Pubdate: Fri, 23 Feb 2018
Source: Globe and Mail (Canada)
Copyright: 2018 The Globe and Mail Company
Author: Carlo Di Carlo
Page: B4


Regulatory upheaval under the Trump administration in the U.S.
cannabis industry is providing Canadian companies with the chance to
be global leaders. However, disagreement between the different
gatekeepers of Ontario's financial markets may squander this

In 2013, the U.S. Department of Justice under the Obama administration
issued a memorandum indicating it would not enforce federal
prohibitions on marijuana in states that authorized its use. This was
referred to as the "Cole Memorandum" (after then-deputy
attorney-general James Cole). It essentially allowed marijuana
producers in certain states to operate their businesses despite the
federal laws that technically made the production of marijuana illegal.

This uneasy detente seemed in danger after the 2016 election, and
threats to the peace materialized last month, when current U.S.
Attorney-General Jeff Sessions rescinded the Cole Memorandum, allowing
federal prosecutors to individually decide how to prioritize enforcing
these laws against marijuana producers.

Before Mr. Sessions's rescission, regulatory uncertainty had led many
U.S.-focused companies to look to Canadian public exchanges to raise
funds. However, after the January rescission of the Cole Memorandum,
it was not clear whether U.S. marijuana businesses would continue to
have this access.

The answer appears to be "yes" - but with a caveat. On Feb. 8, the
Canadian Securities Administrators (CSA), a body made up of securities
regulators from all of the provinces and territories in Canada,
released a staff notice confirming it will continue to permit
companies with U.S. operations to raise funds in Canada.

In order to continue to have access to these funds, these companies
must disclose information regarding regulation in the states in which
they operate, as well as their compliance (or lack thereof) with those

The staff notice essentially reaffirmed the position of the CSA when
the Cole Memorandum was in effect. However, it provided needed clarity
and comfort to marijuana companies with U.S.-facing businesses. It
also seemed to spur other Canadian gatekeeper entities to similarly
issue their support for U.S. cannabis companies. The Canadian
Securities Exchange stated that it would continue to host new listings
from U.S. marijuana companies, and the Canadian Depository for
Securities (a securities clearing house) released a document
confirming it would continue to clear trades for such companies.

However, not all gatekeepers have been equally as supportive. Since
October, 2017, the TSX, Canada's largest stock exchange, has been
unwilling to list cannabis companies with exposure to the United States.

This includes Canadian companies with assets in the United States.
There is no sign that the CSA's recent staff notice has affected this
decision. Given the size of the TSX relative to the CSE (market cap of
$3-trillion for the former compared with $8.5-billion) this creates a
disadvantage for marijuana companies with U.S. aspects to their
business. They are presented with a stark choice: participate in the
U.S. cannabis market at the cost of being prevented from access to the
deeper well of financing available on the larger exchange.

This creates an incentive that is damaging to the prospect of Canadian
companies holding a leadership position in the cannabis industry. It
may tempt these companies to give up a U.S. business in order have the
security of access to the TSX. One company, Aphria Inc., has already
announced that it has sold part of its stake in a U.S. company. The
company's comments regarding the deal suggest that access to the TSX
was an important consideration in the decision. Given the potential
size of the U.S. market (some estimates put it at US $21 billion by
2021) this would mean giving up on significant opportunities.

Because of our more permissive regulatory environment, Canadian
marijuana producers have been given a head start. Recent regulatory
confusion in the United States provides these companies with a chance
to consolidate these gains and occupy leadership positions in the
industry. But this inconsistent treatment by financial market
gatekeepers threatens to undermine this head-start. It jeopardizes the
opportunity for Canadian companies to become global players in the
industry. Canadian gatekeepers should look to learn lessons from their
neighbours to the south and strive for consistency in their regulatory

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Carlo Di Carlo practises corporate/commercial law at Stockwoods LLP in 
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