The Canadian markets remain the go-to option for cannabis-related companies that seeking to take their companies public.
Canada’s liberal stance on cannabis and recent legalization of marijuana has resulted in a flood of over 400 publicly traded cannabis companies on the Toronto Stock Exchange and the Canadian Securities Exchange, including multiple United States-based businesses.
American investors have found multiple challenges with investing and trading cannabis companies listed on the Canadian exchanges including finding US brokers that will trade Canadian listed companies and US broker-dealers that will except share deposit of these businesses. The recent passage of the Farm Bill in 2019 will likely provide a path to companies seeking to go public within the United States, initially companies that are specifically engaged in the cannabidiol (CBD) space that was not previously available. As the American public becomes more educated and common sense prevails with legislators the unnecessary complications of investing in cannabis-related companies on foreign exchange will be superseded with investors being able to invest in companies with US listings.
The move towards cannabis companies listing on US exchanges or listings appears to be inevitable; however today many companies are still opting to list in Canada which provides a continuous process to go through the listing process providing validity to cannabis-based businesses.
Generally, start-up companies that want to trade their stock publicly must pursue an initial public offering (IPO) or reverse takeovers or merger (RTO). Most startup companies take the RTO route, whereby the private start-up company merges into a publicly listed company that generally has no operations or viable business; the end result of this merger is effectively the private company’s common shares are publicly listed with its business moving forward. A private company that takes this option is typically seen as the less than ideal way to be listed. However, the overall perception seems to be changing for industry operators and investors.
RTOs are typically the fastest way for private companies to become a publicly traded company. As such, most cannabis companies seeking capital elect to enter into an RTO transaction; due to the ability to have their shares be listed and traded relatively quickly compared to an IPO.
In general, RTOs tend to not only provide private companies a quicker path to going public; an RTO can also provide a less expensive option. However, as more cannabis companies seek to go public these RTO transactions appear to have increased in costs to the private company operators.
On the other hand, Initial Public Offerings (IPOs) do not involve a business combination or a merger; the private company registers its shares with through the appropriate regulatory authority and qualifies for listing or quotation on the exchange or board. This is typically a more appealing structure and transaction to investors and investment bankers lending to more sophisticated investor participation overall.
IPOs can also be more expensive as they often must pay a commission fee ranging from 5%-7%
The TSX will not work with American companies because cannabis is federally illegal. As a matter of fact, many Canadian cannabis companies had to divest U.S investments so they could keep their place on the TSX. Therefore, you will see U.S. companies on the CSE.
On the other hand, the New York Stock Exchange will list Canadian cannabis companies as there are no Canadian laws being broken.
There are a few interesting quirks should an American company decide to list in Canada. For example, if a company files in Quebec, all documents must be translated into French.
Additional requirements include establishing an incorporated business in at least one Canadian Province. This is because your Canadian entity will need to attain status as a Private Issuer, so one does not have to report to the United States SEC.
Should the United States decide to federally legalize cannabis, bigger banks can work with U.S. companies and we would see more cannabis companies traded on the Nasdaq and the NYSE.
