TSX warns Canadian cannabis companies to cut U.S. ties

Investors in burgeoning marijuana sector get the jitters over stock exchange’s delisting threats

Emerald Health has a joint venture with a Delta greenhouse operator to grow medical marijuana | Submitted

Like most Canadian cannabis companies listed on the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V), Victoria-headquartered Emerald Health Therapeutics Inc. took a hit to its stock on October 17.

The company (TSX-V:EMH) suffered a 5% drop in stock value, as did many others. One cannabis company, Aphria Inc. (TSX:APH), took a 13% hit.

Investors were reacting to memos and staff notices put out the day before by the Canadian Securities Administrators, TMX Group (TSX:X) and Canadian Securities Exchange (CSE) that clarify the rules for publicly listed Canadian cannabis companies that have business interests in the U.S.

The TSX’s position was particularly chilling: any Canadian cannabis company on the TSX that does business in the U.S. and in any way “touches the flower” – has anything to do with the cultivation, distribution or possession of marijuana – could face delisting.

“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,” said Andrew Powers, a partner with Borden Ladner Gervais.

That somewhere else would be the CSE, which lists about 50 cannabis companies. The CSE’s guidance for cannabis companies is less stringent than the TSX’s.

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

The CSE’s guidelines tell cannabis companies listing on the CSE that they must be clear in their public disclosures of any U.S. 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,” Carleton said.

Since Aphria has investments in the U.S., it took the biggest hit. Companies like Emerald Health, which has no business dealings with U.S. cannabis companies, suffered only minor collateral damage.

Ungad Chadda, TMX Group’s president of capital formation, equity capital markets, said TMX Group felt it was necessary to clarify the exchange’s listing requirements for Canadian cannabis companies that may have U.S. interests.

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

“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,” Chadda said.

“The delisting is a last resort,” Chadda added. “There’s so much that we go through before we even get into … a formal listing review process.”

While the TSX’s position could have serious consequences for some companies if those firms are forced to divest U.S. assets, Avtar Dhillon, Emerald Health’s executive chairman, said the clarification is good in the long run for Canadian companies.

Thanks to a bifurcation of state and federal laws, the cannabis industry in the U.S. is in a legal purgatory.

Although 28 states have legalized marijuana in varying degrees, federally it’s still a controlled substance, although U.S. Department of Justice guidelines dating from the Obama administration generally direct state prosecutors not to press charges.

But until cannabis is fully legalized, that threat is always there. As a result, U.S. cannabis companies can’t list on major American exchanges, and U.S. banks won’t touch their money, so it sits in safes or is plowed into luxury cars and other investments.

 “You have this broken system where the money made through cannabis organizations can’t even legally be deposited in an international or national banking system,” Dhillon said. “It’s keeping all the big capital out of the space in the United States, and we’re very much wanting to make sure that this capital, as it starts making its way into the cannabis space into Canada and other federally legal jurisdictions, that they can invest in us.”

Dhillon said the U.S. will likely legalize cannabis at some point, and when it does, American capital from pharmaceutical, alcohol, tobacco and nutraceutical giants will flood into cannabis companies on both sides of the border. Canadian companies could be well positioned to benefit, as long as they don’t tarnish their image in the eyes of exchanges and securities regulators.

“When that changes – and I predict that that will happen in the next three to five years – then there’s going to be a flood of capital and they’re going to be looking for reputable companies that have maintained a pretty clean profile,” said Dhillon, a Canadian medical doctor turned venture capitalist who now lives in California and has run or co-founded a number of pharmaceutical companies.

But what exactly constitutes a breach of Canadian securities or exchange rules?

Would it constitute a breach if a Canadian cannabis company entered into a joint venture with a Washington state company that makes equipment for marijuana growing?

Generally, Powers said, any commercial activity intersecting with marijuana is verboten.

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

Even commercial arrangements that are not outright ownership might be affected – 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.”

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.