The legalization of cannabis in Canada at a time when the Controlled Substances Act still applies in the United States has created a unique situation where Canada’s stock exchanges are attractive for United States cannabis companies looking for equity financing and the American stock exchanges are attractive for Canada’s legal cannabis businesses. The phenomenal growth of Canada’s legal cannabis businesses has also put them in a position to search for attractive acquisition targets in the United States and with the USDA providing some guidance for federally legal industrial hemp, Canadian companies are looking to expand into the American hemp and CBD markets. Local regulations and stock market rules can be impediments to building a multi-jurisdictional cannabis or hemp business.
It has been nearly five years since the first U.S. cannabis company, Oregon-based Golden Leaf Holdings, was listed on the Canadian Stock Exchange (the “CSE”). The CSE has been the stock market of choice for U.S. cannabis companies in the “plant touching” part of the industry because listing on the United States stock exchanges is prohibited because of the Controlled Substances Act, and because the Toronto Stock Exchange will not list U.S.-based “plant touching” businesses. On the flip side, NASDAQ and the New York Stock Exchange are attractive to Canada’s legal cannabis businesses as they supply a larger source of funds, but listing on those exchanges means these companies will not be able to acquire U.S.-based, plant-touching cannabis businesses, with the key exception of industrial hemp businesses that are exempt from the Controlled Substances Act. Before companies get to the stage of a public listing, private equity and venture capital firms are often a source of funds needed to grow operations into new jurisdictions or markets.
However, the regulatory framework for the industry in many jurisdictions was not designed for this level of financial complexity. Until recently, the industry has been dominated by small businesses because of the lack of capital available, but also because of local regulatory structures. Consider that early medical marijuana regulations in states such as Oregon were set up with the basic idea that growers and retailers would be run not-for-profit and that, ultimately, an individual would have personal responsibility—and liability—for the business. While adult use cannabis regulations were more sophisticated, they often borrowed from the existing three-tiered distribution model of existing alcohol regulations or had express requirements for local ownership. While these regulations have slowly changed over time, they still do not always take into consideration the capital structures of cross borders cannabis businesses.
For example, Oregon has a very broad definition of the term “financial interest” (i.e. “having an interest in the business such that the performance of the business causes, or is capable of causing, an individual or a legal entity with which the individual is affiliated, to benefit or suffer financially.”) A licensee that wants to change the financial interests in their business needs to submit a prescribed form to the Oregon Liquor Control Commission (“OLCC”) for the OLCC to approve the change. While the submission of the form is, in many instances, merely a formality, read literally, this would be impractical for a publicly traded entity and problematic for businesses funded by private equity groups with capitalization tables they may prefer not to share. California’s regulations also have a broad requirement of disclosing financial interests, albeit with an exception for ownership of less than a 5% interest in publicly traded company. It is the interpretation of these rules by the regulatory body that become critical and those interpretations are evolving as the ownership structures in the industry evolve. As such, it may be critical to have local counsel involved to determine what state-level disclosures and approvals may be necessary in connection with financing transaction and whether the disclosures can be limited based upon structuring of the transaction.
Canadian businesses looking to acquire industrial hemp businesses may need to be aware that states can have their own regulatory scheme in place of the USDA default regulations if that regulatory scheme is approved by USDA and many jurisdictions are choosing this approach. These regulations often have similar provisions about approval of changes in business structure and these provisions are often less defined than their cannabis counterparts. For example, Oregon’s most recent draft regulations refer to “financial interest,” but do not define the term. We are still very early in the process of regulations related to industrial hemp, so it may be important to engage counsel that is knowledgeable about the most recent developments in this area.