On 18 September 2020, the Financial Conduct Authority (FCA), the securities regulatory authority in the United Kingdom, released long-awaited guidance for cannabis companies considering a listing in the United Kingdom on a regulated market, such as the Main Market of the London Stock Exchange. Whilst preliminary in nature and subject to further consultation, the guidance is welcome news for UK investors and suggests increasing openness by UK regulators to the medicinal cannabis sector.
Since the reclassification in 2018 of cannabis under the Misuse of Drugs (Amendments) (Cannabis and Licence Fees) (England, Wales and Scotland) Regulations 2018, cannabis can be prescribed by specialised medical professionals based in the United Kingdom in certain circumstances. However, the recreational use of cannabis remains illegal in the United Kingdom.
Notwithstanding that cannabis for medicinal purposes was decriminalised in 2018, companies engaged in medicinal cannabis activities (or which have exposure to proceeds therefrom) which have sought a listing in the UK have encountered many inquiries from the FCA in relation to the UK Proceeds of Crime Act 2002 (PoCA) (discussed in more detail below).
The FCA Approach
In the recent guidance, the FCA sets out the circumstances in which it would admit a cannabis-related company for listing on the Main Market of the London Stock Exchange in the United Kingdom. The guidance does not apply to companies seeking to list on Alternative Investment Market (AIM) but it is expected that a similar approach will be adopted by AIM.
The FCA has categorised cannabis companies into three categories: UK-based medicinal cannabis companies; overseas licenced medicinal cannabis companies; and recreational cannabis companies.
UK-Based Medicinal Cannabis Companies:
Provided that appropriate licences are obtained from the Home Office, purely medicinal cannabis and cannabis oil companies based in the United Kingdom can be listed by the FCA. The FCA guidance does not specifically address companies with cannabis-related activity in the wellness sector and, as such, further engagement with the FCA by companies engaged in such activities seeking such a listing would be required.
Overseas Licenced Medicinal Cannabis Companies:
The FCA has indicated that non-UK companies in the medicinal cannabis industry will, in order to obtain approval for a listing (and assuming all other listing requirements are met), need to satisfy the FCA that the activities of such companies “would be legal if carried out in the UK”. For such companies, the FCA has indicated that it will need to understand the legal basis of the company’s activities, including the local licensing regime. It remains an open question whether a legal opinion (in both the local jurisdiction and the UK), directors’ certificates, or another form of comfort will satisfy FCA requirements.
Some Caution Required:
Based on our experience with a variety of foreign cannabis companies considering participation in the UK capital markets, there remains considerable uncertainty as to whether or not a given applicant to a UK securities exchange would be able to satisfy the FCA that its conduct would be legal if carried out in the UK. A variety of legal views exist as to what this means. For example:
- Does it mean that the cannabis business must merely be one involving the supply of cannabis products for medicinal purposes?; or
- Does it require the relevant cannabis business to be supplying products that are subject to an active licencing regime in the UK (with licencing virtually assured on proper application by a company with the applicant’s relevant credentials)?
Unfortunately, until the FCA clarifies these questions some caution is required.
Recreational Cannabis Companies:
Not surprisingly, the FCA confirmed that it will not list the securities of a recreational cannabis company, irrespective of where it is located (including in countries where recreational cannabis is legalised), on the basis that the proceeds from such activities are proceeds of crime under PoCA. We would expect that companies engaged in both medicinal and recreational activities would need to ensure that there was no commingling of funds derived from recreational activities in order for the medicinal side to be listed.
There will be a further consultation by the FCA. While the details have yet to be ironed out, especially in relation to overseas medicinal cannabis companies, licenced medicinal cannabis companies in the United Kingdom considering a listing on the Main Market now have the green light to proceed. Any company looking to list in the UK will continue to need to meet all other listing requirements.
Investor Considerations Under PoCA
PoCA, amongst other things, deems the receipt of financial proceeds from “criminal conduct” a money laundering offence in the United Kingdom, where such conduct, even if legal in the jurisdiction where such conduct occurs, constitutes an offence in the United Kingdom, subject to certain limited exceptions.
Consequently, as the appetite of UK buyers for investments in recreational and medicinal cannabis companies listed in Canada and elsewhere has increased over the past several years, the purchase and holding of such investments, as well as any profits resulting therefrom (for example, acquiring or transferring proceeds from a sale or dividends into or through the UK), has required that investors consider whether such actions could breach PoCA.
In order to mitigate such risks, some investors in recreational cannabis companies (and occasionally medicinal cannabis companies), as well as their advisors, have made disclosures to the National Crime Agency (NCA) by filing a suspicious activity report and, where they have not subsequently received a negative response from the NCA, proceeded with such investments.
How We Can Help
We recommend that a comprehensive legal review be undertaken to ensure compliance with anti-money laundering legislation. Fasken has extensive experience advising cannabis companies conducting business in Canada, as well as assisting companies to list in Canada and the UK.