Canadian cannabis industry disclosure requirements
The cannabis industry continues to have significant growth as an emerging public market sector. We note that issuers in the cannabis industry may operate in several different jurisdictions and the regulatory uncertainty, differences in legal and regulatory frameworks across jurisdictions, and other potential risks should be disclosed to investors.
The Ontario Securities Commission (OSC) continually reviews cannabis filings on a case-by-case basis to determine if there are any novel business models that may give rise to public interest concerns which cannot be addressed by disclosure.
As general guidance, issuers considering entering the cannabis industry, or issuers considering new investments in the cannabis industry, should ensure that announcements about these new opportunities are balanced and that they are not potentially misleading to investors. Also, issuers who are substantially dependent on licenses to cultivate or sell cannabis, or on leased facilities in which those activities are performed, should file the related licenses/agreements as material contracts on SEDAR.
Cannabis issuers must provide investors with transparent information about financial performance and risks and uncertainties to support informed investing decisions. In particular, licensed cannabis producers should provide sufficient information in their financial statements and MD&A for an investor to understand their financial performance. International Financial Reporting Standards (IFRS) require issuers to record growing cannabis plants at their fair value. Issuers should also consistently comply with securities requirements for forward looking information, guidance for providing balanced disclosure and certain other requirements. For more information, please refer to CSA Staff Notice 51-357 Staff Review of Reporting Issuers in the Cannabis Industry.
We continue to expect the cross-ownership of financial interests by cannabis reporting issuers (or their directors and officers) involved in mergers, acquisitions, or other significant corporate transactions (M&A Transactions) as material information for investors and their investment/voting decisions, which should be disclosed. In addition, cannabis issuers should consider the independence of board members, including the development of a written code of business conduct and ethics that addresses these and other governance related matters. Please refer to CSA Multilateral Staff Notice 51-359 Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry for more information.
In addition, Cannabis issuers should disclose the material factors and assumptions related to projections for business growth, including, among others:
- anticipated production capacity in a new facility under construction
- pursuit of cannabis retail licences through applicable provincial retail licensing processes
- the launch of new cannabis product
- the development of cannabinoid-based medicines
- expansion into new international markets
- acquisitions and new assets
The disclosure of such activities should be qualified, as appropriate, by specific risk factor disclosure. Assumptions for financial projections should be specific and comprehensive, particularly with respect to quantitative details, such that an investor is able to clearly understand how each assumption contributes to the projection. Cannabis issuers should also ensure that this forward-looking information is updated, as required by securities law. Please refer to OSC Staff Notice 51-731 Corporate Finance Branch 2020 Annual Report for more information.
U.S. cannabis industry
Issuers that have, or are in the process of developing, cannabis-related activities in the U.S. should also review our specific disclosure expectations set out in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities.
Issuers with cannabis-related activities in the U.S. assume certain risks due to conflicting state and federal laws. While some U.S. states have authorized the use and sale of cannabis, it remains illegal under federal law. The federal law relating to cannabis could be enforced at any time, and this would put issuers with U.S. cannabis-related activities at risk of being prosecuted and having their assets seized.
We expect issuers with cannabis-related activities in the U.S. to address the current legal and regulatory environment in their disclosures, including any related risks that result from government policy changes or the introduction of new or amended guidance, laws, or regulations regarding cannabis regulation. This applies to all issuers with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the U.S. cannabis industry.
We expect these disclosures to be clearly and prominently disclosed in prospectus filings and other required documents such as an issuer’s Annual Information Form, marketing materials, and MD&A. In the context of a prospectus, such disclosure should include bold boxed cover page disclosure about the illegal nature of cannabis under U.S. federal law and the potential risks associated with this circumstance. We also expect issuers with U.S. cannabis-related activities who enter our capital markets through a reverse takeover or spinoff transaction to include these disclosures in their listing statement, or other documents, as applicable.
For more information:
- OSC Staff Notice 51-731 Corporate Finance Branch 2020 Annual Report
- CSA Multilateral Staff Notice 51-359 Corporate Governance Related Disclosure Expectations for Reporting Issuers in the Cannabis Industry
- CSA Staff Notice 51-357 Staff Review of Reporting Issuers in the Cannabis Industry
- CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities
- CSA Staff Notice 51-342 Staff Review of Issuers Entering into Medical Marijuana Business Opportunities