On February 27, the Nasdaq Global Market listed shares of Cronos Group Inc. (TSX-V: MJN; Nasdaq: CRON), marking the first time a cultivator of cannabis was listed on any U.S. exchange. The listing signals a potential paradigm shift for the Canadian cannabis industry, which has to date largely raised funds in Canada. Access to U.S. capital markets brings with it significant uncertainty, however, as the cultivation, possession and sale of cannabis in the U.S. remains illegal under U.S. federal law. Of interest will be whether and when the U.S. investment banks will underwrite offerings of Canadian and other foreign cannabis companies.
What You Need To Know
- Nasdaq has listed shares of a Canadian cannabis business for the first time.
- Strong corporate governance is cited as key to achieving the listing.
- It is unclear whether, when and to what extent U.S. investment banks will underwrite offerings of Canadian and other foreign cannabis companies.
- Cronos has no operations in the U.S. Canadian cannabis companies with U.S. operations or connections to the U.S. cannabis industry will likely continue to be generally limited to listing on the Canadian Securities Exchange (CSE) in Canada.
Cronos, which owns licensed producers (LPs) Peace Naturals and Original BC and has further cannabis-related operations in both Israel and Australia, has been listed on the TSX-V since December 2014, with a current market cap of over C$1.8B. The expansion to the substantially larger U.S. capital markets holds significant promise and may be a catalyst for increased cross-border activity by other Canadian LPs. However, the timing comes less than two months after Obama-era policies that had previously sheltered U.S.-based cannabis producers operating legally under state law but in violation of federal law were rescinded.
The listing of shares of Cronos by Nasdaq demonstrates a willingness by the exchange to accept issuers with material interests in the production and sale of cannabis in jurisdictions in which such activities are legal. Cronos has no operations or activities in the U.S. Each of Cronos' two wholly-owned LPs and three additional LPs in which it holds a minority interest operate in compliance with the Access to Cannabis for Medical Purposes Regulations (ACMPR). Furthermore, Cronos' international operations are located in jurisdictions where medicinal cannabis is legalized nationally—namely, Israel and Australia. In addition, Cronos' CEO and industry commentators have cited Cronos' extensive work in strengthening Cronos' corporate governance as key to achieving the Nasdaq listing.
It's unclear whether Cronos' focus on medicinal cannabis was also instrumental in achieving this listing and even if it was instrumental, whether that may no longer be the case when adult use cannabis becomes legal in Canada this summer. In any event, the door to the U.S. capital markets is no longer locked shut.
It remains to be seen whether and when US investment banks will conduct public offerings for Canadian companies listed in the U.S. Commercial banks in the U.S. remain reluctant to open accounts and provide services to cannabis related businesses, even when fully legal in their operating jurisdictions, which could make such offerings logistically and practically difficult. However, given that there may be no legal prohibition on providing investment banking services to businesses that are fully legal in their respective jurisdictions, we expect U.S. banks to intensify their efforts to explore ways to provide such services. Notably, the U.S. does not have the equivalent of the Canadian money laundering rule that deems the proceeds of certain activities that are legal in a foreign country but illegal in Canada to be the proceeds of crime.
In order to list on Nasdaq, Cronos filed a listing application with Nasdaq and registered its class of common shares with the U.S. Securities and Exchange Commission (SEC). Canadian companies which have been a reporting issuer in Canada for at least 12 months and have a public float of at least US$75 million are eligible to take advantage of the Multijurisdictional Disclosure System (MJDS) in order to register with the SEC. The MJDS permits such Canadian companies to effect the required registration with the SEC by filing a Form 40-F, which is essentially a wrap of its Annual Information Form (AIF), audited financials and management discussion and analysis (MD&A) and which, as a practical matter, is not subject to the otherwise burdensome SEC comment process. This allows for a time and cost efficient process for Canadian companies wishing to enter the U.S. markets.
Currently cannabis companies which have operations in the U.S. cannot list on any U.S. exchange, or the TSX or the TSX-V, but can list on the CSE provided they fully disclose all risks related to such U.S. operations.
To discuss the Nasdaq in the context of your business, contact Cheryl Reicin.
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This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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