A clearer picture is emerging around how the business of legal cannabis will look in Canada and the United States, but amid the consolidations, there is also a frenzy of cross-listing activity as companies stake out territory in this growing market.
Even in states where cannabis is legal, producers are unable to post public listings because itis still illegal at the federal level. The Drug Enforcement Agency classifies it as aSchedule 1 controlled substance, along with heroin, LSD and ecstasy.
Though it would seem likely that cannabis' illegality in the U.S. would make it that much easier for Canada to take pole-position as a leader in this space, the industry is seeing a different trend. Several medical cannabis companies that operate solely in the Great White North have sought approval south of the border, where it is legal in some states for medicinal purposes, to take advantage of a much larger pool of investors.
The Green Rush
Inside a HarvestOne (V.HVT) growing facility.
Corporate securities law firm Venture Law Corp. is seeing things pick up after the market realized that the Securities and Exchange Commission (SEC) didn’t have any issues with Canadian companies raising capital in the U.S. if their business was completely legal in their home jurisdictions.
“My office is receiving more calls from U.S.-based underwriters who are looking at raising capital for Canadian cannabis companies listed on the CSE in particular but also the TSX Venture Exchange,” Venture Law principal lawyer Alixe Cormick told Stockhouse Editorial in an interview. “Private cannabis companies are also actively raising capital in the U.S. “
The Vancouver-based firm acted for True Leaf Medicine International Ltd. (CSE: MJ) in connection with its Regulation A offering in the U.S. The Company’s chairman is former B.C. premier Mike Harcourt, who told reporters in May that once the recreational market becomes legal in Canada in the summer of 2018, prices will drop, making it uneconomic for small and medium producers.
True Leaf was the first Canadian-listed Company with plans to become a cannabis cultivator that qualified under the SEC to offer its securities south of the border. It was looking to raise $3 million in the U.S. but ended up raising $10 million under the offering and another $4 million from a private placement in Canada. “The demand was much higher than anticipated and they could have closed on a significantly higher amount,” Alixe Cormick added.
Up until this point, the SEC had only approved registration statements from companies in two areas:
- Ancillary services such as real estate Company Innovative Industrial Properties Inc. (NYSE: IIPR), that leases land to cannabis-related companies
- FDA pharma approved companies such as GW Pharmaceutical plc (NASDAQ: GWPH)
Canopy Growth (T.WEED) also listed on the NYSE in late May 2018. Alixe Cormick pointed to this major move as another strong signal to U.S. investors, who look at Canadian securities markets as the marketplace where quality cannabis companies are listed and traded. “There is no equivalent market in the world for cannabis stock at all levels of development,” she said. “Investors and the world have watched brands emerge from almost nothing and grow into strong multi-million-dollar market cap companies in a relatively short period of time.”
Likewise, she is seeing cannabis companies that operate in the U.S. take notice and recognize the benefits of being listed on the Canadian Securities Exchange (CSE).
“U.S. cannabis companies that are listed on the CSE have a stronger stock price, marketplace liquidity and ability to raise capital than their peers that trade only on the U.S. OTC markets.”
American investment banks are also eager to help Canadian cannabis issuers raise capital in the U.S., even though it isn’t a requirement that a company list on a U.S. stock exchange as part of financing, though it is preferred by many underwriters.
In fact, Alixe Cormick pointed out that the SEC has qualified offerings by U.S. companies involved with growing, cultivating, and selling cannabis products in states where that activity is legal:
It has also approved a number of U.S. companies doing research and developing natural health products, over the counter drugs and drugs involving cannabinoids:
It still remains to be seen if these companies qualify to list on a U.S. stock exchange other than the OTC.
Cannabis is the latest venture market that Canadian companies are building through strong venture capital trading markets. Canadian companies often reach across the border for investment funds and will likely continue to do so. Alixe Cormick believes that more U.S. cannabis issuers will list on the CSE, along with other cannabis-focused companies from countries like Israel or Colombia listing both on the CSE and the TMX exchanges.
“The door to the U.S. capital markets is no longer locked shut”
That from a recently-published case study from Toronto law firm Torys about Canadian cannabis Company Cronos Group Inc.(TSX-V: MJN; NASDAQ: CRON) successfully listing on the Nasdaq. In the business of cultivation, Cronos registered its securities with the Securities and Exchange Commission and listed on the NASDAQ.
The study notes that expanding into the much larger U.S. capital market holds a “significant promise” for Cronos and could even be a catalyst for more cross-border activity by other Canadian LPs watching this play out.
Was Cronos’ focus on the medicinal side of the cannabis business one of the main reasons it achieved this listing? Torys’ analysis admits that that much isn’t clear, but points to Cronos’ strong corporate governance as one of its main keys to that success.
This listing happened just over a month after U.S. Attorney General Jeff Sessions rescinded “the Cole memo”; a directive from the Obama administration that had previously sheltered U.S.-based cannabis producers operating legally under state law but in violation of federal law, effectively shutting out federally-regulated major banks.
Even when these cannabis-related businesses are completely legal in their jurisdictions, commercial banks could still be hesitant to open accounts and services to them. However, there may be no legal prohibition on investment banking services being offered to a cannabis business that is entirely legal.
On that note, Torys stated - “We expect U.S. banks to intensify their efforts to explore ways to provide such services.”
Retail investors in the U.S. have always been interested in participating in private placements of listed cannabis securities in Canada, but Alixe Cormick explained that there has been (and continues to be) a concern as to how they will be able to trade these securities. “Traditional institutional investors still have concerns as to what Jeff Sessions office may do and how regulators will apply the Cole Memo in the cannabis investment space.”
Rolling the papers
On the other side, cannabis companies in the U.S. are also looking to raise capital and list in Canada. In a Financial Post interview, Canaccord (T.CF) vice chairman Graham Saunders said the sophisticated Canadian investor base is around three years ahead of the U.S. where capital markets for cannabis are concerned. Big banks are taking a serious look, as the Bank of Montreal advised Aurora Cannabis Inc. (T.ACB) on its massive $2.9 billion acquisition of MedReleaf Corp (T.LEAF).
Cannabis companies that have operations in the U.S. cannot currently list on any American exchange, the TSX or TSX-V. However, they can list on the CSE if they disclose all risks associated with their operations.