Pot industry’s fate in securities commission’s hands

Any move by the Toronto Stock Exchange owner to stop settling trades for marijuana companies with US operations would undermine the market’s regulatory system, according to one Canadian pot company.
 

CannaRoyalty Corp. already went through a “very formal” review with the Ontario Securities Commission in which its operations and assets were scrutinized before being allowed to list on an exchange, said Chief Executive Officer Marc Lustig. Lawyers for the Ottawa-based company, which has the bulk of its assets in the US, are reviewing whether any decision to stop clearing trades would be enforceable, he said.
 

“We have a legal strategy that’s been initiated,” Lusting said by phone. “For the TSX to exercise that decision it undermines the efficiency of an independent marketplace and it completely undermines, in my opinion, the regulatory scrutiny that the securities commission exercises at the time of listing these companies.”
 

TMX Group Inc. is discussing with regulators how its clearing house, the Canadian Depository for Securities, should deal with marijuana companies that have operations or investments in the US While some US states have legalized marijuana for medical and recreational use, it remains illegal at the federal level.
 

The exchange operator said last week it’s working to provide clarity for investors and the matter requires “close examination and careful consideration." Major US exchanges, such as the Nasdaq, won’t accept listings for cannabis companies and banks and other lenders remain wary of the industry.
 

A policy change could bring upheaval to Canada’s nascent marijuana market, which has ballooned amid investor optimism that legal recreational sales could reach $6 billion annually (US$4.8 billion) by 2021.
 

CDS clears trades for the TSX and the TSX Venture exchanges as well as the Canadian Securities Exchange, where many Canadian companies and US-focused corporations are traded. There are five marijuana companies listed on the TSX, another 18 on the TSX Venture, and 44 on the CSE, according to exchange data.
 

Shares of CannaRoyalty fell 15% this month in Toronto amid the uncertainty, while other peers with US exposure including Aphria Inc. declined 9.4% and iAnthus Capital Holdings Inc. dropped 12%. Aphria said in a statement Monday it’s pleased the TMX is working to clarify the CDS issue.
 

A major policy change is unlikely as more than a dozen companies have public exposure to the US marketplace and regulators would probably not allow TMX to disrupt the liquidity in an market with more than $2 billion worth of securities, said Julius Kalcevich, chief financial officer for iAnthus, which has offices in New York and Toronto.
 

Any material change to CDS rules must go through an approval process with provincial regulators, according to an Ontario Securities Commission order. Commission staff would review the rule and allow a time period for public comment, according to the document.
 

“When you add all of that up, the stakeholders and the amount of money that could be impacted or left vulnerable, it’s something that the regulators aren’t going to take lightly,” Kalcevich said by phone.
 

As deliberations over Canadian continue, CannaRoyalty and iAnthus are also exploring clearing their trades in the US CannaRoyalty has been approved for trading on the OTCQB venture market in the US and is eligible to settle trades through the Depository Trust Company, Lustig said. iAnthus currently clears between 20 and 30% of trade volumes through the US and plans to shift more volume there in the event of a policy change, Kalcevich said.
 

“This is uncharted territory,” said James Munro, a partner and co-chair of the cannabis practice group at McMillan LLP’s Vancouver office. “Ultimately, it will be the Ontario Securities Commission which will likely have to make a decision.”