If someone told you they wanted to list their cannabis business on the stock market, you would be tempted to throw a joke back at them. That they were high on their own supply. That they’d had one too many puffs.
Turns out, it might not be the reefer talking though — it’s the regulator that’s giving them that confidence. Late on 2 July, the Financial Conduct Authority cut through the fog and made its position the clearest it has been to date on how it would respond to marijuana companies asking for permission to float.
The watchdog’s technical note is just four pages long but is essential reading weed stock fans and the wider City alike. Mostly, because while it confirms that while the door is still open a crack for cannabis IPOs, getting the green light from the FCA might not be as easy as some thought.
A couple of weed firms have already made London’s markets their own, following a boom in investor interest in countries like the USA and Canada, as the legislative environment around the world becomes more favourable to the sector.
However, the next person trying to get a weed listing over the line in the UK is going to have to clear a whole host of hurdles with the watchdog.
The situation as it stands in this country is as follows. Cannabis-based medicinal products were reclassified in 2018 after changes to UK narcotics regulations gave the green light for medicinal use.
However, it is still illegal to possess and supply recreational cannabis. The FCA confirms in the 2 July note that it will not admit the securities of a company with any recreational cannabis business to list, since anyone raising any funds from such a listing would be breaching the Proceeds of Crime Act 2002.
That is the case even if the proceeds were generated from a firm operating in a country where recreational weed was legal, and the activity may be criminal “even where the company possesses a licence issued by an overseas medicines or pharmaceuticals licensing authority.”
“We cannot assume a person who has been licensed in an overseas country would be carrying on lawful business in the UK as licensing regimes differ globally,” the FCA says.
If a medicinal cannabis or cannabidiol firm managed to show the FCA that it could steer clear of PoCA offences like money laundering and met the rest of the listing rules, they could be admitted to IPO though.
Much of that we knew already; the FCA had put out a brief notice to similar effect back in September last year. But what does a weed company need to do to convince the FCA that it would not fall foul of the PoCA? Up until now, we had had less clarity on that issue. Now, it is abundantly clear that the FCA isn’t just going to let anybody raise money on the City’s capital markets.
Firstly, the company is going to have to satisfy the FCA it is not in breach of the PoCA. Anyone with overseas cannabis activities will have to show their purpose is also lawful in the UK. The FCA will need to be given an understanding of the legal basis of the company’s overseas activities, for example the nature of the local licensing and the licences the company holds. All of that will require the company to produce a (probably expensive) legal opinion.
It doesn’t sound like the watchdog is after some tick-box exercise either. That legal opinion will have to be pretty extensive by the looks of things, covering everything from how the product is cultivated, manufactured and processed to how it is distributed and sold.
The firm looking to float will have to detail the purposes of each of those elements of the production chain, using the same vocabulary as in UK drugs legislation, as well review any controlled substances in the cannabidiols it uses.
The legal opinion will have to dive into exactly what the overseas jurisdiction’s licensing system is like, alongside a raft of other questions including:
- Is its scope limited to medicinal purposes and/or pure consumer CBD production or is it capable of being used for other activities?
- Does it seek to ensure that the cannabis product is kept secure?
- Does it ensure that only suitable persons are authorised to engage in cannabis-related activity so that criminal elements cannot exploit the position?
- Is there ongoing and effective monitoring so that licensed companies do not deviate from their obligations?
- Can licences be withdrawn in the event of abuse or non-compliance?
In case that wasn’t complete enough, the company will have to give a full breakdown of its track record. Is it a newbie, or does it have experienced heads at the helm? Are they up to the challenge of playing by licensing laws?
For other companies, the FCA will be asking for evidence that they already hold the appropriate Home Office licences, with some firms needing to satisfy the watchdog that the entirety of their operations, including their supply chain, are UK-based.
Some cannabis firms might face even tighter scrutiny.
“In exceptional cases, where we think there may be a high risk that admission of the applicant’s securities may be, for a reason relating to the applicant, detrimental to investors’ interests, we may ask for additional due diligence as part of the eligibility review,” the FCA’s note says.
“The scope and extent of the due diligence will be determined on a case by case basis, and we will consider the specific risks presented by the new applicant.”
Those lucky applicants could have to provide even more information about their licences and additional legal opinions.
“We advise these companies and their advisers to be pro-active and approach us with any questions about the legality of the company’s operations or areas of significant legal uncertainty as early as possible. In our experience, the absence of this early engagement has the effect of prolonging the eligibility review,” the FCA says.
The watchdog rounds off its note by urging any cannabis firms looking to list to seek their own legal advice to ensure they are compliant.
While the prize may be potentially great for one of the hottest investment trends around, it seems the battle for mainstream recognition is far from over yet.
To contact the author of this story with feedback or news, email Justin Cash