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Canadian Exchange Weighs Risks in Trading U.S. Marijuana Stocks

The parent company of the Toronto Stock Exchange is working with Canada’s provincial and territorial securities regulators to examine whether trading in shares of marijuana companies with U.S. operations is lawful.

By

David George-Cosh

TORONTO—As dozens of cannabis companies have flocked to raise capital on Canada’s stock exchanges in recent years, the country’s regulators are starting to question whether trading in their stock would run afoul of U.S. law.

The parent company of the Toronto Stock Exchange and an umbrella organization of Canadian securities regulators are looking at cannabis companies with U.S. operations—including growers, medical-marijuana distributors and pharmaceutical firms whose products include marijuana ingredients—to determine whether trading in their shares should be allowed to continue on Canadian exchanges.

The regulatory attention comes as the Toronto Stock Exchange and its smaller rival, the Canadian Securities Exchange, have been actively courting marijuana company listings from around the world. At present, roughly half the trading activity on the Canadian Securities Exchange is sourced from marijuana-based businesses, a high-growth sector.

Medical marijuana has been legal in Canada since 2001 for patients with valid prescriptions, and Canada is expected to formally legalize marijuana by July 2018. In the U.S., meanwhile, while eight states plus the District of Columbia have legalized marijuana, and an additional 20 states have legalized it for medical purposes, it remains illegal under federal law.

High Fliers / Total market cap of Canadian-listed marijuana companies, by exchange Source: the exchanges

U.S. exchanges list shares of some companies indirectly involved in the pot business, such as real-estate firms that lease sites to marijuana growers. But neither the New York Stock Exchange nor Nasdaq will allow trading of shares in companies that profit directly from growing or selling marijuana in the U.S., lawyers say.

The exchanges wouldn’t discuss their marijuana policies on the record. A Nasdaq spokeswoman pointed to an exchange rule stating that Nasdaq “stands for integrity and ethical business practices.” NYSE’s rule book says its listed companies “should proactively promote compliance with laws, rules and regulations.”

TMX Group Ltd. , parent of both the Toronto Stock Exchange and a clearinghouse unit, the Canadian Depository for Securities Ltd., a platform where Canadian exchanges settle equity, debt and money-market transactions, has sought clarity from Canadian regulators on the question of whether settling stock trades of cannabis companies with U.S. operations amounts to a violation U.S. law, according to a TMX Group statement.

“This is a complex matter which touches multiple aspects across our capital market system, and as such requires close examination and careful consideration,” said a TMX spokeswoman. The company is cooperating with Canadian Securities Administrators, the umbrella group of provincial and territorial securities regulators.

Neither regulators nor the exchange platform have announced when a formal ruling is expected, although some observers believe a decision could come in November, when the clearinghouse’s board is scheduled to meet.

Any action by Canadian regulators is likely to be closely watched by other countries grappling with how to treat the trading and clearing of marijuana stocks. Exchanges in Germany and Israel, for example, two countries that recently legalized medical marijuana and have publicly-listed cannabis firms, have also been weighing listing standards for such companies.

“The industry wants clarity, and would prefer that it come sooner rather than later,” said Richard Carleton, chief executive of the Canadian Securities Exchange.

In all, there are 69 cannabis-related companies, representing a combined market value of about C$7.8 billion (U.S. $6.4 billion), trading on the Toronto Stock Exchange, the smaller TSX Venture Exchange and the Canadian Securities Exchange. These companies include more than a dozen fledgling U.S. marijuana entities that have turned to Canada to raise money, including 11 companies on the Canadian Securities Exchange with some assets or operations in the U.S., according to Mr. Carleton. There are at least four on the Toronto Stock Exchange and the smaller TSX Venture Exchange.

Cannabis companies that were eager to raise public funds in Canada to fuel expansion plans now face the possibility of new restrictions.

Canopy Growth Corp. , a Smiths Falls, Ontario-based grower and seller of medical marijuana, is the world’s largest publicly-traded cannabis company, with a market valuation of C$1.7 billion on the Toronto Stock Exchange. Chief Executive Bruce Linton said he has turned down opportunities to invest in the U.S. because of the uncertain legal repercussions back in Canada.

Regulatory clarity, Mr. Linton said, would be “one of the last check boxes” to get institutional investors engaged in the cannabis market. “When a sector works in an unclear way, serious capital pools avoid that sector,” he said.

Even if trading in U.S. cannabis shares is allowed to continue on Canadian exchanges, most marijuana startups face an uphill battle to attract capital, given uncertainty over future regulations in Canada and continued illegal status in the U.S. “Many institutional investors wouldn’t touch any of these firms with a 10-foot pole,” said Michael Mayes, president of Quantum 9, a Chicago-based marijuana-business consultancy.

Canadian investment bank Canaccord Genuity Group Inc. said it is considering stepping in to provide clearinghouse services if TMX’s Canadian Depository unit decides to stop processing trades of publicly-traded cannabis companies with U.S. exposure. Canaccord has raised about C$415 million of capital in the cannabis sector as an adviser and underwriter since January 2016.

“If CDS is to make a change to its policy on clearing trades in U.S. cannabis companies, then Canaccord will explore options for a solution," said Graham Saunders, Canaccord’s head of capital markets origination.

However, setting up a clearinghouse system is likely to take the investment bank take several months given the technological requirements, even if the plan were to get approval from securities regulators.

—Alexander Osipovich contributed to this article.

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