Last week, I came across an article surveying the 50 (!) psychedelics companies that are now publicly traded on U.S. exchanges— a handful of which we are proud to call our clients. Of these, 41 are listed on over the counter (OTC) markets, while the remaining nine outfits are traded on either the Nasdaq or the New York Stock Exchange (NYSE). Cannabis, of course, has many, many more public companies. Some of these companies are tiny, with market caps of a few hundred thousand dollars; others are relative giants, with market caps into the billions.
Some of the companies referenced in the articles linked above are cross-listed. Cross-listing occurs when a company is able to meet the requirements of two or more exchanges, and lists its securities on each of them. For instance, a company based in Canada that lists on the Canadian Stock Exchange (CSE) may choose to cross-list on a U.S. OTC exchange, or maybe even a European or Asian market. Companies cross-list because selling on multiple exchanges increases the number of investors exposed to the stock, promoting liquidity and increased share prices.
Both cannabis and most psychedelics — especially the classic psychedelic drugs — are Schedule I controlled substances under U.S. federal law. This means that the senior U.S. exchanges (the NYSE and the Nasdaq) won’t list any company “trafficking” in those substances. The prohibition exists even though the chances of federal enforcement are vanishingly remote (at least on the cannabis side), and even if the company faithfully complies with state and local laws. An exception exists with the decentralized OTC markets, but many businesses don’t want to be there and for good reason. As a result, you see U.S. psychedelics and cannabis companies headed up to Canada to list their shares. But you also see cannabis and psychedelics companies listed on the Nasdaq and the NYSE. Why is that?
The reason is that most senior exchanges worldwide hold that if a business is lawful in all of its markets of operation (and meets various other criteria), the exchange will issue a ticker symbol. That’s why you see Canadian cannabis companies like Canopy Growth and Tilray listed on the Nasdaq– doing strange things like acquiring options (and only options) on U.S. cannabis companies to boot. These companies’ operations in Canada are lawful, but they would only be allowed to acquire U.S. cannabis outfits and maintain their U.S. senior listings once our federal laws change. The other way to do it, of course, is to stay in the R&D lane. Compass Pathways, a psilocybin pharma company we’ve written about for years, is based in England but lists on the Nasdaq. Compass can do this because its sole U.S. activity has been FDA-approved research and patent acquisition.
You might say: “Wait, if a business has to be lawful in all of its markets to be listed on an exchange, how are all of these U.S. cannabis companies listed in Canada?” The answer is that these companies are listing on junior exchanges which have relatively lax requirements. We have helped quite a few U.S. cannabis companies roll up into the Canadian Stock Exchange (CSE), for example, but none of these companies are eligible for the Toronto Stock Exchange (TSX) or the NEO Exchange. U.S. hemp business are another story. After the 2018 Farm Bill passed, the TSX made clear it was open to hemp company businesses. This is because those businesses complied with U.S. federal law.
It’s worth noting, too, that many companies cannabis businesses directly rely upon have full access to senior U.S. and Canadian exchanges. For example, Scott Miracle-Gro trades on the NYSE, even though its wholly owned subsidiary, Hawthorne Gardening Company, focuses on the cannabis production market. Another NYSE outfit, Innovative Industrial Properties, is a REIT focused solely on cannabis. Beyond that, you have a myriad of companies (basically, the whole economy) another half-step out from the plant. It starts to get nonsensical. From a tax policy perspective, it also seems foolish to push so many domestic U.S. companies offshore. Once U.S. federal law changes, those companies may never repatriate their assets or earnings.
Where we are going with all of this is pretty clear. Cannabis and psychedelics companies will continue to go wherever they can to raise money at scale. In the public markets context, this means that any U.S. company that is a “trafficker” and not a research outfit will tend toward the U.S. OTC or Canadian exchanges. A few of the big Canadian outfits will continue to list down here, but operate only in Canada or wherever they can ship. I expect that by this time next year, we will see another 50 psychedelics companies publicly listed, countless additional cannabis companies, and still more cannabis companies moving over to the psychedelics space.
Vince Sliwoski is an attorney at Harris Bricken, a law firm with lawyers in Seattle, Portland, Los Angeles, San Francisco, Barcelona, and Beijing. This article was originally published on the Canna Law Blog and has been reposted with permission.