Canada remains the land of opportunity for cannabis-related companies that want to list their stocks.
A new report titled "Going Public In Canada" from the MGO/Ello National Cannabis Alliance breaks down the pros and cons of cannabis companies going public in Canada. There are almost 400 publicly traded cannabis companies at this point and fewer than 20 traded on the major U.S. Exchanges. Almost all the companies are trading on either the Toronto Stock Exchange (TSX) or the Canadian Securities Exchange (CSE).
Many new retail investors find it challenging to trade American cannabis companies that are listed over the northern border. They are confused as to why the U.S. exchanges have opted not to list these companies and why the U.S. companies prefer Canada.
The main reason most of these companies head to Canada is banking. Because banks in Canada recognize cannabis companies as legitimate operations, it is much easier to go through the exchange listing process. Books are audited and financial transactions are seamless. Because cannabis is still illegal at the federal level in the United States, the big banks won't work with the industry and the major exchanges have chosen to follow their lead.
Banks are typically the way businesses gain capital to fund their operations, and without this option U.S. cannabis companies must look to the public markets to raise capital to expand operations, introduce product lines and make acquisitions.
The cannabis companies that want to begin trading either pursue initial public offerings (IPOs) or, increasingly, are turning to reverse takeovers (RTOs), which traditionally have been considered a less-desirable back-door way to become listed. However, the report from MGO/Ello said that mindset "is changing and is all but absent for cannabis industry operators and investors."
RTO pros and cons
RTOs are the faster option to the market, which is why many cannabis companies have chosen to purchase a shell company to speed their listing process. The transaction only needs to be approved by exchange authorities. The stock can begin trading as soon as the deal is announced, and the report noted that companies can complete raising capital in a private placement.
RTOs also are cheaper than IPOs. But while there is less regulatory oversight of RTOs, the competition for the "good" shell companies is increasing, according to the report. And because shell companies also bring the potential baggage of prior liabilities, a good shell can cost more.
Cannabis company owners also at times must give up a percentage of shares to the shell company owners, which isn't an issue in an IPO. This creates pressure on picking the right shell company.
IPO pros and cons
The report noted that IPOs offer listing companies a "fresh start." There is no shell company history to resolve or debts to pay. There is a longer regulatory review, but the review process can be of comfort to potential investors.
IPOs also tend to raise more capital. "IPOs are commonly considered high profile and may be more appropriate for larger capital raises," the report said.
However, IPOs can be more expensive, too, because companies must pay underwriters a commission, which can range from 5% to 7%.
As for the exchanges...
The Toronto Stock Exchange does not allow their companies to work with U.S. cannabis companies due to the illegality of cannabis at the federal level. When this decision was initially made, several Canadian cannabis companies were forced to divest their U.S. investments in order to remain on the exchange. The Canadian Securities Exchange has no problem with it at all, which is why so many U.S. companies are listed on the CSE.
The New York Stock Exchange (NYSE) lists many Canadian cannabis companies, but that is because they recognize that Canadian companies aren't breaking any laws in their home country. The Nasdaq lists biotech companies such as GW Pharmaceuticals (GWPH) and Insys Therapeutics Inc. (INSY) , but it also has rejected ancillary companies such as Massroots Inc. (MSRT) and has not rolled out the welcome mat for High Times Holdings, which has expressed an interest in listing there. Software company MJ Freeway, which is a seed-to-sale tracking company, has expressed an interest in listing on the Nasdaq, but that hasn't happened yet.
The OTC Markets Group lists many of the CSE cannabis companies, but the credibility isn't the same. The OTC lists large cannabis companies that aren't allowed on the NYSE or Nasdaq but that still file audited results on a regular basis. The problem is that the OTC also lists companies that don't regularly file financials. Some of the problem children are so bad that the OTC places a skull and crossbones on their company pages. By allowing those companies to list alongside the better ones, the OTC doesn't have the prestige of its competition.
Listing in Canada comes with its own unique characteristics. For example, the MGO/Ello report notes, "If you choose to file in Quebec, you would be required to translate essential documents into French." C'est fantastique!
But the requirements don't stop there.
"As a cannabis company based in the U.S., going public in Canada will require establishing a business entity incorporated in at least one Canadian province," the report states. "This is because your Canadian entity, which will be publicly traded and raising capital via those trades, will need to attain and maintain status as a Foreign Private Issuer so it does not have to register and report to the U.S. Securities and Exchange Commission."
If the company does an IPO, it will need to create a subsidiary or spinoff incorporated in Canada. The RTO already comes with the Canadian corporation.
If the United States at a federal level treats cannabis in a way that would allow bigger banks to begin working with cannabis companies, it is expected that many of the companies quickly would jump ship to the U.S. exchanges. The NYSE and Nasdaq would love to earn the listing fees they currently are missing out on and it would make life less complicated for the domestic companies to have everything in one country.
It would also make life easier for the investors who have trading accounts with the big online brokers that don't allow OTC or CSE stock trading. It has been rumored that the new Congress is considering such a move, but until it happens, U.S. cannabis companies are continuing to make the CSE home.