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TSX, TSX-V and CSA Clarify Their Positions on Listed Entities with Ties to U.S. Marijuana Market

Canadian Securities Exchange and OTC Markets Group Announce Strategic Alliance to Attract Foreign Issuers to North America

By Sherri Altshuler and Tyler Brent* from Aird Berlis

The Canadian Securities Exchange (“CSE”) and OTC Markets Group recently announced a strategic alliance to offer a new program for issuers looking to go-public in Canada and have cost-effective access to North American investors. Both the CSE and OTC Markets Group hope to utilize the strategic alliance to introduce foreign companies to the North American capital markets.

The alliance pairs the benefits of public company status in Canada with OTC Markets Group’s secondary market network across the United States. Under the alliance, foreign companies would raise capital through an IPO on the CSE and then broaden their reach to U.S. investors through OTC Markets Group’s dealer network. Securities would then be traded on both the CSE and over-the-counter in the United States, allowing for increased liquidity and access to funding.

Both the CSE and OTC Markets Group have publicly announced their excitement over the alliance, and hope to introduce new and compelling investment opportunities to the North American marketplace. “As a result of our relationship with OTC Markets Group, we expect to offer the most efficient access to North America’s public capital markets for foreign issuers,” said Richard Carleton, Chief Executive Officer of the CSE. “At the same time, with our partners at OTC Markets Group, we will present a series of new and interesting investment opportunities to investors in Canada and the United States.”

We expect the alliance between the CSE and OTC Markets Group will provide companies in the cannabis sector with better access to U.S. investors. As of June 30, 2017, one third of companies listed on the CSE were also quoted on one of the OTC Markets, with the bulk of companies quoted on the OTC Pink (65 companies) or the OTCQB (37 companies).

See related blog post: TSX May delist Canadian Companies With US Cannabis Exposure. 

TSX, TSX-V and CSA Clarify Their Positions on Listed Entities with Ties to U.S. Marijuana Market

By Richard Kimel, Daniel Everall and Tyler Brent*

On October 16, 2017, the Toronto Stock Exchange (“TSX”), the TSX Venture Exchange (together with the TSX, the “Exchanges”) and the Canadian Securities Administrators (the “CSA”) released separate guidance clarifying their positions on the regulation of entities with ties to the U.S. marijuana market.

The Exchanges released identical notices confirming that listed entities are not permitted to engage in the U.S. marijuana market. The Exchanges have always required applicants and listed entities to comply with all laws, rules and regulations applicable to their businesses. The Exchanges’ bulletins reminded that, despite the “Cole Memorandum,” marijuana remains a Schedule I drug, prohibited by the U.S. federal Controlled Substances Act. Therefore, entities that cultivate, distribute or possess marijuana in the U.S. (“Subject Entities”) are considered by the Exchanges to be engaging in illegal activity in contravention of the Exchanges’ policies. Further, the Exchanges suggested that financial transactions involving U.S. marijuana businesses may contravene U.S. money laundering rules. Non-compliance with the Exchanges’ requirements could lead to a delisting. Those following the space should not be surprised with this news, given that it is simply a formalization of the Exchanges’ recent informal positions.

The Exchanges also warned that entities that own Subject Entities either directly, indirectly or in substance are considered to be engaged in the business of U.S. marijuana, and therefore at risk of delisting. Similarly, entities that target Subject Entities with their products or services, or have commercial arrangements with such entities, may also be considered to be in breach of the listing requirements.

The Exchanges announced that they expect to complete reviews of all of their listed entities by the end of the year. The Exchanges expect listed entities to take steps to ensure they are in compliance with their rules, meaning that some companies may need to divest certain U.S. interests or transfer their listing to other exchanges.

The Exchanges’ approach comes in contrast to the CSA requirements, which were clarified by Staff Notice 51-352 (the “Staff Notice”). The CSA considers securities regulation to be primarily disclosure-based. Accordingly, the Staff Notice focused on disclosure requirements for listed entities, which require each entity’s disclosure fairly presents all material facts and risks. The Staff Notice emphasized that the CSA’s disclosure-based approach is premised on the entity complying with U.S. laws at the state level.

The CSA recognized that there is uncertainty associated with operating in the U.S. marijuana industry because the federal government’s policy towards non-enforcement of the federal prohibition (i.e. the “Cole Memorandum”) could change at any time. However, the CSA considered this to be largely a business risk, and barring public interest concerns, not a securities law violation provided adequate disclosure is made to investors. Specific disclosure recommendations were included in the Staff Notice as replicated here in Table 1.

CSA_Disclsure

 Cannabis companies applying to be or already listed on the Canadian Securities Exchange (“CSE”) will be relieved by the Staff Notice, as it largely accords with the CSE’s existing position. Consequently, companies with ties to U.S. marijuana can still list publicly in Canada and comply with our securities laws, but should consider friendlier alternatives to the TSX/TSX-V, such as the CSE.

