Dylan Kennett, Senior Associate | DLA Piper
London is the largest public equity market in Europe and remains one of the leading venues globally. In particular, it has liquid markets in small-cap companies, including the ability to raise money on public capital markets for companies valued up to €100mn. Whilst competing jurisdictions offer some public markets at this size, it is our experience that such markets are, in general, less attractive, with London also providing the opportunity for companies to migrate and ‘up list’ onto other, larger UK capital markets as they grow.
In short, London is a functioning and well-trodden path for capital raising from startup, through scaleup, to publicly listed. Despite these advantages, and the concentration of expertise in the cannabis industry in the UK, there have been remarkably few listings for the industry in London.
To date, this author is aware of around a half-dozen listings, with the majority pursuing purely cannabidiol (“CBD”) related strategies for consumer products, and a large minority – one-third – pursuing a medical-first approach whereby cannabis is supplied to patients by a medical practitioner, or pharmaceutical development businesses.
Currently, the UK has relatively strict laws relating to cannabis compared to other major European and North American centres. In particular, and in contrast to Canada, Germany, Switzerland, and a rapidly growing number of US states, the sale of tetrahydrocannabinol (“THC”) containing substances is restricted solely to medicinal products. The relative legality of activities is usually a minor issue for capital markets, as companies are generally assumed to be compliant with relevant law in order to operate freely.
In fact, London has routinely hosted companies pursuing businesses where the legality of some operations has been contentious, with investors taking account of legal uncertainty with little formal regulatory intervention, pricing in any such risk into the share price. One well-known example is the London-listed global gaming industry. In contrast, for the cannabis industry, there has been a surprising and, this paper argues, unresolved dispute regarding one particular piece of UK legislation.
Proceeds of Crime
The principal cause of difficulties today is the application of the Proceeds of Crime Act 2002 (“POCA”)1. This statute has been much debated, especially as it relates to the cannabis industry. Originally drafted as broad legislation to combat money laundering and terrorist financing, POCA has also captured the nascent cannabis industry in the UK. Within it lies a concept of ‘criminal conduct’ which captures offences taking place in the UK, but also conduct outside of the UK which would be criminal in the UK if carried out here.
Given the possession or supply of cannabis for recreational use carries a significant criminal sanction in the UK under the 1971 Misuse of Drugs Act2, and does not fall within the ‘Spanish Bullfighter’ defence under the legislation (which covers those activities which are lawful abroad and carry less than a maximum sentence of 12 months in the UK), POCA would then apply to proceeds generated from businesses who participate (even tangentially) in adult-use sales. Therefore, dealing with such proceeds or property (including dealing in shares, receipt of dividends from such a company, even the uplift in the value of shares) could constitute an offence of money laundering under POCA.
For some time, the market operated without explicit confirmation of this, although it soon became critical amongst all the deal making, coming from the excitement of those in the UK wanting to make investments in high-growth Canadian cannabis opportunities in 2018-19. The Financial Conduct Authority (“FCA”) issued guidance in September 20203 and a subsequent technical note on that guidance in the summer of 2021.4 In short, the FCA confirmed that overseas recreational activities, conducted entirely lawfully, would nonetheless be considered as generating proceeds of crime in the UK, and therefore unable to list their securities on the Official List.
In order to do so, overseas cannabis companies would need to satisfy the FCA that POCA would not apply to their business and that the company’s overseas activities would also be legal in the UK if they were to take place here; a rub to the technical guidance that many companies fail to realise when approaching a listing. UK-only companies have a marginally easier path, since their regulatory regime is clear and the activities they can undertake are limited to those conducted under licence from the Home Office, or with the appropriate authorisations in relation to CBD focused companies. UK companies who have or have had dealings with adult-use companies may still find themselves in difficulties if the overseas company’s money is potentially considered ‘tainted’.
Overall, the application of POCA continues to cause material difficulties for the industry and has acted as a substantial gating item to navigate in order to achieve a listing, which is already a significant mountain to climb.
UK companies who have or have had dealings with adult-use companies may still find themselves in difficulties if the overseas company’s money is potentially considered ‘tainted’
As such, I believe the resultant listing regime in London is now unattractive for the cannabis industry, for five main reasons: (i) lack of certainty; (ii) apparent discrimination against the industry; (iii) elevated transaction costs; (iv) competing listing venues taking a different approach and (v) doubts over whether in this instance POCA is being applied as Parliament intended.
Lack of certainty
The current regime makes it highly uncertain whether companies are able to access the London capital markets. This uncertainty arises from whether the relevant combination of the FCA, AIM and/or the LSE will accept proposed listings, the longer timeline for any such approval and because of the unclear timelines and incremental costs, the ability to engage and sustain investor interest.
The requirement imposed appears to be unique to companies active in the cannabis industry that are seeking a new listing. No equivalent requirement is imposed on companies in other industries, and this is in contrast with companies with existing listings, who are able to pursue cannabis investments or commercial relationships without any apparent listing-related hurdle. There are multiple examples where UK-listed entities have invested in, or created commercial partnerships with, overseas companies who derive their revenues partially or wholly from adult-use cannabis sales. External lawyers are now well equipped to mitigate potential issues by making relevant filings with the appropriate UK regulatory agencies indicating that such a transaction is forthcoming. As such, there is an asymmetry in how companies are being treated across the market, creating an unjustified competitive market advantage for existing listed entities.
