As noted in our post of October 18, 2017, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities on October 16, 2017. The CSA Staff Notice noted the discrepancy between United States federal and state law as it relates to the use and sale of marijuana. In short, while medicinal marijuana is legal in numerous American states and recreational marijuana is legal in several states, marijuana remains illegal at the federal level in the United States.
The CSA Staff Notice stated that how a company with marijuana activities in the United States ensures compliance with U.S. state-level regulatory frameworks forms an important part of that company’s Canadian continuous disclosure record, and set out specific, detailed disclosure requirements for issuers with marijuana-related activities in the United States, applicable to continuous disclosure documents such as an annual information form (AIF) or management’s discussion and analysis (MD&A), and to a prospectus in the event of a public offering.
All of that may have changed on January 4, 2018, when Jeff Sessions, Attorney General of the United States, issued a one-page “Memorandum for All United States Attorneys” regarding “Marijuana Enforcement” (Sessions Memorandum). The Sessions Memorandum expressly rescinded, effective immediately, previous nationwide guidance specific to marijuana enforcement in the United States, including a “Memorandum for All United States Attorneys” dated August 29, 2013 from James M. Cole, then-Deputy Attorney General of the United States, entitled “Guidance Regarding Marijuana Enforcement”. A press release issued by the U.S Department of Justice contemporaneous with the Sessions Memorandum announced that the Sessions Memorandum constitutes a “return to the rule of law” and that “Attorney General Jeff Sessions directs all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities”.
The “Cole Memorandum” rescinded by the Sessions Memorandum reflected the policy of the Obama administration on enforcement of federal cannabis laws, particularly in those states in which marijuana is legal. The Cole Memorandum stated, among other things, that in those jurisdictions which had enacted laws legalizing marijuana and that had also implemented “strong and effective regulatory and enforcement systems” regarding marijuana, conduct in compliance with such state laws and regulations was less likely to threaten federal priorities identified in the Cole Memorandum (e.g., preventing distribution of marijuana to minors; preventing revenue from going to criminal enterprises, etc.) and that federal prosecutors, in exercising prosecutorial discretion, should weigh all available information and evidence, including whether the operation in question was demonstrably in compliance with a strong and effective state regulatory system.
Following the Sessions Memorandum, the CSA issued a release on January 12, 2018 entitled “Canadian Securities Regulators Issue Statement Following Rescission of the Cole Memorandum” (CSA Release). The CSA Release stated that the CSA is considering whether its disclosure-based approach for issuers with U.S. marijuana-related activities remains appropriate “in light of the rescission of the Cole Memorandum”. The CSA Release concluded by stating that the CSA will communicate more details about its position “shortly”, with no indication of a timeframe. The CSA Release also specified that issuers with no U.S. marijuana-related activities and that otherwise operate in compliance with applicable Canadian laws “are not the focus”.
In other words, the CSA will re-examine its stated policy of allowing a company with marijuana-related activities in the United States to trade on a Canadian stock exchange and to raise funds in Canada by way of public offering or otherwise as long as such company complies with the CSA’s detailed disclosure requirements. However, the CSA is in a difficult position, as it remains to be seen whether U.S. federal prosecutors will prosecute businesses which operate in full compliance with state laws relating to marijuana, in certain cases adopted after a referendum (including California, with a population of 39 million, in 2016). The end result in the United States may well be the status quo – no federal prosecutions of marijuana businesses which operate in compliance with state laws and regulations. Further, the Sessions Memorandum may be challenged in court by one or more states which have legalized marijuana. That illustrates the conundrum for the CSA – trying to establish a policy regarding companies which carry on a marijuana-related business in those American states which have legalized marijuana, while there remains uncertainty as to whether U.S. federal laws will be enforced by prosecutors in such states, the Sessions Memorandum notwithstanding. If the Sessions Memorandum results in a slew of federal prosecutions, it will be easier for the CSA to act, and prohibit companies with U.S. marijuana-related activities from raising funds in Canada or listing on a Canadian stock exchange. If, on the other hand, the Sessions Memorandum turns out to be little more than political posturing without any appreciable effect on the number of federal prosecutions in those states in which marijuana is legal, the CSA’s current policy of detailed disclosure requirements may well continue to be appropriate, perhaps with enhanced disclosure regarding the risk of federal prosecution. Until such time as the CSA policy is defined, public companies in Canada with marijuana-related activities in the United States face a great degree of uncertainty.
As regards companies listed on the Toronto Stock Exchange (TSX) or TSX Venture Exchange (TSXV), our post of October 18, 2017 noted that under TSX Staff Notice 2017-0009 and the equivalent TSXV Notice to Issuers, listed companies with ongoing business activities that violate United States federal law regarding marijuana are not in compliance with the requirements of the TSX/TSXV, and will not be listed or, if already listed, will face the possibility of delisting. If anything, the Sessions Memorandum reinforces the position taken by the TSX in Staff Notice 2017-0009 and by the TSXV in its Notice to Issuers. As we previously noted, it continues to be the case that marijuana, the United States and listing on the TSX/TSXV do not mix.