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By James B. Francis, CFA
Director of Research, Publicly-Traded Securities, CRB Monitor

On September 18, 2020, the Financial Conduct Authority (FCA), the conduct regulator for nearly 60,000 financial services firms and financial markets in the UK, issued updated guidance to “cannabis-related companies interested in listing in the UK.” The guidance included offshore “medical cannabis” (THC, Hemp and CBD) companies seeking access to “The Official List.” Currently, and prior to this announcement, only UK-licensed medical cannabis companies have been considered for listing. In the words of the FCA, “While medicinal cannabis was legalized in the UK in 2018, investment in overseas-licensed medicinal cannabis businesses remains a legally complex area.”

While this update comes with a number of caveats and does not necessarily open the floodgates for the London Stock Exchange (LSE) to begin listing offshore medical CRBs, it is a step in the right direction for certain issuers who would like to list and for UK investors looking for access to more cannabis-related securities.

The new FCA guidance, in short

Before addressing “medical” Cannabis-Related Businesses (CRBs), the FCA first clarifies its position regarding “recreational” aka “adult use” CRBs (emphasis added by CRB Monitor):

The proceeds from recreational cannabis companies, even when they are located in those jurisdictions that have legalised it, are proceeds of crime under [the Proceeds of Crime Act 2002] PoCA. We would therefore not admit the securities of such a company to the Official List.

The FCA then clarifies its position regarding UK-based “medical” aka “medicinal” CRBs:

The legal position of purely UK-based medicinal cannabis companies and cannabis oil companies is clear. UK-based medicinal cannabis companies can be admitted to the Official List, if the company has the appropriate Home Office licences for their activities where they are required.

And, lastly, the FCA addresses overseas medical/medicinal CRBs:

Overseas-licensed medicinal cannabis companies and cannabis oil companies are in a different position. These companies may be admitted to the Official List, provided we are satisfied PoCA does not apply and they otherwise satisfy the criteria for listing. Before they are admitted, we will carry out a review of their case where they will need to satisfy us as to the PoCA risk.

For medicinal cannabis and cannabis oil companies with overseas activities, the company will need to satisfy us that their activities would be legal if carried out in the UK. We will also need to understand the legal basis of the company’s overseas activities, for example the nature of the local licensing and the licenses the company holds.

It is important to note that this update to the regulation is not final, given the following statement:

This is pending a guidance consultation which will follow in due course.

If approved, what will the new regulation allow?

If this regulation becomes effective, the FCA and UK exchanges (ie, the LSE) may consider those applications of offshore medical CRBs that pass a review process. The goal being to ensure compliance with regulators in the CRBs’ locality, including bearing relevant licenses. This process is designed to confirm that the CRB in question is doing business in medical cannabis only and that there is no evidence of an association in the recreational cannabis space.

This is easier said than done, however, because numerous CRBs have direct and indirect ownership linkages and business ventures to both medical and recreational CRBs. These details are often buried deep within cannabis-linked issuers’ filings. There may also be room for confusion related to “cannabis oil companies” due to the fact that, in the United States, there is only one duly-licensed, FDA-approved CBD manufacturer¹; although there are hundreds, if not thousands, of generally unlicensed and unregulated CBD producers and retailers. These include at least one publicly-traded CBD company that received a warning letter from the FDA.

Lastly, note that most, if not all, publicly-traded Canadian CRBs are generally recreational in nature, given that Canada legalized recreational cannabis in October 2018.

What is left out of the FCA Guidance?

This announcement from the FCA does not address the proposed treatment of non-plant touching “Tier 2” and/or “Tier 3” cannabis-related businesses, defined as those which derive some revenue from selling products and services (e.g., fertilizer, packaging, etc.) to Tier 1 CRBs – both medical and recreational. In other words, if a Tier 2 or Tier 3 CRB derives revenue from — or has ownership interested in — a recreational cannabis business, it might stand to reason that the FCA may not admit that issuer to the Official List either.

Which, if any, CRBs are currently listed on the London Stock Exchange?

Through its extensive, global research on publicly-traded cannabis-linked securities, CRB Monitor has identified five CRBs with a primary listing on the LSE. All five of these companies are what CRB Monitor risk-rates as “Tier 1B” CRBs, meaning that, although they themselves are not licensed, they own/control and/or have significant investments in licensed CRBs (nb, CRB Monitor risk-rates licensed CRBs as “Tier 1A”).