It is difficult to see the public policy objective that is met by preventing London capital markets from fulfilling their function of providing capital to one specific industry, but only for potential new issuers. Given its broad applicability, POCA captures a very wide range of stakeholders, including those – both retail and institutional investors – holding shares in UK and overseas listed entities that already have cannabis investments or commercial partnerships. As pursuing this would clearly lead to untenable outcomes, no regulatory action has so far been evident, illustrating that the application of POCA already has practical limits.
The FCA’s Summer 2021 guidance specifically requests legal opinions for every country that an issuer is active in, identifying that the activities being undertaken at local level are within the parameters of the local regulation. In addition to this, an overarching legal opinion is then provided by UK counsel identifying that the issuer, given the local activities, would comply with the provisions of POCA, as well as ensuring that its activities are for purposes which are lawful in the UK. Practically speaking, this means a doubling of already significant legal fees.
Out of step with other jurisdictions
No other potential competitive listing jurisdiction imposes this level of requirement on potential listings. In fact, very close to home, other jurisdictions like Guernsey and Jersey, for example, have taken alternative paths, clarifying or amending their existing anti-money laundering legislation to make clear that overseas adult-use cannabis activities will taint neither their markets nor participants, provided they are derived in legal frameworks overseas.5 Even in a country which has legalised adult-use cannabis, the Canadian Securities Administrators apply a permissive, disclosure-based approach to an issuer’s entrance to and participation in Canadian capital markets. If an issuer operates in various jurisdictions, it must confirm to the applicable exchange (in the listing agreement or, as applicable, a director’s statement) that the issuer is in compliance with the laws of those countries. London’s standard is highly onerous compared with other comparable jurisdictions like Canada.
The impact of POCA also has a bearing on the ability of the UK to receive investment from allied countries that have significant domestic regulated cannabis industries. Whilst there are various countries pursuing cannabis reform, the two most prominent are Canada, where adult-use has been legalised, and Germany, where it has been widely reported that adult-use is planned to be imminently legalised under its new government. These two countries are amongst the most reputable partners for the UK globally, and both are recognised as some of the least corrupt, lawful and best policed societies in the world. Furthermore, adult-use in both countries is (and, in the case of Germany, undoubtedly will be) subject to strict formal controls. The requirement in UK law to seek active confirmation of the UK legality of activities in these countries, for activities that are carried out by regulated corporate entities, is, on the face of it, unnecessary and onerous.
Interpretation of the law
Under the Misuse of Drugs Act 1971 cannabis and certain associated substances are considered controlled drugs; the production and supply of controlled drugs (including cannabis plants) gives rise to a criminal offence. This is subject to any regulations made pursuant to that statute, which authorises the Home Secretary to make other provisions as they see fit. The Secretary of State has indeed made such further regulations under the Misuse of Drugs Regulations 2001. Within those regulations the Secretary of State has the legal authority to issue a licence for the production and supply of a controlled drug, including cannabis.6 Although to date, Government policy has not allowed for adult-use cannabis to be produced and supplied to the wider UK, Parliament has given the Secretary of State the unencumbered facilities to do so. It then follows that the production of adult-use cannabis within the UK could be done without any further Parliamentary authorisation, as the legal basis already is in place.
Therefore, many in the legal community, including prominent Queen’s Counsel, have concluded there are no grounds to find criminal conduct under POCA for activities pursued under a licence that is issued in an analogous jurisdiction to the UK overseas (i.e. Canada and Germany), when such a licence could readily be transposed to the UK. It is conceded that this is a matter subject to legal uncertainty (which is part of the point), but the broader issue is that in such an instance, it is unusual for regulators to impose a specific interpretation in formal guidance.
Challenges for the sector
All of the foregoing combined, present an onerous barrier to listing, and for such a narrow and contentious point this seems prima facie, strange.
The result of these foregoing challenges are two-fold. First, investors are being actively discouraged from participating in cannabis listings because of the legal challenges and the uncertain timing of any potential listing. This, in turn, has created a chilling effect on institutional interest in the sector. Secondly, potential issuers are equally discouraged, and it takes unusually sustained commitment from issuers to successfully list a cannabis-linked company in London.
The Government’s ‘Global Britain’ agenda to boost trade and inward investment post-Brexit depends on the health and growth of capital markets in the UK, including the continued promotion of the UK’s role as a regional capital market for Europe as well as an important global financial centre. The following changes would significantly improve the current situation:
The UK public equity markets are globally respected and currently hold a competitive advantage to their peers. By amending and/or clarifying the POCA legislation as it relates to cannabis, this strength and standing can be extended to support the growth of the legal cannabis industry, as seen across multiple jurisdictions around the world, to the benefit of the UK Treasury, investors, issuers and patients alike.
*The foregoing analysis and recommendations relate purely to the funding of lawfully pursued businesses out of the London capital markets, or for investors in overseas cannabis companies operating legally in their respective markets.
5) See Carey Olsen for Guernsey: https://www.careyolsen.com/sites/default/files/Information%20Notice%20on%20Cannabis%20Cultivation%20and%20Production%20in%20Other%20Jurisdictions.pdf
6) See: 1(1)(b) of the Proceeds of Crime (Jersey) Law 1999 https://www.jerseylaw.je/laws/current/Pages/08.780.aspx and the list of applicable exempted jurisdictions in the Proceeds of Crime (Cannabis Exemption – List of Jurisdictions) (Jersey) Order 2021 https://www.jerseylaw.je/laws/enacted/Pages/RO-087-2021.aspx