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5 key FAQs about Canadian cannabis company “key investor” disclosure requirements

key investor disclosure requirements

Information disclosure is a key theme that emerges from Canada’s new cannabis regulatory regime: the government wants lots of information from those to which it grants a cannabis –related licence – especially about “key investors” of certain licensees. It’s not surprising that the new regime, comprised of the Cannabis Act, Cannabis Regulations and other related regulations (all of which took effect on October 17, 2018), requires cannabis industry licensees to disclose information to the federal government. What might be surprising, however, to certain licensees, their investors (particularly, privately held companies), and others that do business with them (for example, commercial lenders) is the broad scope of both the definition of a “key investor”, and of the information about them that some licensees must disclose.

The Cannabis Regulations establish categories of licences for cannabis-related activities (cultivation, processing, analytical testing, sale and research, and licences respecting drugs containing cannabis) and impose differing disclosure obligations on them. Cannabis cultivation, processing or sale licensees, which we’ll call “Licensed Producers” or “LPs” (the term used in the Access to Cannabis for Medical Purposes Regulations (ACMPR) that were repealed when the new cannabis law regime took effect, but that’s still commonly used in the industry) are subject to some unsurprising – and some potentially surprising – disclosure requirements. All licensees, including LPs, must maintain certain records and make them available to the federal government minister designated as responsible for the Cannabis Act (formerly, the Minister of Health, but as of December 2018, the Minister of Border Security and Organized Crime Reduction) on request. Most come as no surprise: for example, certain license-holders must record the identity of people entering or exiting a cannabis storage area, monitor operations and storage areas, and record unauthorized intrusions into operations and storage areas. Licensed Producers (LPs), however, must also provide extensive and ongoing information disclosure to the designated Minister. One of the most onerous: information about the LP’s “key investors”. And while the requirement to disclose information about “key investors” might come as no surprise, just who a “key investor” is might surprise LPs, their investors and those that do business with them.

5 “Key Investor” Disclosure FAQs

It’s key that all stakeholders clearly understand the Cannabis Regulations’ key investor disclosure obligations to avoid surprises and to ensure compliance. Here are the answers to five key frequently asked questions about cannabis companies’ “key investor” disclosure requirements.

1. What’s a “key investor”?

The lynchpin of the definition of a “key investor” is “control” over the LP. The Cannabis Regulations define the term “key investor” far more broadly than the way in which many other federal laws define it. Section 241 of the Cannabis Regulations defines a “key investor” in a LP as a person (which can be either an individual or a corporation or other entity) that exercises, or is in a position to exercise, direct or indirect control over the LP by virtue either of:

  • Having provided money, goods or services directly or indirectly to the LP.
  • Holding an ownership interest or other right or interest in, or in respect of, a business or organization that the LP operates.

2. What’s “control” for the purpose of determining an LP’s “key investors”?

It looks like the federal government will interpret “control” broadly, though it remains to be seen whether the courts will agree with that approach. But it does require LPs – and those investing in and those doing business with them – to think hard about who a “key investor” is when structuring commercial agreements.

Many laws, such as corporate, securities and tax laws, use the term “control”. Depending on whether, and if so how, a particular law defines it, “control” generally refers to the ability to influence an entity’s decisions and actions either by:

  • “Legal” control (a.k.a. “de jure” control), which generally refers to the direct or legal ability to do so through voting rights, such as the shareholders in a corporation, the partners in a partnership or “ultimate controllers” under the Investment Canada Act, whether or not that ability is actually exercised. 
  • “Factual” control (a.k.a. “de facto” control), which generally refers to the effective ability to do so, directly or indirectly, based on relevant considerations in the particular context.

The existence of a “legal control” relationship is usually straightforward to identify. The existence of a “factual control” relationship, however, is usually more complex to identify because the relevant considerations can vary depending on the particular law, and in some contexts (such as the Income Tax Act) is the subject of legal dispute and interpretation. The Cannabis Regulations’ definition of “key investor” indicates considerations relevant to the existence of a factual control relationship are: the provision of money, goods or services directly or indirectly to an LP; or holding an ownership interest or other right or interest in, or in respect of, a business or organization the LP operates. This suggests the federal government seeks to cast the “key investor” net very broadly. The government’s Cannabis Licensing Application Guide, at Appendix I, confirms this view, providing examples of the forms and factors it will consider relevant to determining whether a party has factual control:

  • The percentage of ownership of voting shares (when it’s not more than 50%) relative to other shareholders’ holdings, but noting that any ownership more than 25% in combination with other factors is likely a significant indication of “control”.
  • Ownership of a large debt of an organization that may become payable on demand.
    Shareholder agreements including the holding of a casting vote.
  • Commercial or contractual relationships of the organization (for example, economic dependence on a single supplier or customer).

The Cannabis Licensing Application Guide is an articulation of how the government says it will apply the cannabis laws, but it’s not actually the law. If a party challenges the government’s interpretation of “key investor”, a court will ultimately define whether a factual control relationship exists, and whether a party is a “key investor”, within the meaning of the Cannabis Regulations. However, under the interpretation of “key investor” in the Cannabis Licensing Application Guide, the government could determine a factual control relationship exists between an LP and these parties, for example, by virtue of the rights and obligations set out in their agreement:

  • Suppliers – and customers. Those with which an LP has a commercial agreement for the provision of goods or services to the LP – or by the LP.
  • Commercial lenders & creditors. Commercial lenders or other creditors under debt financing arrangements.
  • Contracted managers. Where an LP is a partnership or a limited partnership, those with whom they enter into management contracts

3. What information must a LP disclose about its “key investors”?

It depends, but generally: a lot. The scope and volume of the information LPs must disclose under section 241 of the Cannabis Regulations about their key investors can be significant – and can include commercially sensitive information.

