Companies engaged in the cannabis supply chain are highly regulated by federal and provincial cannabis-specific laws as well as a myriad of other laws, like environmental, workplace and agrifood-related laws. Publicly-traded cannabis companies face an additional level of regulation: securities laws. As the number of public companies in Canada digging into and around the cannabis industry grows, securities regulators are keeping a keen eye on their compliance with securities law disclosure requirements. On October 10, 2018, the Canadian Securities Administrators (CSA) published Staff Notice 51-357 Staff Review of Reporting Issuers in the Cannabis Industry. In it, the CSA publicizes the result of its recent review of the disclosure of reporting issuers both directly and indirectly engaged in the cannabis industry, identifies key areas of concern the review revealed, and provides guidance on how “licensed producers” and issuers otherwise involved in the cannabis industry can maintain good securities law disclosure practices in those areas. The Staff Notice refers to “licensed producers” (LPs) because this was the term in the Access to Cannabis for Medical Purposes Regulations (ACMPR) in effect when the CSA conducted its review and published the Staff Notice. The government repealed the ACMPR when the Cannabis Act and Cannabis Regulations took effect on October 17, 2018 and they are no longer in effect. While the new legal regime doesn’t use that term in the same way, it’s still generally understood to refer to license-holders for analogous activities.

The CSA review and report demonstrate that while the cannabis industry is (relatively) new, the disclosure obligations of publicly-traded companies are not. Here are three practical tips to help issuers engaged in the cannabis industry comply with their securities law disclosure obligations:

Look for similarities. Newly minted reporting issuers, whether directly engaged in the cannabis supply chain or indirectly engaged in the cannabis industry (like suppliers or lenders to LPs), or that are planning to be involved in the industry in the future, can look to reporting issuers in other industries to help them comply with their securities law disclosure obligations. All reporting issuers, regardless of the industry in which they operate, are generally subject to the same disclosure rules. Understand how these rules apply to issuers in other industries so you can implement them in your cannabis-related business, and adopt and integrate best practices of issuers in other industries into yours.

Communicate & embrace differences. While navigating the one-size-fits-all securities law disclosure rules, there will be instances where your disclosure must diverge from that of other issuers because of unique industry characteristics, such as additional regulatory responsibilities under the Cannabis Act and Cannabis Regulations or otherwise. You know your business and are in the best position to help investors understand what your disclosure really means to their investment. Use your disclosure documents as an opportunity to engage and educate your investors and the public on your business.

When in doubt, put it out. The cannabis industry is moving out of its seedling stage, but it’s still evolving from a public market and securities regulatory perspective. Your business might have a development that’s an industry first, and there aren’t other disclosure examples from which to draw guidance. If you’re questioning how to handle a new development you think could be material to your business, you’re typically best-served to announce it – in a balanced way that’s not misleading to investors.

The CSA’s review was of 70 reporting issuers with varying levels of participation in the cannabis industry, including: licensed producers (LPs) and others currently directly engaged in the cannabis supply chain; reporting issuers currently indirectly engaged in the cannabis industry, such as suppliers or lenders to LPs; and reporting issuers with plans to get into direct or indirect cannabis-related activities. In Staff Notice 51-357, the CSA identifies three main areas of concern that resulted from its review, and provides guidance on how LPs and issuers otherwise involved in the cannabis industry, both directly and indirectly, can maintain good disclosure practices in those areas:

Financial reporting by LPs. The CSA highlighted five ways in which LPs specifically could improve their financial disclosure:

• Fair value disclosure. As cannabis plants are biological assets, they must be measured at their fair value under International Financial Reporting Standards (IFRS). Licensed producers should disclose the fair value amounts, including unrealized gains and losses resulting from fair value changes and realized fair value amounts included in the cost of inventory sold, separately from cost of goods sold. Licensed producers can achieve this separate disclosure by separate line items on the statement of profit and loss or in the notes to their financial statements.

• Presentation of production costs. Licensed producers should indicate for investors what costs are included in the line item “gross profit, excluding fair value items” and when they have been expensed. Disclosure of significant accounting policies should clarify the LP’s direct and indirect production costs, where those costs are recorded on the statements, and whether they are capitalized or expensed.

• Expensed costs. Licensed producers that expense direct and indirect production costs as they are incurred should provide additional disclosure in their management’s discussion & analysis (MD&A) to assist investors to compare financial results against issuers that capitalize these costs. Because of the potential to mislead investors, it might not be appropriate for these LPs to present a gross profit subtotal.

• Fair value judgements. Licensed producers should enhance their disclosure of the judgements made in determining the fair value of biological assets, including valuation techniques and processes, inputs used in fair value measurement, and sensitivity to changes in inputs.

• Non-GAAP financial measures. Licensed producers should improve disclosure of non-GAAP financial measures (for example, cash cost per gram) so investors can understand them. They must identify all non-GAAP financial measures as such and reconcile them to the most directly comparable GAAP measure, as outlined in CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures, bearing in mind the CSA has proposed new rules for disclosure of non-GAAP and other financial measures that could replace this Staff Notice in the near future.

Risks associated with U.S. operations. According to the CSA, the majority of the reviewed reporting issuers that have U.S. cannabis operations provided insufficient disclosure on the unique risks associated with those operations caused by the internal conflicts between state and federal marijuana laws in the U.S. To ensure compliance with their disclosure obligations in view of those risks, issuers with cannabis-related operations in the U.S. should adhere to the disclosure expectations outlined in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities.

Forward-looking information, balanced disclosure and other disclosure items. The CSA identified inconsistent compliance with certain disclosure requirements, including forward-looking information and balanced disclosure. Specifically, the CSA noted:

• Projections & forward-looking information. Certain issuers announced projected production figures without specific and comprehensive disclosure of the related material factors and assumptions underlying those projections, or failed to update forward-looking information as required. 
• Balance. Announcements concerning new opportunities in the industry should be balanced so they aren’t misleading to investors. 
• Impairment events. An issuer that experiences an impairment event, whether it affects only that issuer or the entire industry, should perform impairment testing. 
• Licence as material contract. If an issuer is substantially dependent on a licence to cultivate or sell cannabis, that licence might be a material contract the issuer is required to publicly file. 
• Foreign operations. Issuers with foreign cannabis operations should disclose the regulations applicable to those operations.

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Please contact your McInnes Cooper lawyer or any member of the Cannabis Law Team @ McInnes Cooper to discuss this topic or any other legal issue.

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McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

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