Brochstein: How Canadian cannabis producers skirted TSX and TSXV rules
In New Cannabis Ventures, Alan Brochstein explains how the major Canadian Licensed Producers have skirted the Toronto Stock Exchange (TSX) and Toronto Venture Stock Exchange (TSXV) rules that locked them out of the U.S. cannabis industry. Leading the charge was Aphria that fought the good fight but eventually was forced to begin to sell off its interest in U.S. based Liberty Health Sciences.
Brochstein also cites the case of CannTrust that moved from the Canadian Stock Exchange (CSE) to the TSX earlier in 2018. CannTrust had to assign intellectual property rights related to its patented single-serving cannabis-infused coffee pod. We would add that Namaste sold its U.S. assets to facilitate a TSXV listing.
Now it seems the lawyers have figured out how to comply with the TSX rules and still maintain interests in the U.S. One has to conclude the way it is done complies with the letter but not the spirit of the regulations. Here are some examples:
Aphria shifted its remaining 64.1 million shares of Liberty to Serruya Private Equity in return for a $59.1 million, 5-year promissory note bearing 12% interest. Aphria retained a call option on the shares so it can re-establish take back its equity in Liberty if cannabis is federally legalized or the TSX permits ownership.
CannTrust gave up royalties it would have earned in the U.S. for $1 but can repurchase the rights for $1 if cannabis is legalized federally in the U.S, if the TSX changes its rules, if the company delists from the TSX or if the company is acquired.
Canopy Growth as well as Canopy Rivers recently restructured their investments in CSE-listed TerrAscend that made the strategic decision to enter the U.S. Canopy Growth and Canopy Rivers swapped their equity stakes in TerrAscend for "exchangeable shares" that do not permit voting or dividends. If the rules for the TSX change or if cannabis is legalized federally in the U.S., then Canopy and Canopy Rivers can convert their securities into TerrAscend common shares.
Aurora Cannabis spun out shares in a new company, Australis Capital, and contributed two minor assets. Aurora received a 10-year warrant to purchase 20% of the company at $0.20 per share and another 10-year warrant to purchase 20% at a price based on the trading price in the future. Australis is independent of Aurora but effectively operates as the U.S. arm of Aurora. If the TSX rules change or cannabis becomes federally legalized in the U.S., Aurora will have a major stake in Australis by exercising their warrants.
Canopy Growth, Aurora and Aphria have come up with a way to participate in the land-grab for American cannabis assets while remaining compliant with the TSX.
I suppose the TSX will take the position that these corporate structures protect shareholders of their listed companies from running afoul of the U.S. government. But that argument doesn’t demonstrate much understanding of the workings of the financial markets. Investor valuation of these companies will include a factor for the value of U.S. operations and assets. In the event of a problem in the future, investors in the TSX listed companies will be hurt just as badly as if the companies had invested directly in the U.S. cannabis industry. In fact what is happening now may be even worse because it could create the illusion that TSX companies are not exposed to U.S. regulatory and legal risk when in fact they are.