The TSX Venture Exchange (TSXV) appears to be easing its opposition toward Canadian cannabis companies buying U.S. marijuana businesses.
The move would mark a major shift for the Canadian exchange and could open the door to more cross-border acquisitions – provided the deals meet strict conditions.
The apparent change in stance comes after a Canadian cannabis company listed on the TSXV purchased a U.S. cannabis vaporizer company over the summer: Rare Industries, which does business as Quill.
Toronto-based 48North’s acquisition in August of Quill for 2.1 million Canadian dollars ($1.7 million) in cash and stock – plus another CA$3.15 million conditional on Quill’s meeting financial targets – represents a milestone for the industry, experts say.
It could serve as a blueprint for other Canadian cannabis companies seeking to enter the huge U.S. market without running afoul of the TSXV’s rules.
“This is a big win for 48North, and it’s a big win for TSXV-listed cannabis companies in general, because it signals that if you’re involved in the business that Quill is involved in, you should likely not be subject to delisting. And in the proper circumstances with all the relevant facts, the TSXV will consider allowing you to acquire such a business and expand into the U.S. marketplace,” said Andrew J. Wilder, chairman of the cannabis group at the Torkin Manes law firm in Toronto.
Kevin Helfand, 48North’s chief operating officer, said it signals a “shift.”
“It is a groundbreaking deal.”
A TSXV spokesperson said the exchange doesn’t comment on the companies trading on its platform.
What’s not allowed
In October 2017, the TSXV issued a guidance stating exactly how issuers with business activities violating U.S. federal law regarding cannabis were not in compliance with its rules.
The bulletin enumerates four scenarios that are off limits for its issuers.
Those situations are listed “in order of concern” as:
- Direct or indirect ownership of, or investment in, U.S. companies involved in cultivation, distribution or possession of marijuana.
- Commercial interests or arrangements with such companies.
- A provider of services or products specifically designed for, or targeted at, such companies.
- Commercial interests or arrangements with companies engaging in ancillary services activities.
After the bulletin was issued, the risk of delisting prompted some firms on the TSX and TSXV – including Aphria – to sell or spin off U.S. assets because they were in violation of one of the bulletin’s four points.
Others – such as Aurora Cannabis subsidiary Australis Capital – list on the Canadian Securities Exchange (CSE), which allows issuers to participate in the U.S. marijuana industry provided they meet risk disclosure requirements.
In Quill’s case, part of its business involves selling vape delivery hardware to licensed marijuana processors to fill with cannabis extracts, including THC. (The company also is expanding into hemp-derived CBD vaporizers.)
Even though Quill does not touch the marijuana plant, the company would be tripped up by No. 4 of the bulletin, which theoretically bans “ancillary services activities” for plant-touching cannabis companies.
So how did 48North win TSXV approval to buy Quill?
How 48North did it
Helfand highlighted four words in the bulletin as important: “in order of concern.”
“And that’s where we started,” he said. “So one and two (of the bulletin) are out for us. We have no direct ownership in a U.S. plant-touching business. But we said, ‘What’s in order of concern’? Three and four are definitely lower on the list, so they’ll have lesser concern,” Helfand said of the ancillary provisions.
That is where the company started the conversation with the TSX Venture Exchange.
Helfand said this particular discussion involving the TSXV and Quill lasted between three and six months.
Quill distributes its vape products in Oregon and Washington state and is expected to expand into California and Nevada, according to a release outlining the 48North acquisition. The company is not engaged in the cultivation, distribution or possession of cannabis in the United States.
“Quill, at its focus, is not a plant-touching business in the United States, and that’s the distinction we had to make with the (TSXV) and work through the (TSXV) rules, because we’re still offside them, but now to a lesser extent,” he said.
The question 48North posed to the TSXV was simple: What amount of ancillary services activities are acceptable, if any?
“I think we had a discussion with them that they’d never had: Is there a de minimis amount that the TSXV would be comfortable with? And if so, would you be comfortable stating that out loud?”
Revenue a key indicator
The regulator told 48North that the measure was determined, in part, by revenue on an overall organizational basis.
That means the issue became the ratio of revenue from the ancillary services compared with the revenue generated from federally legal activities – both current and projected – in the United States and in Canada.
48North said it had to do a “very deep dive” with the TSXV about the company’s business plan and where its revenue is going to come from in the future, as well as Quill’s business plan, and where its revenue is likely to come from in the future.
According to the news release outlining the 48North purchase, Quill is launching a hemp-based CBD vaporizer pen.
The basic idea is that Quill’s CBD business – which is federally legal thanks to the 2018 Farm Bill – is expected to grow at a much faster rate than any revenue it gets from ancillary services activities for THC.
“It became important to this discussion for the TSXV. Yes, (Quill) has a business where they are selling pens that are being filled with THC. And yes, that business is still growing, but as long as it’s growing at a smaller pace than the rest of the business, then they’re all very happy,” he said.
Shortly after the Quill acquisition was announced, 48North secured 1 billion milligrams of CBD oil from Iverson Family Farms in Oregon via an industrial hemp production contract.
“The overall focus for Quill is this CBD vape, and that’s where the bulk of the revenue will be coming as they move forward, and in relation, percentagewise, to the revenue we do in Canada,” Alison Gordon, 48North’s CEO, said in an interview.
That Canadian revenue is expected to outpace the growth of the ancillary services in the United States was another important consideration, said Helfand.
“And that’s what got them comfortable.”
Besides the revenue ratio and plant-touching factors, a lot of the discussion with the TSXV involved how Quill looked to the public.
“All of those things together were very important,” COO Helfand said. “A lot of their concerns were how things looked optically, even though they’re not plant touching.”
That involved updating public-facing documentation online.
“So there was a fair amount of due diligence on the part of the TSXV, and there was a tremendous amount of reaction from us to appease their concerns and make it clear to them what Quill was and was not.
He said being collaborative and willing to have the conversation is important in dealing with any regulator.
“The TSXV is no different. They have their own stakeholders that they have to answer to. Once you understand what makes them tick as a regulator, then you can have an honest conversation. There’s no subterfuge here, there’s no tricks,” he said.
Would this deal have been allowed 18 months ago?
“No, absolutely not,” Helfand said. “I don’t think they would have even contemplated it. I think they would’ve got a straight ‘no.’ Times are changing.”
“This entire business is an evolution, not a revolution. And the public markets aspects of the cannabis industry are no different. It’s baby steps.”
48North is traded on the TSXV as NRTH.
Matt Lamers can be reached at [email protected]
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