(Bloomberg) — Canadian marijuana stocks slumped Tuesday after the country’s largest stock exchange said it may delist pot companies that run afoul of U.S. federal law.
The Toronto Stock Exchange will contact all companies that cultivate, distribute or possess marijuana, or offer services related to the drug in any jurisdiction, by the end of the year. If they’re found to be in violation of U.S. federal law, they could ultimately be delisted, said Ungad Chadda, president of capital formation for equity capital markets at TMX Group Ltd., the parent company for the Toronto Stock Exchange and TSX Venture Exchange.
The move comes after the TMX announced it’s reviewing how to deal with marijuana companies that have operations or investments in the U.S. While some states have legalized marijuana for medical and recreational use, it remains illegal at the federal level.
“There may be issuers on our market that are not in compliance with the requirements. We will only come to find that out through the process of our review,” Chadda said in a briefing with reporters at TMX’s offices in Toronto. “If you’re violating federal law, you’re out.”
Shares of the Leamington, Ontario-based Aphria Inc. fell 13 percent on Tuesday in Toronto, the most since November 2016, to close at C$6.86. The company also announced a deal to raise as much C$92 million in a share sale.
Canopy Growth Corp., the first marijuana unicorn with a market cap over C$2 billion, fell 4.7 percent to C$12.52, while shares of Aurora Cannabis Inc. tumbled 3.8 percent and MedReleaf Corp. declined 4 percent.
Chadda acknowledged that the exchange may have inadvertently allowed companies to list that were already violating U.S. federal law, or that began violating the law while they were listed. There are approximately 25 companies directly involved in the pot industry listed on the TSX and the TSX Venture Exchange, and an unknown number of other firms that indirectly do work for the sector.
The TSX notice is “extremely broad” and it’s difficult to determine what impact it could have, said Vic Neufeld, chief executive officer of Aphria, which is listed on the TSX, has a stake in an Arizona-based medical marijuana producer and has announced plans to expand into Florida. Aphria’s shares have traded on the TSX and the TSXV for almost three years and the company has had marijuana-related activities in the U.S. since 2015, he said in a statement.
Earlier Monday, Canadian securities regulators said they expect marijuana companies with business operations in the U.S. to disclose any risks in official documents. Canadian companies with interests in the U.S. “assume certain risks due to conflicting state and federal laws,” according to a statement Monday from the Canadian Securities Administrators, an umbrella organization for provincial and territorial regulators.
“We expect issuers with marijuana-related activities in the U.S. to address the current legal and regulatory environment in their disclosures,” said Louis Morisset, CSA chair and chief executive officer of the Autorite des marches financiers.
U.S. federal law relating to marijuana could be enforced at any time, and this would put issuers with U.S. marijuana-related activities at risk of being prosecuted and having their assets seized, the CSA said.
“I think this really does clear the air in terms of what the expectations are for the companies, to basically disclose what those risks are to the public,” said Richard Carleton, chief executive officer of the Canadian Securities Exchange, which has about a dozen listed marijuana companies with U.S. exposure. “It’s the kind of clarity we’ve been looking for.”
The move will remove uncertainty for investors and is likely to spur more marijuana companies to try to raise funds in the public market, Carleton said. The exchange is still in talks with Canadian regulators on settlement services for pot companies and “we’re confident of a positive outcome,” he said.
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