Aphria’s marijuana plants intended for medical use grow in their greenhouse in Leamington, Ont., in 2014.GEOFF ROBINS/The Globe and Mail
After making a fortune in the vitamin business, Vic Neufeld set his sights on the burgeoning market in Canada for medical marijuana.
He signed on to run a pot startup, Aphria Inc., and three years later the business appears to be thriving. It has more than 250 acres of greenhouse space for growing marijuana in Leamington, Ont., is building additional space and has started to turn an operating profit. Investors are buying in, driving Aphria's value to more than $825-million on the Toronto Stock Exchange.
By that measure, it's already one of the biggest players in the Canadian industry. But lately, Mr. Neufeld has turned his attention to a market that could be even more lucrative: the United States.
For subscribers: Inconsistent rules for marijuana stock listings sow confusion
Last year, Aphria acquired a small stake in a pot grower in Arizona and added to its position this year. In April, it said it would invest $25-million in a new entity to be called Liberty Health Sciences Inc.
Liberty owns one of the few licences in Florida to grow and sell marijuana for medical use. The potential for growth in Florida is huge, says Mr. Neufeld, Aphria's chief executive: Thousands of new patients suffering from any of 12 medical conditions are being prescribed the drug each month.
From his office in Markham, Ont., Neil Closner has been watching Mr. Neufeld's moves closely. This spring, Mr. Closner, the CEO of MedReleaf Corp., was in the middle of taking his licensed marijuana producer public on the TSX when, on the same day that Aphria announced its Florida deal, the exchange told MedReleaf that if it wanted to list its shares on the TSX, it should stay out of the United States (The message came in a comment letter to the company's prospectus.)
Two public companies, one stock exchange – but, apparently, two sets of rules. "There should be a level playing field. Clearly that's not the case today," Mr. Closner said.
Moves toward the regulated legalization of cannabis in Canada and several U.S. states have helped create a tidal wave of investment capital – and speculation – in the pot sector. Dozens of companies – most of them small, some quite big – serving the marijuana market have already gone public in this country and are now collectively worth billions of dollars.
Canadian public markets have become vital for marijuana entrepreneurs with big growth plans – a way to tap into investors willing to provide money at a time when other major sources of capital, such as the large chartered banks, are generally staying away from the sector for legal and branding reasons.
As with most Canadian agriculture, the biggest opportunities for marijuana are likely outside the country. But there's a problem: While more than two dozen U.S. states have moved to legalize pot in some form, cannabis is still illegal in the United States under federal law.
That legal ambiguity has made it difficult for U.S. growers to raise money to expand their businesses, opening the door for better-capitalized Canadian firms to step in. But by seizing those opportunities, those Canadian companies are taking a legal gamble and raising questions about whether they should qualify for a listing on Canadian stock exchanges.
Cannabis executives interviewed by The Globe and Mail, including Mr. Neufeld, all say they've been transparent in their financial disclosures and have followed stock exchange rules and guidelines on U.S. investments – as they say those rules were communicated in private meetings with TSX staff.
But there still appears to be inconsistency and confusion about those rules.
Brett Zettl, the CEO of Saskatoon's CanniMed Therapeutics Inc., said Aphria's Florida deal prompted his company to make a call to stock-exchange operator TMX Group Inc., which owns both the TSX and more junior TSX Venture Exchange. CanniMed was mulling a push of its own into the U.S. and asked whether Aphria's deal meant TSX issuers could now enter certain U.S. states.
"We weren't sure if there was a change in rules, given that they let the Aphria deal go through," he said. "If the rules have changed, we want to know."
He said the exchange advised his company that nothing had changed and that a forthcoming policy announcement would make the rules on U.S. investments clear. But that was months ago. "We can't wait forever for the TSX to decide what their policy is going to be," Mr. Zettl added.
Participants were taken aback this month when TMX CEO Lou Eccleston said there would be no new policy coming for cannabis listings. The existing rules of the two stock exchanges, which disallow any listed issuer from participating in illegal activity, are clear enough, he said.
But many pot executives say they're still in the dark about what's acceptable, and many issuers are halting or rethinking plans for expansion south of the border as a result.
Ungad Chadda, president of capital formation for TMX's equity markets business, said the exchanges make evaluations on listed companies "on a case-by-case basis."
"Each application for listing on our exchanges is subject to a consistent review process, in accordance with our published policies and guidance," he said through a spokesperson. "Any risks identified through our review process may need to be addressed through items including audit opinions, legal opinions, third party sponsorship reports and technical reports."
Mr. Neufeld said his company has had numerous meetings with TSX staff in recent months. "We've never been told we were non-compliant," he said. "We've never had any dialogue on delisting. We've never been threatened."
The ink on the April news release for the Liberty deal was barely dry when his lawyers at Stikeman Elliot LLP phoned to tell him the exchange wanted to know more about his plans for the business.
