CSA Updates Guidance for Issuers with U.S. Marijuana Operations or Assets

It was unclear how the Canadian Securities Administrators (“CSA”) would react to the rescission of the Cole Memorandum by Attorney General Jeff Sessions, we recently discussed, given that Canadian issuers with U.S. assets or operations rely on the regulatory framework created by each State based on the guidance and enforcement priorities set forth in the Cole Memorandum. Consistent with the CSA guidance from October 2017, the CSA continues the theme of a disclosure-based approach for issuers with U.S. marijuana assets or operations as discussed in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities¹ (“CSA Staff Notice”). The CSA recognizes that while marijuana remains listed as a controlled substance under U.S. federal law these businesses are operating legally within a state regulatory framework and the best way to deal with this conflict is through disclosure to the investor.

The continuation of this disclosure-based approach is also excellent news for those U.S. private companies currently seeking a go-public transaction in Canada through a reverse-take over or other means on the Canadian Securities Exchange. Any concern U.S. companies had regarding how the CSA was going to respond to the recission of the Cole Memorandum and the potential impact this may have had on a Canadian listing have been allayed for the moment. However the CSA specifically noted that companies entering the Canadian capital markets through such transaction would be required to comply with the CSA’s disclosure expectations in its listing statement.

The specific disclosure expectations outlined in the CSA Staff Notice are detailed below.

INDUSTRY INVOLVEMENT	SPECIFIC DISCLOSURE REQUIREMENTS
All Issuers with U.S. Marijuana Related Activities	Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table. Prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk. Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S. Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations. Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana related activities. Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law.
U.S. Marijuana Issuers with direct involvement in cultivation or distribution	Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Discuss the issuer’s program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations.
U.S. Marijuana Issuers with indirect involvement in cultivation or distribution	Outline the regulations for the U.S. states in which the issuer’s investee(s) operate. Provide reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any noncompliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee’s licence, business activities or operations.
U.S. Marijuana Issuers with material ancillary involvement	Provide reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.

The CSA Staff Notice also made clear that the disclosure requirement is not static. The disclosure, and any related risks, should be continually evaluated, monitored and reassessed and updated and communicated to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation.

Issuers that do not appropriately comply with the disclosure requirements may be subject to regulatory action.

If you are U.S. marijuana company interested in pursuing a public listing in Canada or learning more about the CSA Staff Notice and the impact it may have on your business please reach out to Daniel D. Nauth at 416-477-6031 or at dnauth@nauth.com.

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