Some credit for the “green rush” bringing Canadian companies into the US cannabis market is due to a snag that makes it difficult for American firms to go public and access waiting investment capital.
US firms that deal in the cannabis market that wish to be publicly traded are highly scrutinized by the US Securities and Exchange Commission (SEC), and until very recently, all plant-touching companies have steered clear of public offerings to avoid any issues that would arise from being in conflict with federal law, according to Phil Brown, chief strategy officer with Intelligize, the LexisNexis-owned market data-gathering service.
“Almost every single company that’s come down the pike, they don’t touch the weed at all,” Brown said.
In Brown’s research, he found that only one of 114 US cannabis-related companies that are publicly traded in this country actually handle marijuana directly. Instead, these companies may offer proprietary solutions to grow better or stronger marijuana, or they may sell supplies or services that enable businesses to sell cannabis.
“They give you all of the stuff that sort of surrounds it,” Brown said. “It’s kind of like someone who makes cakes and they don’t sell cake batter. They’re nothing more than facility managers.”
Canadian companies, on the other hand, are unfettered by US law. They have access to both Canadian and US capital, and they can be listed on US exchanges with far fewer complications if they aren’t directly handling a product that under the US Controlled Substances Act is classified as a Schedule I drug.
“The key is the weed’s not going in the US, so it’s not violating US law,” Brown said.
The SEC has been thoroughly scrutinizing cannabis-related publicly traded companies. The regulator offered nearly 200 comments on public filings from marijuana businesses in public filings last year, records show.
Many of those SEC comments were related to disclosures, namely requiring companies to disclose the risks of dealing with cannabis because of its controlled substance status by the federal government.
An example is a 2017 filing by Nutrafuels Inc., a Coconut Creek, Florida-based CBD and nutraceutical distributor, in which SEC regulators noted that the filing states that the products the company deals with are exempt from the definition of cannabis and are legal for manufacture and over-the-counter sale to consumers.
The SEC noted that on Dec. 14, 2016, the US Drug Enforcement Agency (DEA) issued a final rule creating a separate Administration Controlled Substances Code Number for marijuana extract under Schedule I and that all extracts that contain CBD will also contain at least small amounts of other cannabinoids.
“Revise related disclosure in your document accordingly, for example clarifying if true that there is a risk that DEA action potentially could result in your being required to cease operations,” the SEC comment states.
In another 2017 filing from Stem Holdings Inc., a Boca Raton, Florida-based company formed to purchase, lease, and improve certain real estate properties to be utilized as either state-licensed cannabis selling retail establishments or state-licensed cannabis growing facilities, regulators took issue with certain references in the filing.
One reference that caught the SEC’s attention was that the filing noted that there was a continuing trend toward the legalization of marijuana for medical and recreational use in certain states within the US.
“Please revise to clarify that state laws referenced herein do not supersede the prohibitions set forth under federal law,” the regulators wrote.
The comment also took issue with the phrase in the filing, “once it is permissible under U.S. federal law for a publicly-traded company to engage in the marijuana business,” and requested that the company either give the basis for a statement that included or to remove the statement from the filing.
SEC media relations officials declined numerous request to comment for this article, and referred all questions to its public database.
Brown in his research did find one US public company that directly handles cannabis.
Players Network Inc. is a holding company listed on the OTC – over-the-counter is off-exchange trading. Players is engaged in the development of digital networks, cultivation, and processing for medical marijuana.
Players is actively pursuing the cultivation and processing of medical and recreational marijuana in North Las Vegas, Nevada, pursuant to two medical marijuana establishments licenses that were granted by the city for cultivation and production to its majority-owned subsidiary, Green Leaf Farms Holdings LLC, in which Players holds an 85 percent interest. Players also distributes content relating to the cannabis industry at WeedTV.com.
Brown noted that the federal government has yet to do anything about Players.
“From my position, it looks like a criminal enterprise as they are seeking to violate a federal law by cultivating marijuana (in the eyes of the federal government),” Brown said.
Public companies directly handling marijuana in both the US and Canada have steered away from being listed, however two Canadian plant-touching companies have recently bucked the status quo and been listed for public trading.
Canopy Growth Corp. began trading on the New York Stock Exchange in late May 2018 under the symbol CGC, making it the first marijuana-touching company listed on the NYSE. It joined Cronos Group, which became the first Canadian marijuana company to list on the Nasdaq in February.
Despite the promise that getting listed brings for companies and for investors, numerous legal and regulatory challenges lie in wait, according to Lance Rogers, an attorney in the cannabis paw practice group of Greenspoon Marder, which focuses on regulatory compliance.
“These transactions can occur, but they’re fraught with risk in terms of giving the proper disclosures to the investors,” Rogers said.
Another major issue he foresees for Canadian companies in particular is complying with anti-money laundering statutes in US if a foreign entity is taking or distributions from the sale of something that is considered illegal by the federal government.
“Because cannabis is a controlled substance under the federal Controlled Substances Act, it can be challenging to use financial institutions for payments,” Rogers said. “There is a lot of risk involved there.”
Some of that risk could be mitigated in California under a bill making its way through Legislature that would establish a state charter bank for cannabis businesses.
SB 930, authored by state Sen. Bob Hertzberg, overwhelmingly passed the Senate Floor on a 32-6 vote Wednesday, May 30, 2018. The bill would enable banks to issue checks to cannabis business accountholders to be used for paying state and local taxes and fees, paying vendors in California for goods and services, paying rent, and purchasing state and local bonds and other debt instruments. The bill is headed to the Assembly.