The Canadian Securities Administrators (the “CSA”) released Staff Notice 51-357 (the “Notice”) on October 10, 2018. The guidance in the Notice was based on a review (the “Review”) of 70 reporting issuers, in several different countries, operating with various levels of involvement in the cannabis industry (“Cannabis Issuers”).
The CSA has provided guidance on disclosure practices for Cannabis Issuers so that investors have access to more transparent information about financial performance, risk, and uncertainties. The CSA was particularly concerned after the Review found:
- insufficient information in the financial statements and management’s discussion and analysis (“MD&A”) of many licensed cannabis producers (“LPs”);
- a failure by some Cannabis Issuers to comply with securities requirements for forward-looking information and balanced disclosure; and
- 74% of Cannabis Issuers that currently engage in, or are in the process of developing, marijuana-related activities in the U.S. (“U.S. Marijuana Issuers”) failed to provide sufficient disclosure about the risks related to their U.S. operations.  These expectations were previously set out in CSA Staff Notice 51-352 (Revised) Issuers with U.S. Marijuana-Related Activities (the “U.S. Disclosure Expectations Notice”). 
1. Financial Disclosure
Impact of Fair Value Accounting on Financial Statements – Like other issuers with agricultural activities, LPs are required to measure living plants, or biological assets, at their fair value under International Financial Reporting Standards (“IFRS”). During the Review, the CSA observed that 71% of LPs did not properly disclose fair value amounts in their statement of profit and loss (“P&L”). Instead, many fair value adjustments were merely embedded in the cost of goods sold. The CSA found that, in the absence of additional line items on the P&L, investors were unable to understand how much LPs paid to produce their product (excluding all fair value amounts).
Therefore, the CSA has advised LPs to separately disclose both:
- Unrealized gains/losses resulting from fair value changes on growth of biological assets; and
- Realized fair value amounts included in the cost of inventory sold.
Disclosure of Accounting Policies Related to Biological Assets – The Review showed that most LPs had P&L line items called “production costs” or “cost of goods sold”. However, LPs generally did not discuss the composition of those line items. The CSA stated the importance of investors being able to understand the costs included in the P&L. Going forward, LPs are expected to disclose:
- what they consider to be the direct and indirect costs of production associated with biological assets;
- which P&L line item(s) these direct and indirect costs are recorded in; and
- whether the direct and indirect costs of biological assets are capitalized; or whether they are expensed as incurred.
Additionally, the CSA observed that many LPs who expensed costs as incurred (related to biological assets) have not been providing sufficient financial disclosure regarding the:
- cost of cannabis sold in the period covered by the P&L;
- composition of gross profit subtotals;
- fair value measurement process (including, for example, techniques, processes, and sensitivity to change); and
- disclosure regarding non-GAAP financial measures (such as “cash cost per gram”).
2. Other Review Findings
The CSA also provided guidance on other issues identified during the Review:
Production Estimates – The CSA advised Cannabis Issuers making announcements about anticipated production capacity in new facilities to disclose the material factors and assumptions related to those projects. Similarly, Cannabis Issuers should base financial projections relating to these announcements on specific and comprehensive details, referencing how each assumption contributes to the projection. 
Misleading or Unbalanced Disclosure – The CSA advised issuers considering entering the cannabis industry, as well as existing Cannabis Issuers considering new investments in the cannabis industry, to ensure that announcements are balanced and not misleading. In many cases, issuers should enhance their disclosure by stating factors upon which a transaction is contingent (for example, regulatory approval).
Impairment – Issuers with material cannabis-related assets should perform appropriate impairment testing in response to impairment events. This could include industry-wide changes in cannabis valuations or regulatory frameworks.
Material Contracts – Cannabis Issuers that are substantially dependent on licenses to cultivate or sell cannabis, or on leased facilities, should consider filing these as material contracts.
Regulatory Frameworks – Cannabis Issuers operating outside North America should provide disclosure about the foreign regulatory frameworks that are applicable to them. This would be similar to obligations on Cannabis Issuers with operations in Canada and the U.S.
3. Issuers with U.S. Marijuana-Related Activities
The U.S. Disclosure Expectations Notice provided specific disclosure guidance for U.S. Marijuana Issuers. The expectations included, but were not limited to:
- a description of the nature of an issuer’s involvement in the U.S. marijuana industry;
- disclosure that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk;
- related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.;
- a discussion of the issuer’s ability to access public and private capital, including which financing options are and are not available to support continuing operations;
- a quantification of the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities; and
- as further described in the U.S. Disclosure Expectations Notice, additional disclosures are expected depending on whether an issuer has direct, indirect or ancillary involvement with U.S. marijuana-related activities.
The Review noted that inadequate disclosure had been provided by most U.S. Marijuana Issuers. As a result of the review, 74% of U.S. Marijuana issuers took action to improve their disclosure and 17% were required to refile their most recent MD&A.
In many cases, deficiencies in disclosure identified during the Review were simply rectified with a commitment to prospective improvement. However, in cases where deficiencies were pervasive, the Notice states that many issuers were required to refile documents. Therefore, current and prospective Cannabis Issuers should review the Notice and ensure their practices are in line with CSA guidance.
 Only where such activity is authorized by a state regulatory framework.
 For more information regarding the U.S. Disclosure Expectations Notice, please see our previous communique: CSA Provides Clarification to Issuers with U.S. Marijuana-Related Activities <https://www.millerthomson.com/en/publications/communiques-and-updates/securities-practice-notes/feb-22-2018-spn/csa-provides-clarification-issuers-u-s-marijuana-related-activities/>
 Issuers must also ensure that forward looking information is updated as required by Part 4A Forward-Looking Information and Section 5.8 Disclosure Relating to Previously Disclosed Material Forward-Looking Information of National Instrument 51-102 Continuous Disclosure Obligations