Investing in Canada

Legalization measure bolsters investor confidence

In more ways than geography, Canada is “higher” than the United States.

Since the 2015 election of Prime Minister Justin Trudeau, investors globally have had an eye on Canada. In April, the Liberal government introduced a measure to legalize cannabis; investor confidence is soaring; Canadian cannabis stocks continue to trade successfully in public markets; and the average private investment in Canada is reportedly tens of millions of dollars more than that in the United States.

Upon parliamentary and royal assent, Canada’s legalization measure, Bill C-45, will set the framework for regulations governing the production, distribution, sale and possession of cannabis throughout Canada. Currently licensed medical marijuana producers will be automatically licensed to continue their activities under the act. The Canadian government anticipates that legal sales of cannabis will begin mid-2018.

The act also contains a series of objectives, many of which echo the priorities of U.S. federal enforcement delineated in the 2013 Cole Memorandum and the criminal sentencing guidelines that formerly existed in the 2013 Holder Memorandum, which encouraged strict sentencing for only the most serious and high-level drug kingpins and traffickers (U.S. Attorney General Jeff Sessions rescinded the 2013 Holder Memorandum in May).

Above all, the act seeks to: (a) restrict youth access; (b) protect young people from promotion or enticements to use cannabis; (c) deter and reduce criminal activity by imposing serious criminal penalties upon those who violate the law, especially those who import, export or provide cannabis to youth; (d) protect public health through strict product safety and quality requirements; (e) reduce the burden on the criminal justice system; (f) provide for the legal production of cannabis to reduce criminal activities; (g) allow adults to possess and access regulated, quality-controlled legal cannabis; and (h) enhance public awareness with respect to health risks associated with cannabis.

The act legalizes dried and fresh flower, oil, seeds and plants. Edibles are expected to be legalized, but are prohibited for now, as the government grapples with regulations governing dosing, packaging, labeling and product warnings.

Cannabis businesses may also anticipate heavy regulations on advertising — more akin to tobacco regulation than alcohol. Branding will be kept to a minimum, to the chagrin of current licensed producers. Taxation remains an open question, as regulators seek to make legal cannabis more affordable than cannabis offered through the black market. Likewise, penalties for black market activity are steep: up to 14 years imprisonment for illegal distribution or sale, or production of cannabis beyond personal cultivation limits or with combustible solvents, and up to five years for possession over the limit.

Under the act, adults 18 and older may publicly possess and gift up to 30 grams of dried cannabis (or the equivalent in non-dried form); grow up to four plants per residence, anywhere on their properties, to a maximum height of 100 centimeters each; and make edible and other infused products at home, provided they follow safety standards. Provinces are empowered to alter these federal minimums and maximums, including enacting zoning regulations and measures to allow or restrict consumption in public places, such as cafes and bars. As long as local law is followed, there will be no barriers to transporting cannabis between provinces and territories.

Transportation across international boundaries remains prohibited. According to Michael Bergman, a Canadian cross-border transactional attorney, “Once in force, Canada’s cannabis legislation will radically change the environment for the horticulture, refining, sale, distribution and personal use of cannabis, no doubt challenging the checkerboard permissive cannabis use legislation in some of the states the United States.”

The concept of legal cannabis is not new in Canada. Medical cannabis is overseen by Health Canada, the country’s governmental public health department. Unlike the U.S., federal legality has allowed licensed medical cannabis producers to operate openly, without fear of civil asset forfeiture or governmental raid or arrest, conduct much-needed medical research, enjoy traditional banking relationships and taxation schematics, register federal trademarks and foster general stability. Existing licensed producers are scaling up in anticipation with far greater ease than cannabis businesses in the U.S.

For example, in April, the Toronto Stock Exchange welcomed the world’s first publicly traded cannabis fund, Horizons Medical Marijuana Life Sciences ETF (TSE: HMMJ). Its top stock, Aurora Cannabis (NASDAQOTH:ACBFF) is up 345% over a one-year period.

On May 9, Aphria recorded the country’s largest capital raise to date. The “low-cost” producer powered solely by sunlight in Ontario, Canada’s greenhouse capital, closed more than $86 million.

Then, in late May, MedReleaf shattered that number with a $100 million IPO with shares priced at $9.50 apiece, making it the second-largest publicly traded medical marijuana company behind Canopy Growth.

Of the top 10 licensed producers, seven enjoy a market cap greater than $100 million, including  Canopy Growth (TSE:WEED), the industry’s first unicorn, with a $1.2 billion valuation and a one-year return of 316%.

While significant economic barriers to entry exist, the reward is enticing: Conservative forecasts estimate that the value of the Canadian market will exceed $8 billion by 2024.

For those eager to invest or go public in a decidedly stable market, options abound in Canada.

 

Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a white-shoe boutique firm with a track record for success and handling sophisticated legal matters that include business and corporate law.

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