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Crackdown coming for TMX cannabis stocks with US interests

(FinancialPress) — Canadian cannabis companies were threatened with a potential delisting by the TSX Venture Exchange (TSX.V) yesterday, which could lead to a possible exodus to more accepting exchanges sooner than later.

The news travelled swiftly among those in the cannabis sector, as the exchange put its foot down regarding activities in the United States.

Citing that while many states have legalized cannabis for medicinal and recreational consumption, the TSX.V pointed to the classification of marijuana as a Schedule I drug under the U.S. federal Controlled Substances Act.

“The Exchange is aware that a number of U.S. states have legalized the cultivation, distribution or possession of marijuana to various degrees and subject to various conditions. Nevertheless, marijuana remains a Schedule I drug under the U.S. federal Controlled Substances Act. This means it is illegal under U.S. federal law to cultivate, distribute or possess marijuana in the United States. Furthermore, financial transactions involving proceeds generated by, or intended to promote, marijuana-related business activities in the U.S. may form the basis for prosecution under applicable U.S. federal money laundering legislation. While the Exchange is aware of the federal guidance1 concerning the enforcement of these legislative provisions, the Exchange notes that such guidance does not have the force of law and can be revoked or amended at any time.”

The threat of delisting came with just 76 days left in the year for companies to make their case, or change their operations.

As per the official the official announcement, the TSX Venture claimed that it would classify these companies based on two categories, and assess accordingly:

“In the context of its continued listing review of listed issuers in the marijuana sector, the Exchange expects to group issuers into two categories. The first category is composed of issuers with business activities that involve the cultivation, distribution or possession of marijuana in any jurisdiction. The second category is composed of issuers that do not cultivate, distribute or possess marijuana, but that appear to be engaging in Ancillary Services Activities. The Exchange expects to contact listed issuers identified in its continued listing review by the end of the year for a more comprehensive review.”

In response to the announcement, competing index the Canadian Stock Exchange (“CSE”) issued its own statement regarding its stance towards these types of businesses, and its relationship with the Canadian Securities Administrators (“CSA”).

“The CSE is very pleased that the CSA has issued this detailed notice, which provides significant clarity for all stakeholders in this sector. Some of the notable disclosure expectations are listed below.

All issuers with U.S. cannabis exposure:

  • Must explain that cannabis remains illegal under U.S. federal law and that the approach to enforcement of U.S. federal laws is subject to change. The resultant risks, including the risk of adverse enforcement action, must be discussed;
  • Must state whether and how their activities are conducted in a manner consistent with any U.S. federal enforcement priorities;
  • Must discuss their ability to access both public and private capital, and indicate whether financing options are available or are not available in order to support continuing operations, given the illegality of cannabis under U.S. federal law.

Issuers with direct involvement in U.S. cannabis cultivation or distribution:

  • Must outline the regulations in the U.S. states in which they operate, and confirm how they are complying with applicable licensing requirements and the regulatory framework enacted by the applicable state;
  • Must discuss their program for monitoring compliance with U.S. state law on an ongoing basis and outline internal compliance procedures. They also must disclose any material non-compliance as well as material citations or notices of violation.

Issuers with indirect involvement in U.S. cannabis cultivation and distribution:

  • Must outline regulations in the U.S. states in which their investee(s) operate;

  • Must provide reasonable assurance that the investee’s business is in compliance with the applicable licensing requirements and regulatory framework enacted by the applicable U.S. state. (A similar requirement also applies to issuers with material ancillary involvement in the U.S. cannabis sector, as defined by the CSA.)”

At the moment, there are approximately 25 companies listed on TMX exchanges that cultivate, distribute, and possess marijuana, while others provide services to the cannabis industry. How many of those have dealing in the US is still yet to be determined, and we’ll know likely by year end.

One major company that may run the risk of being on TMX’s redflag list is Aphria Inc. (TSX:APH)(OTC:APHQF). The market has since responded negatively to the news, dropping Aphria’s market cap to below $1 billion, with an 11% plunge over the news. Part of the reason for the kneejerk response is that Aphria has invested in companies operating in Florida and Arizona, both of which would need to be divested in the near future or else the cannabis giant will risk being delisted from Canada’s top exchange.

Aphria officials aren’t worried, as they’ve issued their welcoming of the new CSA disclosure guidelines.

CEO of Aphria, Vic Neufeld, commented: “We believe the new CSA staff notice provides a very balanced framework for the Canadian capital markets and we welcome the additional guidance on specific and enhanced disclosure requirements for U.S. marijuana-related activities as they pertain to the medical marijuana industry in Canada .”

“We are on record as seeking greater securities regulatory guidance for the medical marijuana industry in Canada and we believe the new disclosure framework including related risks will provide greater investor protection and increased credibility to our industry.”

Despite the drop in share price, Aphria remains confident that they’ll remain in compliance.

“We at Aphria and at our joint venture partner, Liberty Health Sciences Inc., believe this approach to disclosure for medical marijuana companies in Canada is truly representative of the existing U.S. legislative, regulatory and political environment,” added Neufeld.

“In contrast, we believe the TSX’s recent staff guidance concerning the minimum listing requirements to applicants and listed issuers in the marijuana sector does not properly apportion the weight and context that must be applied to the current split between U.S. Federal and state laws governing medical cannabis. For example, while medical cannabis is technically covered by Schedule I of Controlled Substances Act, it is presently medically legal in 31 U.S. states and/or territories and Congress has not appropriated any funds to a federal agency for either civil or criminal enforcement prosecutions against state licensed medical marijuana operators and has instead enacted legislation that prohibits the U.S. Department of Justice from utilizing any federally appropriated funds to carry out criminal or civil actions against state licensed medical cannabis operators.”

For investors in the space, the news of the CSA’s guidelines presents a new wrinkle in the fight to legitimize a sector of the life sciences industry. However, given the nature of the discourse regarding marijuana/cannabis and their derivatives, the added risk of investing in such a sector isn’t news to those who have chosen to put their skin in the green game.

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