That concern comes from the fog that surrounds U.S. marijuana laws.
Like heroin and ecstasy, pot is classified as a Schedule I drug by the U.S. federal government, meaning it can be abused and has no accepted medical use in treatment. The states keep their own lists for classifying drugs, and recently some have decided to legalize the medical or recreational use of cannabis within their borders.
Under the Obama administration, the Department of Justice issued guidelines for federal prosecutors in these states, instructing that federal resources should not be employed to prosecute people complying with existing state laws. It added that the federal government's priorities for enforcement include preventing violence, drug-impaired driving, the distribution to minors and revenue from fuelling criminal enterprises. This guidance was known as the Cole Memo.
But whether the Trump administration will follow the same policy is unclear. Attorney-General Jeff Sessions is a known skeptic when it comes to marijuana legalization and recently warned the governors of four states that he had "serious concerns" about their weed policies, according to the Los Angeles Times.
The U.S. Congress has passed bills that do not appropriate federal funds for prosecuting cannabis offences that comply with state law. However, if Congress decides at any time to put money aside to start doing this, the federal government can go after even the companies that have been abiding by state laws.
"The way the drums are being beat in the attorney-general's office is that they're going to start to lower the boom," Mr. Zettl said. "They're giving lots of indication that the sheriff is back in town."
Neither U.S. federal law nor TMX's listing rules are new. And yet there are at least two issuers that produce pot in the U.S. with shares listed on the Toronto Stock Exchange or the TSX Venture Exchange – and potentially more exposed through other arrangements such as licensing deals. And at least 11 cannabis companies with U.S. investments are listed on the lesser-known Canadian Stock Exchange, an upstart that lists mostly small public companies.
Cannabis producer the Canadian Bioceutical Corp. is one of them.
Years ago, when the company was still listed on the TSXV, CEO Scott Boyes said, the exchange said it could participate in U.S. medical-marijuana activities because they were already legal in Canada. Since Mr. Boyes wanted to also serve the U.S. recreational market, he moved Canadian Bioceutical shares over to the CSE in January.
"Thank goodness that the CSE has been there as an option," he said. "They give you straight answers and were very quickly to come out and enunciate their policy."
The CSE has been welcoming to pot issuers as long as they are eligible and inform investors of the legal risks associated with their U.S. businesses. Almost 50 of the issuers listed on the market are in the cannabis industry, but these stocks account for 52 per cent of all trading on the CSE.
Still, for Canadian public companies that want to attract institutional investors, there is no substitute for a listing on the big board – the Toronto Stock Exchange.
Last year, when Aphria acquired a stake in Copperstate Farms LLC, a licensed grower and seller of medical pot in Arizona, approval came quickly from the TSX Venture Exchange. "Everything was disclosed," Mr. Neufeld said. "You would assume silence is golden."
So golden that in March Aphria's stock moved from the TSXV to the TSX, and in April the company's executives celebrated by ringing the ceremonial opening bell at TMX's headquarters in Toronto.
That was around the same time Aphria announced its Florida deal, which the company describes as just the start – Liberty, which is listed on the CSE, is already looking at other states where cannabis is approved for medical use, such as Ohio.
Next, Aphria raised funds through debt and equity financings. In April, the company borrowed $25-million from Windsor, Ont.-based WFCU Credit Union, and in May it raised more than $75-million in a share sale. Aphria earmarked roughly 40 per cent of the proceeds for strategic investments, including U.S. expansion.
But as it was touting these moves in regulatory filings and news releases, some of its competitors in Canada's nascent cannabis sector were fuming.
One of them was Bruce Linton, the CEO of Smiths Falls, Ont.-based Canopy Growth Corp., the country's largest licensed cannabis producer by market capitalization ($1.5-billion). He started asking questions after reading the legal risks Aphria outlined for its U.S. operations in the prospectus for its $75-million equity raise.
In filings, Aphria says that while the Copperstate and Liberty assets are violating federal law in the United States, "the risk of federal prosecution and enforcement is currently unlikely." But it also can't assure investors that the federal government would never take up any cases against the business or its people.
If the company is found to have breached federal laws, Aphria cautions it could face civil proceedings brought by either the federal government or private citizens – or even criminal charges. The consequences could be large fines, penalties or settlements or the possibility of "disgorgement of profits, cessation of business activities or divestiture."
Mr. Linton said he contacted staff at the TSX and the Ontario Securities Commission, arguing that just because a firm discloses to investors that it might be breaking federal law doesn't mean such actions should be permitted.
"How can you use disclosure of an intent to break a law that appears unlikely to be enforced as the basis for being allowed to do it?" he said. "Is there no boundary to that? What laws does disclosure allow you to break?"
