High Stakes - The Financial Conduct Authority issues preliminary guidance for cannabis companies looking to list on the London Stock Exchange

On 18 September, the Financial Conduct Authority (FCA) set out its approach in assessing applications by cannabis-related companies for listing in the UK. Although this guidance is high-level for now, the FCA confirm that a consultation on their approach to this topic “will follow in due course”.

The FCA makes the point that the law surrounding overseas medical cannabis businesses is largely a complex area, with the risk of proceeds from such businesses constituting criminal property under the Proceeds of Crime Act 2002 (POCA) remaining a paramount issue. The review comes following the legalisation of medical cannabis in 2018, where specialist doctors can now prescribe patients medicinal cannabis.

Up until now, investors into the UK would have largely found difficulties in investing in this sector because of POCA’s deliberately wide definition of ‘criminal property’. Under POCA, the proceeds of any activity conducted overseas will be deemed as criminal property if that activity is illegal in the UK, even if it is legal or licenced in the country in question. This poses an issue for UK companies seeking to invest into, or acquire, foreign companies that operate a cannabis-related business as the payment of dividends upwards could breach POCA. The FCA helpfully categorise cannabis companies into three categories:

1. Recreational cannabis companies – as recreational cannabis is illegal in the UK, these companies will not be admitted to the Official List, regardless of whether it is legal or licenced in its own jurisdiction.
2. UK-based medical cannabis companies – these companies can be admitted to the Main Market as long as they have the appropriate Home Office licences in place.
3. Overseas-licenced medical cannabis companies – these companies will be assessed on a case-by-case basis. In order to be admitted to the Main Market, the FCA must be satisfied that POCA does not apply and the usual criteria for listing is met.

In summary, companies that are fully licenced for all their activities in the UK are now able to float in the UK. This also means certain foreign operators that have a medical equivalence are also eligible to be admitted to the Main Market, subject to a POCA review by the FCA.

Comment

With the FCA citing that this guidance is in response to various queries, there is clearly an appetite from cannabis-related companies to apply for listing and it may be the case that there are already companies with draft prospectuses almost ready to apply very soon.

Although this is promising news for companies already operating in this space, it is unlikely that we will see an immediate influx of listings for medical cannabis companies. With an emphasis on medical cannabis, these companies, and investors, will need to have a very good understanding as to how the regulatory framework surrounding medical cannabis works in practice. It is also not entirely clear where the FCA stands with ‘over the counter’ or wellness companies dealing with cannabis.

Steps will have to be taken by a cannabis-related company to establish whether it can be admitted to the Main Market, primarily through a review of its licences. Overseas companies will have to consider further steps, with a review of its foreign licenses and an analysis that its operations would remain legal if carried out in the UK having to be undertaken.

It also remains to be seen how the FCA will approach the POCA review. In any case, we consider that it would remain prudent for a company seeking to list on the Main Market to obtain Counsel’s opinion on the legality (or otherwise) of their activities and it may be the case that the FCA are happy to rely on such opinions.

It will also be interesting to see the approach of the AIM regulation team of the London Stock Exchange to any proposed cannabis-related listings and whether they follow the FCA’s approach.

Our expertise in the relevant areas of law, including regulatory, capital markets and healthcare, as well as our network of international firms, means we as a firm are well positioned to assist those looking to act on this new guidance from the FCA.