CRB Monitor identifies Tier 1B CRBs by scanning global securities filings, press releases and news, and then closely reviews the information to identify cannabis-related subsidiaries and operations to determine each issuer’s exposure to the cannabis industry (eg, medical vs recreational, USA vs Canada vs ROW, etc.).

A few observations:

• Typically reported industry “sectors” are unreliable for identifying CRBs, as demonstrated by the FTSE Sectors
• Only one issuer, Associated British Foods, has UK-cannabis exposure.
• Four issuers have NON-UK cannabis exposure through their subsidiaries, yet have been listed on the LSE for a period of time, suggesting that they were not assessed under these FCA cannabis guidelines or identified as being cannabis-related. The apparent common attribute is that these companies own or invest in “direct” licensed Tier 1As (or other Tier 1Bs) and are not licensed, plant-touching Tier 1As themselves. This apparent “swing-and-miss” may call into question the FCA’s and LSE’s ability to effectively look through public-traded companies’ financials to uncover their Tier 1 subsidiaries.
• One issuer, Imperial Brands PLC, has significant ownership of in a recreational, plant-touching CRB.²

What about the AIM?

Additionally, two companies that are recognized by CRB Monitor as 1B CRBs are currently listed on the AIM (Alternative Investment Market) Exchange, which is a subsidiary of the LSE. These two companies’ connection to cannabis would seem to pass the current FCA test and therefore would be appear to qualify for The Official List under the cannabis guidelines (even though they are already trading in the UK):

Implications for Investors and Traders

While there is no way for us to know if or when this regulatory change will take place, investors and traders should take comfort in the fact that regulations related to the cannabis industry are slowly becoming clearer and more investor-friendly. In the near future they might be able to soon find more Tier 1A/1B Cannabis-Linked Securities to buy and sell on UK exchanges.

According to CRB Monitor research, there are currently 189 Tier 1 “medical” and/or hemp Cannabis-Related issuers that would meet the FCA’s qualifications that are currently trading on other exchanges:

                          * Medical & Hemp Only

Indeed, if the FCA follows through with this guidance, then there is no apparent downside for investors, with the obvious winners being local institutions and individual investors in the UK. The expanded universe of potential Tier 1 CRBs for listing would be 189 securities. If we take out those that have primary listings on OTC Markets,⁴ the number of eligible, listed, Tier 1 CRBs would be 121. The prospect of over 100 newly-listed CRBs should be sufficient to satisfy investors at least for the short term.

Here are ten examples that might meet the FCA’s cannabis guidelines that are currently trading on other exchanges:

Summary

In a complex, evolving regulatory environment, the cannabis industry is viewed by finance professionals as both an obstacle and an opportunity; as a source of both investment risk and investment return.

Without the right tools and using standard industry classifications and regulatory guidance, it is a challenge for finance professionals to fully define or map the “cannabis ecosystem” and/or their exposure to it. This is because cannabis-related companies do not fit into any of the industry “buckets” that have been previously defined by existing market data vendors, and because regulators may not yet fully understand the industry or be able to effectively identify cannabis-linked issuers. It is for this reason that cannabis lives in its own complex, volatile risk/return space.

CRB Monitor is the only comprehensive, global, rules-based universe of nearly 1,300 public, cannabis-related securities and more than 40,000 cannabis-related private businesses. Our database is the “gold standard” for financial institutions that need to accurately and effectively identify cannabis-related exposure, as well as those looking to identify new investment opportunities related to the emerging cannabis investment space. Visit our website to learn more or to request a demo.

The information provided herein presents general information and should not be relied on as legal advice. If you have specific questions regarding a fact, please consult with competent legal counsel about the facts and laws that apply.

(1) GW Pharmaceuticals, plc is a UK-domiciled biopharmaceutical company focused on developing and commercializing therapeutics from its cannabinoid product platform in a range of disease areas. The company manufactures and distributes the only cannabis-based pharmaceutical product that is FDA-approved in the USA. Although GW Pharmaceuticals is UK-based and its ADR trades on the LSE, the primary exchange for its shares is the NASDAQ, so we excluded it from this particular analysis.

(2) Imperial Brands reported a 19.9% ownership stake in Auxly Cannabis Group in December of 2019.

(3) Associated British Foods Plc owns British Sugar plc, which has been growing a non-psychoactive variety of cannabis since 2016 and supplies cannabis to biotech company GW Pharmaceuticals.

(4) OTC-traded companies would be unlikely candidates for listing on the LSE, given their general characteristics like market cap and share price which would tend to disqualify them.