Guidance for Issuers with U.S. Marijuana Activities
February 15, 2018
In light of political and regulatory uncertainty surrounding the treatment of U.S. marijuana-related activities, on February 8, 2018, the Canadian Securities Administrators (the CSA) published a revised Staff Notice 51-352 - Issuers with U.S. Marijuana-Related Activities (the Notice). The Notice sets out current disclosure requirements for participants and proposed participants in the Canadian capital markets with U.S. marijuana-related activities.
The Notice represents welcome news for those with involvement in U.S. marijuana-related activities and confirms that such issuers may continue to access our markets as long as the prescribed disclosure requirements are adhered to.
On October 16, 2017, the CSA released CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities, which set out the CSA’s specific disclosure requirements for issuers that had, or were developing, marijuana-related activities in the U.S.
At that time, U.S. federal drug laws were not being generally enforced at the state level. This policy of non-enforcement was set out in a memorandum issued by former Deputy U.S. Attorney General James M. Cole (the Cole Memorandum).
The CSA's position was that it would re-examine its views in the event that the U.S. federal government’s approach deviated from what was set out in the Cole Memorandum.
On January 4, 2018, U.S. Attorney General Jeff Sessions rescinded all previous guidance on federal law enforcement relating to marijuana, including the Cole Memorandum.
In response to the rescission of the Cole Memornadum, the CSA advised that it would review whether its guidance contained in the original notice remained appropriate. The Notice is the result of that review.
General Disclosure Requirements
The Notice requires all issuers with U.S. marijuana-related activities to clearly and prominently disclose specific information in prospectus filings and other required disclosure documents under applicable securities laws.
All such issuers must:
- Describe the nature of the issuer’s involvement in the U.S. marijuana industry;
- 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.;
- 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; and
- 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.
Specific Disclosure Requirements
The Notice also introduces additional requirements based on the extent of an issuer’s U.S. marijuana involvement.
“Direct involvement” arises where an issuer, or a subsidiary that it controls, is directly engaged in the cultivation or distribution of marijuana in accordance with a U.S. state licence.
Issuers with direct involvement must:
- 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; and
- Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations.
“Indirect involvement” arises when an issuer has a non-controlling investment in an entity who is directly involved in the U.S. marijuana industry.
Issuers with indirect involvement must:
- Outline the regulations for U.S. states in which the issuer’s investee(s) operate(s);
- 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; and
- Promptly disclose any non-compliance, 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.
However, in circumstances where an issuer with indirect U.S. marijuana exposure holds one or more investments which are in the aggregate significant to the issuer, staff may consider whether negative statements (for example, indicating that the issuer is not aware of non-compliance) are sufficient.
“Ancillary involvement” arises when an issuer provides goods and/or services not limited to financing, branding, recipes, leasing, consulting or administrative services to third parties who are directly involved in the U.S. marijuana industry.
Issuers with material ancillary involvement must 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.