*Tyler Brent is a 2017/2018 articling student at the firm. 

Aird Berlis is a law firm specializing in the cannabis industry.

 

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During May 2017, Health Canada announced that they are making the process to become a licensed producer of marijuana in Canada easier and quicker.  We at Invest In MJ are excited to see this happen, we expect a lot of attraction to the industry as more applicants become licensed over the coming year.  

Why this is significant to an applicant who is in the final review stages?  Instead of waiting for approval to build out the facility, they can start building it out now which takes capital.  I suspect we will see many of these applicants looking to build out their facility in the coming months, that could mean them looking to raise capital for at financing options.  We at #IMJ will seek out these opportunities to work with many of the pre-license companies looking to become a ACMPR licensed producer.

Below is the notice from Health Canada's site...

Improving the Licensing of Production of Cannabis for Medical Purposes

From Health Canada, May 2017

Health Canada is introducing several improvements that aim to streamline the licensing of medical cannabis producers and enable increased production of cannabis. 

Licensed producers and applicants will need to continue to meet all of the requirements under the Access to Cannabis for Medical Purposes Regulations, including the security and inventory control measures that help prevent diversion, and the Good Production Practices that help to provide individuals with access to quality-controlled cannabis for medical purposes.

As announced previously, Health Canada has begun conducting random testing of cannabis products produced by licensed producers to provide added assurance to Canadians that they are receiving safe, quality-controlled product.

What is a licensed producer?

A licensed producer is the holder of a producer’s licence that is issued by Health Canada under the Access to Cannabis for Medical Purposes Regulations to produce quality-controlled cannabis under secure and sanitary conditions. They can be authorized to produce and sell dried and fresh cannabis, seeds and plants, and cannabis oil. As of May 24, 2017, there are 44 licensed producers of cannabis for medical purposes. Over the past four years, licensed producers have established a strong record of compliance and are inspected regularly by Health Canada.

Licensed producers are authorized to sell to registered clients who have been authorized by their healthcare practitioner to use cannabis for medical purposes. Products are delivered to clients securely through the mail or by courier. More than 153,000 individuals are registered to purchase cannabis from licensed producers, while more than 4,000 individuals are registered with Health Canada to produce a limited amount of cannabis for their own medical purposes. On average, the number of registered clients has been growing by 10% a month. Sales of dried cannabis have been growing by 6% a month, and sales of cannabis oil have increased by 16% a month.

What is the current process to become a licensed producer?

All applications to become a licensed producer undergo a strict and thorough review. Applications are assessed on a case-by-case basis. All key personnel must pass a stringent security clearance process. In addition, each application must demonstrate how the security and inventory control measures and Good Production Practices at the facility meet all the regulatory requirements. This compliance is verified by Health Canada inspectors.

How will the licensing approach change?

Health Canada has drawn on nearly four years of experience administering the medical cannabis regime to identify what works well, and what can be improved. The changes that are being put in place are measures to streamline licensing and enable increased production of cannabis for medical purposes. These measures will help ensure that Health Canada’s approach to licensing and oversight continues to be aligned with the regulations, the existing evidence of risks to public health and safety, and its approach to other regulated sectors.

Effective immediately, Health Canada is implementing the following measures:

  • Increasing the Department’s capacity to review and process applications
    • Health Canada is allocating more resources to streamline the processing of applications to produce cannabis for medical purposes. The majority of these additional resources will focus on applications at the review stage, during which Health Canada undertakes a detailed review of all aspects of the application and assesses its compliance with the requirements of the regulations. There are currently 187 applications at the review stage. Additional resources will also be applied to applications at the intake and screening stage.
    • In the past few weeks, Health Canada has dedicated additional resources to accelerate the processing of applications from individuals who are authorized by their healthcare practitioner to produce a limited amount of cannabis for their own medical use.
  • Undertaking some stages of the review of the application concurrently;
    • The detailed review stage of processing applications will now happen at the same time as the personnel security screening process. Historically, the review stage did not begin until the security screening of key personnel is complete, which can lengthen the time to process the application.
  • Permitting licensed producers to manage production on the basis of their vault capacity;
    • Licensed producers will be permitted to increase cannabis production within their existing facility to the maximum they are authorized to store, based on the capacity and security level of their vault(s) or safe(s). This will allow licensed producers to better manage production as necessary to meet demand.
    • In addition, licensed producers will be able to store low-value cannabis waste products (e.g., leaves) in a secure area and will no longer need to keep these products in a secure vault or safe, thereby creating more room for storage of finished cannabis products and enabling increased production.
  • Authorizing longer validity periods for licences and security clearances in accordance with the regulations
    • New licences that are issued, and existing licences that are renewed for licensed producers with a good compliance record, may now be valid for the full three years allowed in the regulations. New or renewed security clearances for key personnel at licensed production facilities may also be valid for up to five years in accordance with regulations, subject to Health Canada receiving new information that could result in a security clearance being suspended.
  • Streamlining the review and approval of applications to modify or expand a production facility for licensed producers with a record of good compliance with the ACMPR;
    • Where a licensed producer has a good compliance record and the proposed modification or expansion is straightforward, materially similar to an existing room or facility, and falls within an existing security perimeter (e.g., fence), applications for a production site modification or expansion may be approved following a successful application review. The physical inspection of the site modification or expansion would then occur during the regular facility inspection rather than before approval.

