as they disclose the legal risks they face. On the other hand, the TMX-owned equities exchanges have been turning them away, helping the CSE emerge as a hotbed for marijuana stocks.

The CSA’s latest notice set out some specific requirements for issuers with direct involvement in growing or distribution marijuana in the U.S., as well as those with indirect participation. It also stated that any action taken by the U.S. federal government to alter its approach to enforcement regarding marijuana could result in a re-examination of the group’s views.

More to come…

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