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TSX warning to cannabis companies gives investors jitters

Stock prices dropped 4% to 13% for Canadian cannabis companies on TSX following warning about doing business in U.S.
Any business dealing that 'touches the flower' in the U.S. could spell trouble for Canadian cannabis companies on the TSX, says one legal expert.

In the cannabis industry, legitimate or otherwise, it’s known as “touching the flower.” That’s any activity related to the cultivation, distribution or possession of marijuana.

While it is legal to varying degrees in 28 U.S. states, marijuana is still a controlled substance under federal law in the U.S.

So what does that mean for publicly listed Canadian cannabis companies that have investments or other business arrangements in the American cannabis sector?

According to a staff notice issued by the TMX Group on October 16, it could mean that any cannabis company listed on the TSX that has American business interests may either have to divest those assets or interests or face delisting.

The staff notice came out the same day that the Canadian Securities Administrators (CSA) also released guidance for issuers on the reporting requirements for Canadian cannabis companies.

Stock in TSX cannabis companies dropped 4% to 13% the next day. Andrew Powers, a partner for Borden Ladner Gervais, suggests the jitters by investors are not unwarranted.

“The way I see it, there are only two paths, based on my reading of the TSX bulletin, and that’s going to be divest yourself of those interests, so you are in compliance with requirements, or you will face delisting and you will have to go somewhere else,” he said.

Ungad Chadda, the TMX Group’s president of capital formation, Equity Capital Markets, said the TMX Group felt it was necessary to clarify the exchange’s listing requirements for Canadian cannabis companies that may have American interests.

There is a perception that because marijuana is legal in some U.S. states, that means there are no legal ramifications for Canadian cannabis companies doing business in the U.S.

“There’s some confusion perhaps around some people talking about things like state law,” Chadda told Business in Vancouver.

“We felt it was important for us to come out and say, because of all the activity in this space, we want to make it crystal clear that the TSX and TSX Venture does not acknowledge state law in this area.”

He added that delisting would not be automatic.

“The delisting is a last resort,” Chadda said. “There’s so much that we go through before we even get into – if we ever did – with a company as formal listing review process.”

Of the five cannabis companies listed on the TSX big board, one is based in B.C. – Aurora Cannabis Inc. (TSX:ACB). Of the 28 cannabis companies listed on the TSX Venture exchange, seven are based in B.C

Four of the five companies on the big board saw their stock drop 4% to 5% on October 17, while Aphria Inc. (TSX:APH) stock dropped 13.38%. Aphria has investments in Florida and Arizona.

So what, exactly, would constitute a breach of the TSX guidelines? Powers said any investment or business arrangement with an American company involved in the cultivation, distribution or possession of marijuana – i.e. “touching the flower” – would likely be captured.

“If you have an investment or interest in any entity that touches the flower, you are caught – you are in breach of the requirements,” Powers said.

Even commercial arrangements that are not outright ownership might be captured – streaming agreements, for example.

“This could capture joint ventures, streaming agreements, royalty agreements, profit sharing agreements. If you’re providing some sort of technology, or you’re providing recipes for guys who manufacture edibles, you’re caught. If you’re providing financings, if you provide real estate to entities that grow, you’re caught.”

Exchanges and securities commissions aren’t the only ones scrambling to clarify securities law with respect to cannabis.

Powers said the Canadian Depository for Securities (CDS) – the clearing house in Canada for trades on Canadian exchanges – is also analyzing the potential risk that trades for cannabis companies could be captured by proceeds of crime actions from the U.S.

It has already been suggested that the TSX could become depopulated of cannabis companies, which might flock to the Canadian Securities Exchange (CSE).

The CSE has also come out with new guidance for cannabis companies, but it is taking a less heavy-handed approach.

“We see the matter differently,” CNSX Markets Inc. CEO Richard Carleton told BIV. “We actually regard the issue as of one of disclosure.”

The CSE’s guidelines tells cannabis companies listing on the CSE that they must be clear in their public disclosures of any American interests so that investors understand the potential risks.

“We are going to continue to list and offer trading services for companies that meet our requirements and we will make sure that in some way, shape or form those trades will settle.”