Health Canada will continue to inspect all facilities before cultivation begins and before a licence to sell products to the public is issued. Henceforth, Health Canada will schedule this first inspection after it has determined an application meets the regulatory requirements and it has issued the licence to cultivate and once the producer is ready to initiate production in its facility. This approach will help provide successful applicants with a decision on their application as soon as possible while ensuring that all facilities are inspected as cultivation begins.

Licensed producers and applicants must continue to meet all of the requirements under the Access to Cannabis for Medical Purposes Regulations. These include security and inventory control measures that help prevent diversion, and the Good Production Practices that help provide individuals with access to quality-controlled cannabis for medical purposes. Since licensed production began in June 2013, licensed producers have established a solid record of compliance with the regulatory requirements and Health Canada will continue to ensure compliance through regular inspections.

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A former Liberal cabinet minister who recently chaired a panel guiding Ottawa’s push to legalize cannabis says police everywhere should enforce the existing prohibition of marijuana, despite several communities in British Columbia choosing to regulate – not raid – illegal pot shops.

Anne McLellan, head of an official task force that submitted recommendations to Ottawa on how best to legalize cannabis, said Thursday that Vancouver crafted Canada’s first municipal marijuana bylaw in response to what was a “growing difficult situation for them.”

But the former minister of public safety, health and justice in the Liberal governments of Jean Chrétien and Paul Martin said other cities should not follow suit before the current laws change, echoing what the federal government has repeatedly said when asked about the rise of illegal dispensaries.

“Nobody would deny that there are some practical problems at street level, absolutely, nobody denies that,” said Ms. McLellan, who was in Vancouver speaking at Simon Fraser University’s downtown campus on the work the task force did last year.

“Cities should wait until the law changes instead of making their own rules now and hoping to adapt them to a federal framework later on,” she said. “I cannot advocate that anybody break existing laws. We are a nation of law-abiding citizens.”

Ottawa is expected to table legislation this spring that will legalize and regulate recreational marijuana over the next two years. While the stores are still illegal under federal law, they have proliferated in cities such as Vancouver and Victoria, where local politicians argue their rules can eventually be adapted to any national framework regulating the storefront sale of the drug.

All dispensaries and compassion clubs across Canada still operate outside the federal government’s medical-marijuana program, which permits about 30 industrial-scale growers to sell dried flowers and bottles of cannabis oil directly to patients through the mail.

The federal government has said its two core priorities behind legalizing the recreational sale of marijuana are: to keep the drug out of the hands of young people and to stop the flow of money to organized criminals involved in the production and sale of the drug on the black market.

Vancouver’s approach to regulating its dispensaries stands in stark contrast to Toronto’s, where police and politicians say a continuing crackdown has become more urgent as these pot shops have become a magnet for violent thieves because some owners are reluctant to report robberies.

Civic and provincial politicians across the country are waiting on the coming legalization bill to give some guidance as to where the drug may be sold once it is legalized.

Vancouver councillor Kerry Jang, architect of the local dispensary bylaw, said he was disappointed in Ms. McLellan and Ottawa’s rhetoric, noting they both appear to be eschewing the public-health approach of his city, and that of other communities in B.C. also licensing these illegal stores.

“It’s sort of like we’re in purgatory,” he said Thursday. “And when you’re in purgatory, it’s not about allocating our resources, it’s about advocating what’s right for our citizens – that’s what Vancouver has done.”

He said he wants Ms. McLellan to push federal ministers to implement the new legislation faster because local governments across the country are wasting millions of dollars containing the grey cannabis market.

“When it comes to resources, the federal government better provide good resources for us to help enforce and help manage what they want us to do,” said Mr. Jang, a clinical psychiatrist. “Otherwise, we’re going to be back to square one.”

The Union of B.C. Municipalities has long advocated that cities deserve to receive some of the eventual tax revenue from recreational cannabis sales if they are expected to enforce federal cannabis laws.

The federal Liberals have said any pot proceeds would be directed to addiction treatment, mental-health support and education programs, and that provinces and territories will also have a significant say in how cannabis revenues are spent. A recent study from the parliamentary budget watchdog predicted that about 60 per cent of marijuana taxation will flow to the provinces.

