After the introduction of the Marihuana for Medical Purposes Regulations (MMPR), there has been a significant increase in investment in businesses looking to build and/or expand their operations into the cultivation, production, and sale of marijuana for medical purposes. The success of these businesses has been heavily dependent on their ability to successfully complete the Health Canada licencing requirements. The requirements are rigorous and difficult to complete. Since the beginning of the MMPR regulatory regime, there have been over 2500 applications but only 26 licences have been issued. This means that the majority of these businesses listed on the Canadian Securities Exchange (CSE) or the Toronto Stock Exchange (TSX-Venture) have not yet secured the requisite licences to begin operations in Canada. Without the requisite licences, these business are marketing their stock without the ability to create value for their shareholders.
Marijuana is a controlled substance under Schedule II of the Controlled Drugs and Substance Act, the distribution and/or possession of which have criminal liabilities. The previous Conservative government did not endorse the use of marijuana, but the courts mandated reasonable access to legal sources of marijuana when authorized by a healthcare practitioner. To meet this court requirement, the Marihuana for Medical Purposes Regulations (MMPR) was brought into force on June 2013. The MMPR created a regulatory environment for the commercial sale and distribution of marijuana for medical purposes. Under the new regulations, a business must secure separate licences for the production of dried marijuana, the production of fresh marijuana oils, and the distribution of marijuana for medical purposes. All applicants under the MMPR go through a rigorous review:
The process generally requires over a year to complete and licences are only issued after it is determined that:
The tests to demonstrate sufficient building, production, and physical security are the most rigorous and costly to pass. The requisite capital expenditures to create a facility that meets the MMPR requirements can be in the millions of dollars.
Once a business receives a licence and begins production, the government of Canada will report annual production and consumption figures and inventories to the International Narcotics Control Board. The business will be subject to regular inspections to verify ongoing compliance with MMPR regulations. If the business fails to correct any issues discovered during an inspection within a reasonable time, the licence will be revoked and the business will have to shut down operations or be in violation of the Controlled Drugs and Substances Act.
Although the new Liberal government campaigned on a platform of marijuana legalization for recreational purposes, there have been no official announcements on when and how the government plans to implement any changes. Because of this, it is impossible to predict how the Canadian legal framework will evolve over the next few years.
US Investment in Canada
After the MMPR was implemented a significant influx of US investors came into the Canadian market. Interviews of US Drug Enforcement Agency (DEA) personnel conducted by Reuters suggest, because marijuana is still illegal at the federal level, US investors investing in Canadian medical marijuana companies may be violating the US Controlled Substances Act. Further, the use of a banking system to transfer the proceeds of such investments could be construed as money laundering under the US Bank Secrecy Act. DEA personnel have stated that they are already starting to track such cross border investments. However, according to this report, no US investors have been prosecuted thus far.
Large institutional investors have avoided investing in the Canadian medical marijuana market because of the relatively small size of the market and its legal uncertainty. This has opened a space for smaller players to take a major role in investing in the Canadian market. The same Reuters report suggests that some investors like Privateer Holdings, a major US player in the marijuana industry, have opened subsidiaries in Canada to indirectly invest in the medical marijuana industry. Other investors have moved to invest directly in the Canadian market. For example, OrganiGram, a medical marijuana producer listed on the TSX-Venture, has 30% of its shares held by US investors. Toronto-based PharmaCan, an institutional investor in the industry, raised 35% of its capital outside of Canada.
Invest with Caution
The Canadian Securities Administrators and the US Security and Exchange Commission Office of Investor Education have published investor alerts urging caution to all investors looking to invest in companies announcing plans to expand or open operations in the Canadian medical marijuana sector. According to both organizations, many of the companies who have announced their entrance into the Canadian medical marijuana market have done so before securing the necessary licenses from Health Canada. This means that many of the companies currently listed are trading their shares at an inflated price without having a licence to generate value for its shareholders. Thus, any investment in currently listed companies must be done with caution. All potential investors are urged to preform rigorous due diligence before committing any funds.
About these authors: Claudius du Plooy has over ten years of experience in matters of business law, securities law, commercial real estate development, entertainment law and international trade law. Jovan Kljajic is a student at Du Plooy Law with an interest in entertainment, business, and intellectual property law.