Many jurisdictions in the United States now permit the use and sale of marijuana within a regulatory framework. Consequently, several Canadian public companies currently have, or are in the process of developing, marijuana-related activities in such U.S. states (U.S. Marijuana Issuers). However, marijuana continues to be listed as a controlled substance under U.S. federal law. As such, marijuana-related practices or activities, including the cultivation, possession or distribution of marijuana, are illegal under U.S. federal law. This is a significant risk factor, and raises concerns about the disclosure requirements under Canadian securities laws, for U.S. Marijuana Issuers. The Canadian Securities Administrators (CSA) have recently issued CSA Staff Notice 51-352 (Revised) outlining its specific disclosure expectations for U.S. Marijuana Issuers.
Canadian Disclosure Requirements
Securities regulation in Canada is primarily disclosure-based, with requirements for timely and accurate disclosure of material information. Material information is any information relating to the business and affairs of a company that results in, or would reasonably be expected to result in, a significant change in the market price or value of any of the company’s securities. These principles require that each issuer’s disclosure fairly presents all material facts and risks so that investors can make informed investment decisions.
Application to US Marijuana Issuers
CSA Staff Notice 51-352 (Revised) contains the following specific disclosure expectations for U.S. Marijuana Issuers.
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 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 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.
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.
U.S. Marijuana Issuers who do not provide appropriate disclosure, including confirming how they comply with applicable regulatory frameworks, may be subject to regulatory action such as:
- Receipt refusal in the context of prospectus offerings.
- Requests for restatements of non-compliant filings.
- Referrals for appropriate enforcement action.
Invitation for Discussion:
If you would like to discuss any aspect of this blog in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.
 These disclosures need to be clearly and prominently disclosed in prospectus filings and other required documents such as an issuer’s AIF, marketing materials, and MD&A. In the context of a prospectus, such disclosure should include bold boxed cover page disclosure about the illegal nature of marijuana under U.S. federal law and the potential risks associated with this circumstance. For issuers who enter Canadian capital markets through a reverse takeover or spinoff transaction, these disclosures need to be included in their listing statement, or other documents, as applicable.
 Direct industry involvement arises when 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 license.
 Indirect industry involvement arises when an issuer has a non-controlling investment in an entity who is directly involved in the U.S. marijuana industry.
 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, CSA staff may consider whether negative statements (for example, indicating that the issuer is not aware of non-compliance) are sufficient.
 Ancillary industry 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.
 Negative statements may include statements indicating that the issuer is not aware of non-compliance.