Ms. McLellan, now in the public-policy division of Bennett Jones, one of the Canada’s leading law firms operating in the cannabis sector, said different communities have different concerns about the drug, as evidenced by Toronto and Vancouver’s contrasting approach to dealing with illegal dispensaries.

Original article by: MIKE HAGER, VANCOUVER — The Globe and Mail. Published Thursday, Mar. 23, 2017 10:04PM EDT

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Marijuana Investments: A Word to the Wise

With more cannabis retailers and dispensaries entering the market, marijuana entrepreneurs are having an increasingly difficult time distinguishing their brands and product lines. The need to stand out is not only necessary to secure to new customers (once the company is up and running) but more importantly, to initially entice investors and convince them that the business model is sufficiently unique to succeed.  Indeed, raising capital from investors is absolutely critical for many marijuana entrepreneurs and as a corollary, an exciting proposition for investors looking to capitalize on this popular and growing industry. 

Cannabis Investors or Cannabis Lenders?

Cannabis investors may provide capital to cannabis entrepreneurs in (generally speaking) one of two ways; equity or debt.  A simple capital-for-equity model is fairly straightforward - investors buy into the company at a given valuation and in return, own a part of the company.  The second option, debt, is often a much more complex transaction and involves the "investor", who may not be an investor in any pure sense of the word, loaning the company money at a high rate of interest. Unfortunately, many smaller investors (or lenders, depending on your perspective) are not sufficiently equipped to protect their interests in the event that the marijuana business goes under.   

What happens when the invested in cannabis defaults on the loan? Here are your two options:

(1) Renegotiate the Marijuana Startup's Debt

Promissory notes that are well drafted typically contain a statement regarding an uncured event of default, which causes the debt to accelerate. Thus, if the cannabis business you have invested in misses a payment and does not make a late payment by a cure date, that company’s entire debt is due. When this happens, partners tend to negotiate an extension, and you as the financer can extract concessions from your borrower (i.e. security interests, personal guarantees, or pledges of ownership in the company). This generally happens so that your borrower can avoid you obtaining a judgment against them.

(2) Get A Judgment Against Your Cannabis Borrower

If you have the money to obtain a judgment against your borrower, you can use that judgment to levy on the borrower’s business assets.  The idea here of course is to seize assets of your borrower that are sufficiently valuable to cover your losses.  In many states, if you are indeed awarded a judgment against your marijuana borrower, you may also be eligible to be reimbursed for attorney fees and other associated costs.

A Note of Caution: Fraudulent Transfers

Unfortunately, it is not too uncommon for companies in debt to do everything in their power to avoid paying it.  Once such method used to this end is the employment of a fraudulent transfer. A fraudulent transfer occurs when a borrower transfers the company’s property to a third party, without receiving something back of equal value, in order to deplete the company of the funds required to repay the financer. This is undoubtedly a dirtier tactic and if intent can be established may rise to the level of criminal liability.

Be Proactive in Protecting Your Assets

Ultimately, if you are planning to finance or lend to a cannabis company, it is important to develop a contingency plan that accounts for the possibility of a failed business. Is your agreement with the marijuana company tight and drafted in such a way as to maximize your protections?  If the business goes under, can you sustain the loss of your entire investment? Do you have funds to litigate in court?  Unfortunately, the legalization of cannabis does not guarantee businesses financial success.

Blog Provided By: Abe Cohn is COO of THC Legal Group, a Marijuana Law Firm specializing legal protection for the cannabis industry.  For more information, please visit their website at http://www.THCLegalGroup.com

For more information on THC Legal Group, view the company directory listing on Invest In MJ

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Investors should be cautious about Canadian Cannabis Stocks

Contributed to The Globe and Mail - Published Monday, Nov. 02, 2015 5:00AM EST
Anthony Wile is chief editor of the economic and investment newsletter The Daily Bell and chief investment strategist of High Alert Investment Management.

The election of Justin Trudeau’s Liberals has had an immediate impact on the investment marketplace, with a rush to invest in the handful of publicly traded Canadian medical marijuana startups – all on the promise of legalization of recreational marijuana use.

However, as with any burgeoning new industry, including the Canadian cannabis industry as it “whitens” from its previous black-market status, investors considering directing their capital there may want to take a temporary respite from hitting the go button.

Investors who make assumptions today about what may be profitable tomorrow will likely find their wallets considerably lightened by a changing set of regulatory circumstances.

While a legalized cannabis industry means a substantial increase in potential profitability for the industry leaders already invested in the marketplace, for all investors the key questions are: What will that new landscape look like? How will the industry be regulated, structured and taxed? And, most importantly for the new or individual investor – how best to navigate the marketplace?

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