Member Blog: Cannabis and the Canadian Public Markets

By Charles Alovisetti and Brett Williams, Vicente Sederberg, LLC

While the American cannabis industry ponders the strange twist of fate that was the 2016 election, our cannabis neighbors to the north are experiencing unprecedented levels of capital markets activity. There are now over thirty publicly listed cannabis companies in Canada trading on three different exchanges. As a group, cannabis companies in Canada have a combined market cap of over four billion dollars; nine of these companies have market caps of over one hundred million Canadian and one, Canopy Growth, has recently become the first Canadian cannabis company with a market cap of over one billion Canadian dollars. Unlike in the United States, where most publicly traded cannabis companies are listed on the OTC markets with a few exceptions (mostly pharmaceutical companies that have limited exposure to cannabis), the publicly listed cannabis companies in Canada trade on exchanges with significant listing and reporting requirements.

If you’re a Canadian, or have experience dealing with the Canadian markets, this article likely won’t cover new ground. If you, however, like many Americans, have only a passing awareness of the Canadian economy, this article will provide the basics for understanding the current rash of fundraising in Canada. The securities law issues related to cross-border fundraising are complex and beyond the scope of this article.

2016 was a very active year for the cannabis capital markets in Canada, with the total amount raised by publicly traded cannabis companies exceeding $500 million Canadian (around $381 million U.S. at today’s exchange rate). Most of this activity took place after the April 20th statement by the Canadian government stating that legislation to legalize adult use of cannabis would be forthcoming in the spring of 2017. Unlike in the U.S., where investment banking services are generally not available to public cannabis companies, Canadian investment banks have been active in raising capital for Canadian Licensed Producers (LPs – described in further detail below). Also in contrast to the U.S. market, these firms have begun to publish research on the public companies.

There are several Canadian stock exchanges, the most significant of which is the Toronto Stock Exchange (TSX most commonly, but sometimes referred to as TSE), but almost all Canadian cannabis stocks trade on one of three exchanges:  the TSX, the TSX Venture Exchange (TSXV), and the Canadian Securities Exchange (CSE). Below are the basics with respect to each exchange:

• Toronto Stock Exchange (TSX): The TSX is Canada’s largest and most important stock exchange and the eighth largest in the world by market capitalization. An American-centric way to describe it would be as the Canadian version of the New York Stock Exchange. Reflecting the natural resource focus of the Canadian economy, the TSX is heavily populated by mining and energy companies, though financial services companies also make up a significant proportion of the exchange’s market capitalization. Many large Canadian companies have a dual listing on both the TSX and the NYSE. Currently only two cannabis stocks trade on the TSX:  CanniMed Therapeutics and Canopy Growth Corp. (CGC), which is the holding company for Tweed Inc., Tweed Farms Inc., and Bedrocan Canada Inc.
• Toronto Venture Exchange (TSXV): The TSXV is analogous to the NASDAQ Capital Market or the OTC markets. It serves as a public venture capital marketplace for emerging companies. Before 2001, this exchange was known as the Canadian Venture Exchange (abbreviated CDNX), but was renamed when the TSX Group purchased the exchange. Over sixteen hundred companies list on the TSXV, and the mining and energy sectors predominate.
• Canadian Securities Exchange (CSE):  Formerly known as the Canadian National Stock Exchange and dating back only to 2003, the CSE has lower listing and reporting requirements than the TSX and the TSXV. Over three hundred issuers list on the CSE. It is the most common exchange for Canadian cannabis companies.
• Aequitas Neo (Neo Exchange): Canada’s newest exchange. The Neo Exchange was established with an aim for fairness, and has measures in place to eliminate what is perceived to be predatory high-frequency trading. As of the date of publication, the authors are not aware of any cannabis stocks that trade on this exchange.

George Bernard Shaw once said that “England and America are two countries divided by a common language.” Similarly, investors need to be careful not to confuse the Canadian and American public markets, which, while they have a great deal in common, also diverge in several key aspects. The full scope of these differences is beyond the scope of this article, but below are several important Canadian terms that highlight key differences:

• Reverse Take-Over (RTO): This is the Canadian equivalent of a reverse merger. Like a reverse merger, it allows a company to gain access to the public markets without undergoing an IPO, but does not raise any additional funds.
• Initial Public Offering (IPO): A Canadian IPO is quite similar to its U.S. equivalent, but is usually a less expensive and time-intensive process.
• Amalgamation: An amalgamation is comparable to a U.S. merger, but lacks the concept of a surviving corporation. Instead, in an amalgamation, the amalgamated corporation takes on the identity (along with the rights and obligations) of each predecessor corporation.
• Listing Requirements: Unlike in the U.S., listing requirements on a Canadian exchange can vary based on the industry of the issuer. For example, mining companies on the TSXV have their own listing requirements.
• Ontario Securities Commission: Canada does not have a federal securities regulator like the SEC; instead, each province (there are ten provinces and three territories) has its own securities regulator. Ontario, as the home of the TSX, functions as the equivalent of the SEC.
• Capital Pool Company (CPC): A CPC is a public shell company trading on the TSXV that has no commercial operations and no assets except for cash. A CPC uses its cash holdings to evaluate potential acquisitions, which it must complete within 24 months of listing – this is referred to as a “Qualifying Transaction.” Companies trading as a CPC have a “P” after their ticker symbol. Once the CPC completes a Qualifying Transaction, its shares continue to be traded on the TSXV.
• LPs: Short for licensed producers, which hold a license issued by Health Canada under the Access to Cannabis for Medical Purposes Regulations (ACMPR). This license authorizes them to produce and sell to the public dried cannabis, fresh cannabis, cannabis oil, or starting materials to eligible persons. (The overall structure of the Canadian medical cannabis system will be addressed in a separate article.)

A publicly listed Canadian cannabis company (like any other publicly traded Canadian company) need not restrict its operations or its shareholders to Canada. Many have significant U.S. operations, which is only natural given the considerably larger size of the U.S. market. But U.S. expansion is not without its complications. It remains unclear how Canadian regulators, and the Ontario Securities Commission in particular, will treat publicly traded cannabis companies with U.S. operations if crackdowns occur under the Trump administration.

Compliance with securities law more broadly can also be an issue. To raise capital from U.S. investors, a Canadian public company will generally need to undergo a private offering for U.S.-based investors in addition to the public offering in Canada. The legal issues surrounding a cross-border fundraise are complex, but the payoff is the ability to tap investors in the U.S.

2017 promises to be another year of major fundraising, particularly with the anticipated introduction of legislation to fully legalize cannabis in Canada this spring, following which it would not be surprising to see further inflows of capital into the Canadian capital markets. It’s also not clear what effect Trump’s administration will have on the Canadian markets. While it is possible that investors will flee U.S. markets for the greater safety of Canadian markets, particularly if any crackdowns occur under a Department of Justice led by Attorney General Jeff Sessions, it is also possible that crackdowns could have significantly negative effects on the numerous Canadian public companies with substantial U.S. operations. However, the continued legalization of medical cannabis in other countries, such as Germany, will open additional opportunities for Canadian companies to trade with, and to offer their expertise to emerging cannabis markets. U.S. investors would be wise to continue paying close attention to developments north of the border.

As a reference, below is a list of the Canadian public cannabis companies and the exchanges on which they list as of February 23, 2017 (which does not include companies which are not currently actively trading). Many are LPs, but others are primarily engaged in a range of other cannabis-focused activities, including investing in U.S. operations, developing or researching cannabinoid therapies, developing infused cannabis products, and several other business lines. If any have been omitted, please let me know. I can be reached at charlie@vicentesederberg.com or on Twitter @CAlovisetti.

This information is educational only and shall not be construed as legal advice. Please consult your attorney prior to relying on any information in this article.

Charles Alovisetti is a senior associate and co-chair of the corporate department at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Mr. Alovisetti worked as an associate in the New York offices of Latham & Watkins and Goodwin where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Mr. Alovisetti has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Mr. Alovisetti has experience in both U.S. and cross-border transactions, and has advised clients across a range of industries including cannabis, technology, manufacturing, software, digital media, energy and clean tech, healthcare, and biotech. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar. Mr. Alovisetti is admitted to practice in both Colorado and New York and is a Level One Interprener. He can be reached at charlie@vicentesederberg.com. Follow him on Twitter @CAlovisetti.

Brett Williams is a law clerk at Vicente Sederberg LLC as well as a third-year law student at the University of Denver Sturm College of Law. During his law school experience Mr. Williams worked at United States Attorney’s Office – District of Colorado in the Criminal and Civil Division. Mr. Williams also clerked at Vicente Sederberg LLC working in their Corporate and Policy Departments. At Sturm College of Law Mr. Williams serves as the President of the Honor Board and as Executive Director of Students for Sensible Drug Policy DU Law Chapter. Additionally, Mr. Williams holds a Bachelor of Science in Economics from Arizona State University. He can be reached at bwillia7@outlook.com.