Canadian pot stocks exposed to the U.S. market are tanking

Regulators are concerned about weed’s murky legal status down south
August 23, 2017, 1:26pm

Shares of three Canadian weed companies listed on two different stock exchanges have seen their values plunge over the last week. And they all have one thing in common — they’re heavily invested in the U.S. weed space.

The stock of CannaRoyalty, an Ottawa-based weed investor that has vast exposure to various American weed producers fell just over 15 percent this month, while Aphria Inc., saw its stock plunge almost 10 percent since the end of July.

iAnthus Capital Holdings Inc., one of the newest weed investors to be listed on a Canadian stock exchange also took a hit. The company, which claims it provides investors “diversified exposure to the best-in-class licensed cannabis cultivators, processors and dispensaries throughout the United States” saw its stock drop roughly 12 percent in the last two weeks.

Here’s the real reason for this stock mess:

Recently, the TMX Group which owns and operates all stock exchanges in Canada including the Toronto Stock Exchange, announced it would be “seeking guidance” from Canadian securities regulators about how to handle weed companies listed on Canadian stock exchanges that have significant investments in the U.S. where weed is illegal federally.

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Weed’s legal status in the U.S. is nothing new, but lately, there has been a surge of new Canadian weed companies — producers and investors — looking to take advantage of the pot boom in the States, a market 10 times the size of Canada’s.

The TMX Group has been largely averse to listing companies with large U.S. weed exposure on its various stock exchanges, but it does process all Canadian equity trades (the buying and selling of any stock) through its clearing house, the Canadian Depository for Securities Ltd. (CDS).

That essentially means that the TMX Group is unintentionally involved in a business that remains illegal in the U.S.

(Just to clarify, there is no such thing as a weed company that is publicly-listed on any American stock exchange. Americans looking to invest in the marijuana industry can do so by either buying stock of Canadian weed companies, or putting their money in a new exchange-traded-fund listed on the TSX, that pegs your money to a basket of major weed stocks).

The legalities surrounding whether or not TMX Group should stop processing the trades of weed companies with U.S. exposure remain ambiguous, but lawyers who work with some of the big licensed-producers told The Canadian Press recently that there’s an unwritten rule of sorts that “companies traded on the Toronto Stock Exchange or the TSX Venture Exchange are not permitted to have investments in the U.S. cannabis sector.”

All this to say there’s a whole lot of confusion that needs to be cleared up in the next little while, failing which, investors will continue to remain jittery about investing in weed stocks that have a high degree of American exposure.

“This is uncharted territory,” James Munro, a partner and co-chair of the cannabis practice group at McMillan LLP’s Vancouver office told Bloomberg News. “Ultimately, it will be the Ontario Securities Commission which will likely have to make a decision.”

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