What are the Risks for Cannabis Investors Crossing to the US?

LEGALIZATION COVERAGE

Canada’s decision to legalize the recreational use of cannabis has allowed the rise of an emerging investment market. The cannabis public sector has become one of the most followed industries for investors. 

As such, the Investing News Network brings investors a collection of stories on the critical transition and its impact on the public markets.

Debate continues over the risks for Canadian cannabis investors when entering the United States after legalization up North goes into effect on October 17.

Investors were put on notice back in July when Canadian Sam Znaimer told his story of detention and eventual ban from entering the US due to his investments in US cannabis companies.

In various reports, Znaimer said he was denied entry at the border in Washington state from officials citing his relationship to these companies as the reason for denied entry into the country.

Since then, Canadian investors have waited for more clarity on the impact their investments will have when entering the US.

While recreational use and sale of cannabis is set to become legal in Canada, in the US the drug has gained legal status in some states but not under the federal law.

Offering some clarity on the issue on October 10, the US Customs and Border Protection (CBP) issued a statement reminding travelers no Canadian legal cannabis product will be admissible to cross, no matter of the state laws.

The border agency said Canadian citizens “working in or facilitating the proliferation” of the cannabis market crossing to the US for reasons unrelated to cannabis will “generally” be allowed entry.

However, the agency added that if a person is found to be entering the US for a cannabis-related reason, the person may be denied access.

Experts share point of view on the risk investors could face

With the legalization in Canada coming into effect, questions remain on the risks investors face.

One lawyer with a focus on the public sector and the cannabis market said he expects the potential risk factor for Canadian investors crossing the border will reduce with legalization.

“What might create risk is a likely rapid rise in stock prices for Canadian companies, which may then fall back down to previous levels after the excitement of full legalization dies down,” Marc Adesso, lawyer at Waller Lansden Dortch & Davis, LLP told the Investing News Network (INN).

In an exclusive interview with INN, Robert Laurie, a lawyer with AD Lucem representing several cannabis parties, said there’s a huge potential for escalation during a questioning session with a border agent and investors, along with others associated in the industry.

“What a lot of entrepreneurs and investors need to be aware of is when you are dealing with a customs officer, you better be very clear on what your situation is,” Laurie said.

He explained if a person is involved with a US cannabis company but does not have a work permit, saying the purpose of travel is for business will lead to more questions.

Telling the customs officer that you are entering for business is just going to lead to more questions and then they ask ‘what kind of business?’ and then you say ‘well I am involved with cannabis.’ Even if you are not involved in the growing and cultivation of cannabis we have seen recently Canadian nationals receive lifetime bans from entering the United States.

When asked about the comments from Canadian Prime Minister Justin Trudeau during a radio appearance, saying no Canadian should lie to a border agent about cannabis use, Laurie said travelers involved with the industry need to be careful.

“[W]hat the Prime Minister is saying is don’t lie to persons of authority, but what I’m saying as a lawyer is don’t be stupid with persons of authority when you are approaching customs officers,” Laurie said.

Prime Minister Justin Trudeau said back in September marijuana is legal in a number of US states and the government was trying to guarantee “travel between our two countries is not disrupted.”

Laurie is still unsure what will happen to investors realizing gains from the US cannabis market through Canadian listings.

I think we are going to see tremendous consolidation if you are invested in companies that are the leaders. They probably will be acquired, so there will be an opportunity of a capital gain. [U]ltimately, what does that look like for an international investor who’s invested in a Canadian company but they are domiciled in the United States? Of course Americans are taxable on the worldwide income regardless of domicile — what happens then? You sell those shares, realize a capital gain; is that technically proceeds of crime now? That have now tainted your legal investment account.

US investing has become attractive model for investors

At the start of the year, uncertainty on the overall state of marijuana laws in the US led to analysts and other financial experts dismissing companies involved in this market already raising capital in Canada.

Following a handshake agreement between Sen. Cory Gardner (R-CO) and US president Donald Trump in April, stocks involved in the market below the border took off with experts even showing support for this play.

In August, a report issued from analysts at Eight Capital showed their bullish sentiment on the existing US market.

“We favor vertically integrated players operating in multiple states that will create scale coupled with a first mover advantage,” the report says. Eight Capital projects the entire worth of a mature US cannabis market to be around US$63 billion.

Denominated as multi-state operators, a majority of the companies in the public markets operate assets in separate legal cannabis states. These may include recreational brands, physical dispensaries or even distribution networks.

All of these companies have gained support from the Canadian investment community through listings on the Canadian Securities Exchange (CSE) which determined it would take a more open approach to these companies.

After a heated debate between the TMX Group, operators of the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV), and Canadian licensed producer Aphria (TSX:APH) over the ownership of US assets dealing with the drug, new guidance was issued.

The CSE listings continued under the guidance that a risk update be given. No cannabis stocks with US operations are currently listed on the TSX or TSXV.

In the end, Aphria sold its stake in a US multi-state operator Liberty Health Sciences (CSE:LHS) and a producer in Arizona.

Investor takeaway

Due to legalization, its impacts won’t be fully discovered until some time after October 17. In this case, investors may need to take into consideration their involvement in the US cannabis market.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.