He said he's making an issue of this because it affects Canopy – even though the company doesn't have plans to enter the U.S. market any time soon. In his pursuit to attract a group of larger, more stable investors, he said the big U.S. asset managers he's talking to are avoiding the sector altogether because they worry about inadvertently investing in a firm with some exposure to the U.S., putting the fund at risk legally.
Aphria's trouble-free, quick ascension to the TSX also bears no resemblance to the experience of Aurora Cannabis Inc., which is based in Alberta and also has stakes in medical weed companies in Germany and Australia. It took months for Aurora to get approved to graduate its stock listing from the TSXV to the TSX in late July. CEO Terry Booth said the TSX put his company through the wringer.
During the process, which began in the spring, Mr. Booth said Aurora was asked to submit opinion letters from lawyers in Germany and Australia, confirming that their investments in those countries were in line with those countries' laws. At that time, Aurora was exploring an opportunity with a company that does some work in the United States, but had to put those talks on ice.
"It seemed like when we were going through it, it was off the cuff," he said, referring to the vetting by the TSX. "It would increase daily. It's frustrating. Just tell us what the rules are."
He added that Aurora has a condition on its stock listing: If the company engages in any activity outside Canada's medical framework, it must file a legal opinion from a lawyer in that country saying the company is not engaging in an illegal activity, then seek the TSX's approval before any deal can close.
Meanwhile, U.S. cannabis firms "have asked for an opinion that this company is fully in compliance with U.S. law," said Charles Alovisetti, a lawyer at law firm Vicente Sederberg LLC in Denver, Colo. "You just can't write that opinion."
Aurora also owns a stake in Radient Technologies Inc. of Edmonton, which develops technology for extracting compounds and whose stock is listed on the TSXV.
Mike Cabigon, Radient's chief operating officer, says he needs more clarity from TMX around the type of exposure to the U.S. market that is considered unacceptable. He said he was told by TMX that an issuer would be offside if it generates revenue from the U.S. pot business.
Mr. Closner of MedReleaf said he's heard a similar definition.
"The distinction was made to us that if it's a tiny, tiny, tiny fraction of the company's revenue, then we might be able to look past it," he said. "But if it's anything more than that, then the answer is no."
If it's a blanket ban, that's "way too broad" for Mr. Cabigon.
"We're not exactly clear what exposure means, so we just decided to stay away from the U.S. altogether," he added. "We have turned away U.S. opportunities – to our own detriment. But we don't want to put our ownership with Aurora or our listing at risk."
Marc Lustig is the CEO of CannaRoyalty Corp., based in Ottawa. The company has investments in the Canadian and U.S. cannabis sector through royalty agreements, equity interests, secured convertible debt and licensing agreements.
Its shares are listed on the CSE. Since mid-2016, Mr. Lustig has been talking to the TSX about what it would take to get CannaRoyalty's stock on there. He was hopeful after TSX staff told him the company was "going to be in a very good place to be listed" after it filed its year-end audited financials. But that posture changed this year around the time Mr. Sessions made his feelings about the drug known.
"I'd like to know the list of what constitutes U.S. exposure or not," Mr. Lustig said. "The line has never been drawn."
He said he has e-mailed the TSX asking how Aphria's investments are different than CannaRoyalty's holdings. "The response was: 'Good question, we'll get back to you.' I don't think I've heard back from them since."
Mr. Neufeld remains undaunted by the uncertainty plaguing his competitors.
Liberty is pushing ahead with its plans to enter the medical market in Ohio.
"We are marching forward," Mr. Neufeld said. "We can't stop and hold commerce at bay. Others are going to beat us. That's not what a good CEO does."
In Canada, stocks are listed on one exchange, but can trade on any electronic marketplace that offers equity trading. All participants then meet at the Canadian Depository for Securities Ltd. (CDS), the only clearinghouse in Canada for equities.
CDS is the plumbing behind the country's capital markets. Its job is to ensure that when an investor makes a trade, the cash and securities end up in the right hands.
CDS is owned by TMX Group Inc. But it handles trades not just from the Toronto Stock Exchange and the TSX Venture Exchange but from competing exchanges. This includes the small-cap cannabis stocks with U.S. assets that are listed on the Canadian Securities Exchange (CSE).
The Globe first reported in August that CDS was considering a move that would disqualify these stocks from the platform, disrupting the trading in these companies. In mid-August, TMX said in a press release that is discussing the CDS issue with Canadian securities regulators. It added that "this is a complex matter" that "requires close examination and careful consideration."
A move by CDS to stop clearing certain marijuana stocks would be drastic and likely take months to review. It would first have to be approved by CDS's board, which, because CDS is a utility, has directors from across the Canadian capital markets. Material changes to CDS's rules have to be approved by securities regulators in Ontario, British Columbia and Quebec, which would consider whether the proposed amendment is contrary to public interest. This process would include public comment.