What’s Up in Weed

August 18, 2017

By: Andrea Hill

After a brief summer break, I am pleased to bring you this instalment of my blog, rounding up what’s currently happening in the cannabis industry in Canada and abroad.

No TMX cannabis policy cometh, but CDS may not yet be out of the woods

• This has got to be the most attention CDS has received in ages.
• There’s been a lot of talk about the possibility that The Canadian Depository for Securities Limited, commonly known as CDS, might implement a policy of refusing to settle trades in securities of companies which are involved in the cannabis business in the US.  Given that cannabis remains a controlled substance under US federal law, the TMX Group, which wholly owns CDS, is reportedly concerned about its exposure to liability for facilitating, via CDS, trading and financings by companies relying on the US federal administration’s policy of non-enforcement of its drug laws against state-legal cannabis businesses, outlined in an Obama-era statement known as the Cole Memorandum.
• CDS, the settlement and clearing agency that processes the vast majority of exchange-based securities trades in Canada, is a quiet figure in the Canadian securities scene, despite processing over 1.6 million exchange trades daily.  Largely computerized, CDS is barely seen and not at all heard, and seems to like it that way.  It has no real competitors since acquiring West Canada Clearing Corporation in the 1990s; apparently, the razor-thin profit margin of CDS’s business model makes it uneconomical for another company to acquire the hardware, software, networks, and regulatory recognition necessary to enter CDS’s playing field.
• For securities which are being listed on an exchange, CDS coordinates the assignment of an ISIN (International Security Identification Number) and CUSIP (Committee on Uniform Security Identification Procedures) number which uniquely identifies a security and its issuer, and ensures that listed securities end up in the right hands at the end of each trading day.
• Although CDS is owned by TMX Group, it serves a variety of unaffiliated stock exchanges, including the Canadian Securities Exchange, or CSE.  The CSE, a competitor of the TSX Venture Exchange (TSXV), lists so many cannabis companies that it has its own “Marijuana List”, and could be hit particularly hard by any change by CDS in the way it treats such issuers.
• Since there really isn’t any other clearing agency that can step up to settle such trades, any such move by CDS could seriously affect the liquidity and capital-raising ability of listed companies like TSX-listed Aphria and CSE-listed iAnthus Capital Holdings Inc., Vodis Pharmaceuticals Inc., Golden Leaf Holdings Ltd., and Nutritional High International Inc., all of which have investments or operations in the US cannabis industry, along with a variety of other Canadian and US cannabis businesses which are considering or in the process of going public in Canada.
• Following an analyst call on which the cannabis question was raised, TMX Group CEO Lou Eccleston confirmed to the Globe and Mail that TMX Group does not expect to issue a cannabis-specific listing policy.  “We might come out and reinforce our listing policy and be clear about it,” he told the Globe.  “But we’re not about to launch a cannabis policy.”
• So, no TMX cannabis policy cometh.  However, Mr. Eccleston indicated that discussions are ongoing about whether “anything has to change” in relation to CDS. Mr. Eccleston, who reportedly divides his time between Toronto and Princeton Junction, New Jersey, acknowledged to the Globe that “the Cole Memorandum was under the Obama administration.  There’s a very different administration now in place, and it creates uncertainty around where it’s going to go.”
• Mr. Eccleston recently appeared on BNN to, in part, address the “cannabis confusion”.  “Listings for us is very straightforward,” Eccleston explained.  “We’ve got a published policy which is transparent, clear, and is enforced.”
• The TSXV’s Listing Agreement requires that a listed issuer agree to comply with all laws, rules and regulations applicable to its business or undertaking, although the TSX’s Listing Agreement does not contain such language.  In fact, no aspect of the TSX’s Company Manual actually specifies that issuers must comply with the laws of their jurisdictions, although section 701 of the Manual states that the TSX may suspend or delist an issuer if “such action is necessary in the public interest”.  TMX spokeswoman Catherine Kee has said that the Exchange mandates that all listed companies are expected to comply with relevant laws and regulations in the jurisdictions in which they operate, and that “each issuer is handled on a fact-specific basis”.
• Aphria is perhaps the prime example of a TSX-listed issuer which maintains significant US investments.  This past spring, Aphria, a powerhouse LP which carries a market cap of around $800 million, announced a US expansion strategy which included a $25 million investment into an entity which would hold a Florida medical cannabis dispensary licence.
• Canada is an attractive business environment for both Canadian and American cannabis companies.  Canadian LPs and other cannabis-based businesses raised over $700 million in late 2016 and early 2017, according to an article quoting a Canaccord Genuity analyst report.

Ample Organics gets ample media lovin’

• SkyLaw client Ample Organics took over the news this week as the Globe and Mail published a front-page article about the company, and BNN interviewed its president, John Prentice, on how he was building a “picks and shovels” participant in the “green rush” of capital towards the cannabis industry.
• “I think the recordkeeping requirements were so stringent that to try to put together a Frankenstein solution from all of these different software that was available created a very inefficient approach to doing business, so we recognized a need in 2014 to really step outside of that,” Prentice explained.
• Both features hint at the young company’s expansion into cannabis markets beyond Canadian borders: “Ample is now selling its product to Australia, Germany, South Africa, and into the Caribbean,” gushes the Globe. “Mr. Prentice said it’s just getting started.”
• Prentice’s roots in the cannabis industry, as he explains in the BNN interview, trace back to his work with the successful licensing of Peace Naturals Project, Inc., Canada’s first non-incumbent licensed producer and now a wholly owned subsidiary of SkyLaw client Cronos Group.
• It’s fair to say we’re totally chuffed to see our terrific clients getting some screen time!

What’s Up in Weed is not legal or financial advice. It is a blog by SkyLaw which is made available for informational purposes only and should not be used as a substitute for professional advice from a lawyer. This blog is subject to copyright and may not be reproduced without our permission. 

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