CSA Staff Notice 51-357 “Staff Review of Reporting Issuers in the Cannabis Industry”

The Canadian Securities Administrators (the “CSA”) recently published a notice based on a review conducted by the securities regulatory authorities in Alberta, British Columbia, Ontario, and Québec. The CSA reviewed the disclosure of 70 reporting issuers operating in the cannabis industry.

The CSA’s results identified the following key areas where issuers are expected to improve their disclosure:

  • Licensed cannabis producers (“LPs”) often did not provide sufficient information in their financial statements and management’s discussion and analysis (“MD&A”) for an investor to understand their financial performance. International Financial Reporting Standards (“IFRS”) require issuers with agricultural activities, or biologic assets, to measure living plants at their fair value (in the context of growing cannabis plants intended for harvest, references to fair value are understood to represent fair value less costs to sell. Refer to International Accounting Standard 41 Agriculture);
  • All of the LPs reviewed needed to improve their fair value and fair value related disclosures. Almost three-quarters of the issuers did not separately disclose all fair value amounts included in the statement of profit and loss (the “P&L”). In these cases, fair value adjustments were often embedded in cost of goods sold. The CSA is of the view that it is critical for investors to be able to understand how much it costs a company to produce its product. Since fair value amounts in the P&L of an LP are not costs that have been incurred related to cannabis sold, it is important for all fair value amounts to be separately disclosed, so that investors can understand a company’s cost of sales excluding any fair value amounts;
  • Some issuers did not consistently comply with securities requirements for forward-looking information (including production estimates), guidance for providing balanced disclosure, and certain other requirements such as required disclosure about the use of non-GAAP financial measures; and
  • Almost three-quarters of the issuers with cannabis operations in the United States did not provide sufficient disclosure about the risks related to their US operations to satisfy the disclosure expectations set out in CSA Staff Notice 51-352 (Revised) Issuers with US Marijuana-Related Activities (the “US Disclosure Expectations Notice”). Deficiencies included:
      • inadequate descriptions of the issuer’s involvement in the US cannabis industry,
      • failure to identify that cannabis is illegal under US federal law,
      • failure to disclose that various regulatory bodies could impose restrictions on the issuer’s ability to operate in the US,
      • failure to discuss the issuer’s access to public and private capital, including which financing options are and are not available to support continuing operations,
      • failure to provide a quantification of the issuer’s balance sheet and operating statement exposure to US cannabis-related activities, and
      • as further described in the US Disclosure Expectations Notice, failure to make additional disclosures depending on whether an issuer has direct, indirect or ancillary involvement with US cannabis-related activities. For example, issuers with direct involvement are expected to provide a description of applicable regulatory frameworks, a discussion of internal procedures for monitoring compliance, and a statement confirming compliance, amongst other things.

Where deficient disclosure was identified during the CSA’s review, issuers either committed to prospective improvements or, when the deficiencies were pervasive, refiled certain documents.

Alexander Holburn Beaudin + Lang LLP’s Corporate Finance and Securities Group can work with LPs to assist them with their continuous disclosure obligations under relevant securities laws.

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