Sponsored Content provided by Lexaria Corp. (OTCQB: LXRP)
Cannabis investing in the United States is mostly done “over-the-counter.” Without a real selection of blue chip stocks, OTC investments can be a mixed bag, and investors have to do their research. The diligent investor may go the extra mile before purchasing stock, but OTC Markets lack the reliability and potential revenue of an exchange like Nasdaq or the New York Stock Exchange.
While investment in cannabis industries is limited in the U.S. by federal law, Canadian companies and investors do not face these same restrictions. Medical marijuana is federally legal in Canada, enabling marijuana-based companies to have a greater presence on Canadian stock exchanges, and work toward recreational legalization began on Nov. 13, 2015.
Similar to the U.S. stock market, the Canadian stock market is made up of multiple stock exchanges. The Toronto Stock Exchange (TSX), Toronto Venture Exchange (TSXV) and the Canadian Securities Exchange (CSE) are three of the major exchanges in Canada. Of the three, the TSXV and the CSE are designed for emerging companies, like those entering the developing cannabis industry.
Toronto Venture Exchange (TSXV)
Originally a 1999 amalgamation of the old Vancouver Stock Exchange and Alberta Stock Exchanges after they were combined to improve efficiencies, the Toronto Venture Exchange was formed, then purchased and renamed by the TMX Group—the same financial services company that owns the much larger TSX. Newer companies typically list initially on the TSXV and may eventually move to the TSX.
Like TSX, the TSXV uses two levels, Tier 1 and Tier 2, to organize its listings. Tier 1 listers face stricter listing requirements to prove that they qualify for TSXV’s premier status, but once listed a Tier 1 issuer has fewer filing requirements than a Tier 2 issuer. As Tier 1 is considered to be the best of the best, the majority of listings on TSXV are Tier 2.
Regardless of tier, prospective listers must be sponsored by a TSXV member firm and submit a prospectus. The prospectus serves as part of the application process and to provide future investors with information about the company. To be listed on the TSXV, companies should have a strong financial plan and potential for continued growth as well as the resources to carry out this plan for the next 12-18 months.
The process can take three to six months. Listing fees range from $7,500-$40,000, depending on the value of shares, and do not include other costs necessary to prepare for listing such as accounting fees, auditing fees and legal fees. All-in costs can reach $250,000 and even higher.
Some of the cannabis industry companies currently trading on the Toronto Venture Exchange are Mettrum (TSXV: MT); Canopy Growth Corporation (TSXV: CGC), formerly Tweed Marijuana; Aphria (TSXV: APH); PharmaCan (TSXV: MJN); OrganiGram (TSXV: OGI); and Emerald Health Therapeutics (TSXV: EMH). In addition to listing on TSXV, these companies are also among the few licensed by Health Canada to produce and sell marijuana and cannabis products.
Canadian Securities Exchange (CSE)
Formerly the Canadian National Stock Exchange, CSE is the newest stock exchange in Canada. CSE opened in 2003 and became recognized by the Ontario Securities Commission in 2004, making it well adapted to understanding new markets and new technologies, with roughly 300 companies listed today.
Listing on CSE is similar to listing on TSXV, but overall the costs are lower. While TSXV’s listing fees can vary, CSE currently charges a flat listing fee of $12,500. CSE is a smaller exchange, but one that’s rapidly growing. Companies that have been listed on another Canadian exchange need a minimum working capital of $50,000, but as this is half of the minimum requirements for TSX and TSXV, most companies will likely need a minimum capital of $100,000 to qualify.
Cannabis industry companies listed on the CSE include Lexaria (CSE: LXX), Wildflower (CSE: SUN), Aurora (CSE: ACB), and Supreme Pharma (CSE: SL). Since 2009, U.S.-based Lexaria has been one of the many international companies listed on the CSE.
For companies based in or with a presence in Canada, listing on a Canadian stock market is a way to find more investors and demonstrate value. Exchanges like TSXV and CSE are a way for newer companies, like many of those in the cannabis industry, to go public and build their brands. Both exchanges are also recognized by the federal government for registered retirement accounts. Canadian investors cannot invest into OTC companies with registered retirement accounts, by law. Both exchanges provide online resources to help prospective issuers choose a stock exchange and prepare for listing.
For investors, exchanges provide an additional sense of security as all listed businesses are subject to certain rules and restrictions to achieve and maintain their listing. While OTC stocks are not without their rewards, savvy investors should be open to Canadian stock exchanges as a way to broaden their portfolios.