On October 10, 2018, with a week remaining before cannabis becomes legalized, the Canadian Securities Administrators (CSA) issued CSA Staff Notice 51-357 Staff Review of Reporting Issuers in the Cannabis Industry (The Staff Notice).

CSA staff reviewed the disclosure of 70 reporting issuers in the cannabis industry, with the intent of highlighting good disclosure practices for these issuers so that investors may make informed investment decisions based on transparent information about financial performance, risks, and uncertainties. Of the 70 issuers, 21 were licensed cannabis producers (LPs), 23 had U.S. related cannabis activities, and 31 were classified as other cannabis-related issuers.

Key findings include:

  • 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;
  • While International Financial Reporting Standards (IFRS) require issuers to record growing cannabis plants at their fair value, CSA staff found that all of the LPs they surveyed needed to improve their fair value and fair value-related disclosures. Most specifically:
    • 100% of LPs had issues with their fair value measurement processes;
    • 71% of LPs had issues regarding the impact of fair value accounting on their financial statements;
    • 95% of LPs had issues regarding their accounting policies related to biological assets;
    • 52% expensed costs related to biological assets; and,
    • 38% of LPs had non-GAAP (Generally Accepted Accounting Principles) measures in place to deal with fair value.
  • Some issuers did not consistently comply with securities requirements for forward-looking information, guidance for providing balanced disclosure and certain other requirements; and,
  • CSA staff found that 74% of issuers with cannabis operations in the U.S. did not provide sufficient disclosure about the risks related to their U.S. operations to satisfy the disclosure expectations set out in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities.

CSA staff reported that where insufficient disclosure was found, the issuers in question either promised prospective improvements or in the more serious cases, refiled documents.

CSA Staff Notice 51-357  is available for download from the websites of the participating jurisdictions.

For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.

This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.