The American Trade Association for Cannabis and Hemp (ATACH) has published a policy paper urging the Nasdaq and New York Stock Exchange to allow U.S. cannabis operators that “touch the plant” to list on their respective Exchanges. The current prohibition to listing is purely discretionary and not because of any regulatory action by the SEC or any other U.S. regulatory authority. The policy paper, published November 7, 2022, outlines very convincing arguments for allowing U.S. operators to list on the National Exchanges.
The policy paper notes that up until now, the National Exchanges have refused to list these companies while cannabis remains federally illegal out of concerns that they could be charged with aiding and abetting violations of the U.S. Controlled Substances Act (“CSA”) or with money laundering by the receipt of listing fees. As of the time of the publication of the policy paper, cannabis is legal in 37 states, D.C. and U.S. territories. The ATACH rightfully asserts that “the Exchanges’ practice of not listing operators is outdated and out of step with the reality that transacting business with state legal cannabis operators is a not a priority for enforcement by the DOJ and thus the risk of such enforcement is low.”
The policy paper breaks down its arguments as follows: (i) the federal government’s explicit de-prioritization of state-legal cannabis activities for federal prosecution; (ii) the growth of the state-legal cannabis industry and the ubiquity of state-legal cannabis businesses and products; (iii) Nasdaq and NYSE are already listing companies with material cannabis-related interests and are already assuming the remote risk of prosecution by the DOJ; (iv) operators function in an environment of compliance and transparency; (v) listing operators would support the Exchanges’ purpose initiatives; and (vi) listing operators is in the public’s interest.
The Federal Government’s Hands-Off Approach to Prosecution
Under federal law, it is unlawful to “knowingly and intentionally … manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense” a controlled substance. Although the federal government legalized hemp in 2018, and of course widespread state legalization, marijuana remains a Schedule 1 controlled substance.
Since 2013, the U.S. federal government has taken a public hands-off approach to state-legal cannabis activities announcing that it would not expend federal resources on prosecution. Then Deputy Attorney General James M. Cole published a memo for U.S. attorneys titled “Guidance Regarding Marijuana Enforcement” (the “Cole Memo”) deferring marijuana related enforcement actions to state governments.
The Cole Memo advised U.S. attorneys operating in states with cannabis regulations to prioritize the prevention of: (i) legal cannabis distribution to minors; (ii) legal cannabis revenue from going to criminal enterprises; (iii) legal cannabis diversion to states where not legal; (iv) legal cannabis as a pretext for trafficking illegal drugs or other illegal activity; (v) violence/firearms in legal cannabis cultivation/distribution; (vi) drugged driving and adverse public health consequences from legal cannabis; (vii) the growing of legal cannabis on public lands; and (viii) possession/use of legal cannabis on federal property.
In 2018 Attorney General Jeff Sessions rescinded the Cole Memo; however, in practice, enforcement proceedings, or the lack thereof, did not change. Recently, U.S. Attorney General Merrick Garland recently reaffirmed James Cole’s position stating, “[I]t does not seem to me a useful use of the limited resources that we have to be pursuing prosecutions in states that have legalized and that are regulating the use of marijuana, either medically or otherwise …”
Despite the position of the changing Attorney Generals and DOJ chiefs, federal law currently prohibits federal prosecutors from using funds appropriated by Congress to prosecute individuals and businesses operating cannabis companies in compliance with state laws regulating medical use of marijuana. In 2014 the Joyce Amendment was passed prohibiting the Department of Justice from using federal funds to prevent states “from implementing their own state laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” The Joyce Amendment is part of the federal appropriations legislation and has been renewed each year since its first enactment including on March 15, 2022.
Also recently, addressing a campaign promise, on October 6, 2022, President Biden stated that criminalization of marijuana was a “failed approach” and rather the federal government, including the Secretary of Health and Human Services and the Attorney General should initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.
Growth of the State-Legal Cannabis Industry
As a result of the federal government’s lack of involvement, the proverbial horse has left the barn, with legal cannabis sales now exceeding $30 billion as part of an industry with an estimated $100 billion U.S. economic impact. Currently, 37 states, the District of Columbia, and U.S. territories have legalized (or voted to legalize) marijuana for medical use, and, of those, 19 states, the District of Columbia, and two territories have legalized (or voted to legalize) marijuana for adult use (or “recreational”) as well.
Nasdaq and the NYSE Already List Companies with Material Cannabis-Related Businesses
The policy paper is timely. Over the last several years both Nasdaq and the NYSE have relaxed their approach, listing several companies that are in ancillary businesses deriving their revenue from operators. The ATACH notes that the Exchanges should gain comfort from the highly regulated nature of the state-legal cannabis business. Moreover, many of these operators already trade on the OTC Markets, Canadian Securities Exchange and NEO Exchange and thus are familiar with public company reporting and disclosure requirements, and in many cases, SEC reporting requirements. The ATACH paper lists no fewer than 25 examples of such companies on Nasdaq alone.
Operators Are Subject to Strict Compliance and Transparency Regulations
The cannabis industry is heavily regulated requiring participants to obtain licenses from states and sometimes local jurisdictions. In order to obtain a license, operators must demonstrate processes and procedures that ensure the safe and state-legal growing, processing, and distribution of cannabis. Each state requires procedures related to the security of facilities and the use of track and trace software in all transactions. Moreover, officers, directors, managers and significant equity holders must undergo background checks (similar to those for officers and directors of financial institutions) and be approved by the relevant cannabis regulatory authority. Each of these operators must renew these licenses, typically on an annual basis.
Listing Operators Would Support the Exchanges Diversity and Similar Initiatives
Pointing at Nasdaq’s diversity initiatives (see, for example – HERE), the ATACH refers to the numerous states that include diversity requirements in connection with the issuance of an operator license. Consequently, the cannabis business has a high level of women and minority participation.
Listing Operators is in the Public’s Interest
Due to the federal illegality, the cannabis industry has faced challenges accessing traditional banking and financial services. As a result, many U.S. operators choose to go public in Canada to access capital. The ATACH paper includes a chart evidencing that U.S. operators that list in Canada or on the OTC Markets have significantly less liquidity than Canadian or other international operators that list on Nasdaq. Clearly the capital markets demand for operators is high. If such operators could access this capital, they would grow, employ more people and in general further support the U.S. economy.
Laura Anthony, Esq.
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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