This blog discusses how U.S. businesses and entrepreneurs might benefit from the expansion and legalization of cannabis in Canada.
Canada has chosen to regulate cannabis at a federal level. This allows Canadian business to both trade their stocks on a public market and export their product(s) both withinCanada and internationally. U.S. cannabis businesses and entrepreneurs can invest in Canadian cannabis businesses or license their brands or formulas to Canadian companies. Moreover, many U.S. cannabis businesses are looking into taking their companies public in Canada as a way of raising capital and expanding these brands internationally.
U.S. cannabis businesses are more often taking advantage of the Canadian market through reverse mergers than initial public offerings. This allows the company to bypass the lengthy and complex process that accompanies an initial public offering. In a reverse merger, a private business will arrange for its own acquisition by an already publicly listed business. The surviving public company will issue its own shares to the private business’ shareholders, resulting in their being the majority shareholders of the public company.
In October 2017, the main Canadian stock exchange, the Toronto Stock Exchange, adopted the position that Canadian businesses in violation of the United States’ Controlled Substance Act are non-compliant with its listing requirements and are subject to delisting. In the following days, the Canadian Stock Exchange, the equivalent of over the counter/penny stock exchange in the U.S., took a different stance – stating that as long as the Canadian business’s cannabis-related activities are compliant with the laws of whatever state(s) in which they are involved, and they provide proper detailed disclosure to investors (so as to allow for informed decision making), the business will not be subject to delisting for these activities.
U.S. companies that partner with Canadian companies, or license their brands or intellectual property in Canada, are subject to several notable limitations. First, products may not be branded beyond the name of the company selling the product. Therefore, “Snoop Dogg” edibles or other explicit brands are prohibited. Second, at this time, Canadian cannabis companies can only sell by mail order. Finally, in the near future, each province will decide if it will require cannabis to be sold at state-run stores or allow private dispensaries. Ontario will require sale to occur at state run stores, but others have yet to decide.
Despite these limitations, the Canadian cannabis market is attractive to cannabis producers that are already licensed under the Canadian medical cannabis regime because they will receive preferential treatment (the nature of this preference has not been made clear yet) in recreational licensure expected to begin in the summer or fall of 2018. Likewise, Canadian cannabis producers can export internationally. Seven Canadian producers are currently licensed to export and are anticipated to have sent 528 kilograms of dried cannabis flower and 911 liters of cannabis oil overseas by the end of March 2018. Countries already importing Canadian cannabis include the Czech Republic, Australia, New Zealand, Brazil, the Cayman Islands, Chile, Croatia, Cyprus, South Africa, and Germany. Many of these markets are negligible in comparison to countries like the United States, but Germany has the world’s largest federally legal medical cannabis market and relies on imported cannabis, particularly from Canada.
McAllister Garfield, P.C. is working with U.S. companies interested in expanding into Canada and other countries. If you would like more information about this issue, contact us today.