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09/19/2019
Q & A: An inside look at Canada’s public markets
CohnReznick interviews Barrington Miller for an inside look at Canada’s public markets
Due to limitations in accessing capital from U.S. banks and public markets, cannabis companies operating in the U.S. are increasingly listing on Canadian exchanges. In fact, U.S. cannabis companies raised about $2.2 billion U.S. dollars on the Canadian Securities Exchange (CSE) in 2018. To learn more about this option, Andrew Lines, MAI, and a valuation partner at CohnReznick, interviewed Barrington Miller, director of Client Listed Services at the exchange.
Drew: Why do companies list in Canada’s public markets?
Barrington: The most common reason is to access public capital, primarily for expansion purposes. Canada allows even nascent companies to apply for capital. The CSE recognizes cannabis operators as legitimate businesses and serves as a viable platform for accessing needed capital. We have a healthy ecosystem to provide capital for startups.
Drew: How are companies listing on the exchange?
Barrington: Most companies on our exchange do a reverse takeover (RTO), or reverse merger. U.S. companies usually don’t need to do an RTO, because they are somewhat mature and have an operating history. But, surprising to many, you don’t need to list on the exchange as an IPO. Most cannabis operating companies that have listed on the CSE have listed as RTOs.
Between an IPO or an RTO, opinion is divided as to which is better. An IPO is perceived to take longer and have higher fees, while an RTOmay be deemed as a fast track for distribution and shareholders. With an RTO, there also may be concerns about liabilities connected with companies that are merged, which might prolong the process and reduce shareholder value.
Drew: What are the operational metrics that the exchange requires before a business can list?
Barrington: You need a minimum of 150 shareholders and sufficient working capital to sustain your business for 12 – 18 months. This applies to pre-revenue companies. As a venture company (“small V”), you need up to one year of audited financial statements, be in good standing, and have a legitimate business. On your listing document, you should outline some of the political situations in the U.S., including the fact that cannabis is still federally illegal.
Drew: What have you observed in U.S. companies going through the process?
Barrington: Companies have split shares to defer tax consequences for the founders. If the majority of shareholders are non-U.S. residents, a company might be exempt from filing with the SEC.
Also, a U.S. company can expect to trade at a discount relative to Canadian companies, due to, for example, the legal risk of operating in a federal jurisdiction that doesn’t recognize the business. U.S. operators usually have real metrics when they come to market, because they tend to be more experienced and advanced than operators in other countries.
Drew: For companies to be successful in this process, what advice can you offer?
Barrington: Completing an audit takes more time than other steps, so hire your auditor first and make sure the accounting firm has cross-border experience and is a CPAB member.
Further, your shares should be eligible for the Depository Trust Company (DTC), one of the world's largest securities depositories. U.S. companies need their shares to be registered electronically so they can be traded on both sides of the border. If not registered, the shares will be difficult to buy and sell.
U.S. companies that go public in Canada get a Canadian trading symbol. These companies also need a U.S. trading symbol. We advise going to regulated board markets like the U.S. OTC for the U.S. trading symbol. That’s the easiest, fastest, and cheapest way.
It’s critical to meet Canadian security regulators’ disclosure expectations. We have our own criteria, so companies should read the Canadian Securities Administrators’ rules so that they comply.
Drew: There seems to be a decrease in the number of U.S. cannabis companies going public in Canada in the last nine months – would you agree? Is there a shift in the market? Is this perception a reality, and do you expect the trend to reverse?
Barrington: We aren’t necessarily seeing a decrease in the number of U.S. companies going public. There are roughly the same number that are exploring their options. The difference is that several U.S. MSOs (the already public ones) are in an acquiring mode and these companies feel this is their best alternative right now. All the big ones have bought or acquired other large companies.
The money that was being raised in 2018 was primarily from the U.S. MSOs in the going public process. We are seeing in 2019 secondary and tertiary raises by these same companies that are using those funds to acquire said operatives and to expand their own organic growth.
In addition, there has been a shift in geography as companies from the Caribbean, Europe, South America, and Africa are starting to either list or explore the go-public avenue.
Drew: What will happen when cannabis becomes federally legal in the U.S.?
Barrington: That is the million-dollar question. There will most likely be a shift of U.S. operators choosing to list on U.S. exchanges, but for the ones already here with Canadian shareholders and trading, we believe they will maintain their listing status.
Subject matter expertise
Andrew Lines
MAI, Principal, Valuation Advisory Services
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