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Canadian regulators call for more transparent disclosure from cannabis companies

Just in time for Canada's legalization of marijuana, the Canadian Securities Administrators have asked cannabis companies to improve disclosure processes after a review of 70 companies revealed practices that would not properly inform investors.

In a notice issued Oct. 10, the Canadian Securities Administrators, or CSA, highlighted the lack of clear disclosures in 70 cannabis companies' financial reports. The report said that licensed cannabis producers often did not provide sufficient information for an investor to understand the company's financial performance. The notice said 100% of the producers reviewed needed to improve their fair value and fair value-related disclosures.

Other deficiencies included a lack of consistent compliance with securities requirements and not providing sufficient disclosure about risks related to U.S. operations. The CSA said the disclosure concerns spanned the whole industry, "with most or all [licensed producers] having the same or similar issues."

The notice comes just seven days before marijuana is legalized for recreational use in Canada. While the notice focuses on cannabis producers and issuers with U.S. operations, the CSA urged all issuers in the cannabis sector to heed the guidance.

Since the beginning of 2018, cannabis companies have generated significant chatter among competitors and investors alike as Canada neared legalization, and Canadian companies sought opportunities in the U.S. The largest Canadian cannabis companies, Canopy Growth Corp. and Tilray Inc., were included in the CSA's review. Canopy Growth recently made its first legal medical cannabis export to the U.S., the company said in an Oct. 9 press release.

Both Canopy and Tilray trade on U.S.-based stock exchanges in addition to the Toronto Stock Exchange. Aurora Cannabis Inc., another Canadian cannabis company that has generated buzz over its aggressive M&A strategy, is also looking to list on the New York Stock Exchange.

"The cannabis industry has benefited from increasingly permissive legal frameworks and has grown significantly as an emerging public market sector," the CSA report said. "[The] industry specific disclosure deficiencies ... are notable given the recent rapid growth."

However, since the review was conducted, CSA said 74% of the 70 companies have taken action to improve disclosures, with 17% refiling their most recent management discussion and analysis reports to correct more pervasive deficiencies. The notice said the CSA would continue to monitor disclosure practices, adding that "issuers who do not provide appropriate disclosure may be subject to additional regulatory action."