Basics. A LP must disclose the following in respect of any and all of its key investor(s):

  • Their name and address.
  • A detailed description of the means by which the key investor exercises, or is in a position to exercise, control over the LP.
  • Details about the transaction that makes the key investor an investor in the LP.

Money, Goods or Services. A LP must disclose additional information about each “key investor” depending on how it became a “key investor” under the Cannabis Regulations’ definition – and must do so each time the key investor provides the LP, directly or indirectly, with money, goods or services:

  • Money. If the investor became a “key investor” by providing money directly or indirectly to a LP, the LP must also disclose in respect of that key investor:
    • The amount of money the key investor provided to the LP.
    • The date on which the key investor provided the money to the LP.
    • The terms and conditions under which the key investor provided the money.
    • If the key investor provided the money by way of a loan to the LP, the interest rate and term of the loan.
  • Good or Services. If the investor became a “key investor” by providing goods or services directly or indirectly to a LP, the LP must also disclose in respect of that key investor:
    • A description of the goods or services the key investor provided to the LP.
    • The fair market value of the goods or services when the key investor provided it.
    • The date on which the key investor provided the goods or services.
    • The terms and conditions under which the key investor provided the goods or services.

And regardless of how a key investor became such, the LP must also disclose:

  • Subsequent transactions. Once a “key investor” becomes a “key investor”, the LP must disclose more than just the transaction by which it became a key investor: it must disclose all of these details in relation to each and every subsequent transaction between it and that key investor.
  • Other benefits. If the key investor received any other benefit from the LP as a result of having provided money, goods or services, or by having an ownership or other right or interest in, or in respect of, the LP then the LP must also disclose that benefit. Unfortunately, the Cannabis Regulations don’t offer any guidance in defining what these might be, though it seems reasonable this requirement would capture items such as complimentary tickets to an event or gifts, and possibly even donations or product discounts. Similarly, the Cannabis Regulations don’t offer any guidance about whether every benefit must be disclosed, or there’s a threshold value for such disclosure comparable to, for example, the Canada Revenue Agency’s guideline requiring employees to disclose only gifts valued at over $50.
  • Repayment. Each time a LP repays money or returned goods to the key investor, the LP must disclose the amount repaid and the date of repayment. Where any goods were provided to a LP, the LP must disclose a description of the goods, their fair market value when the LP returned them, and the date on which the LP returned them.
  • Third party claims. If the LP knows of it, it must disclose whether any interest the key investor holds in or in respect of the LP has actually been, or is subject to an agreement where it will or potentially could be: mortgaged, pledged, assigned, hypothecated (pledged as collateral to secure a debt) or sold (partly or completely) to any person (an individual or an entity). And if the LP knows, it must also disclose the name and mailing address of that person.

4. Are there any exemptions from the “key investor” disclosure obligations?

Yes. The Cannabis Regulations set out these exemptions from the key investor disclosure obligations: 

Publicly traded LPs. Notably, none of the key investor disclosure requirements apply to publicly-traded LPs. This is presumably because the disclosure that securities laws and exchange rules require of public companies, including public LPs, achieves the same level of disclosure that the Cannabis Regulations’ key investor disclosure requirements seek to achieve – although a recent review by the Canadian Securities Administrators (CSA) concluded disclosure by publicly-traded companies in the cannabis industry needs improvement.

Pre-license Key Investors. There are some advantages to getting in early: the LP isn’t required to disclose the details about the transaction by which an investor became a “key investor” if that transaction completed before the LP was granted its license – but the LP must still disclose all other information about and in respect of that key investor that the Cannabis Regulations require, including those about subsequent transactions between the LP and that key investor.

ACMPR-Continued Licences. And it isn’t required to disclose the details about the transaction by which an investor became a “key investor” if: that transaction completed before the Cannabis Regulations took effect; the LP obtained its license under the former Access to Cannabis for Medical Purposes Regulations (ACMPR); and that license was continued under the new cannabis licensing law regime. But, again, the LP must still disclose all other information about and in respect of the key investor required under the Cannabis Regulations.

5. Who can obtain the “key investor” information that an LP discloses to the government?

It’s clear that it’s best practice for a LP to inform prospective “key investors” that the Cannabis Regulations require it to collect certain information from and about the key investor, and disclose that information to the federal government. It’s also clear that a prospective “key investor” needs to agree to this to become a “key investor”. But it’s not clear yet who can access that disclosed information, or to whom the federal government can disclose it. To date, there are no decisions of any court or privacy commissioner that offers further guidance around these issues. However, it’s still early days in the cannabis legal regime, and clarity around access to and further disclosure will likely come in due course. Right now, it seems the purpose of the key investor disclosure requirements isn’t to publicize the information, but to facilitate the regulation of the cannabis industry further to the stated purposes of the Cannabis Act: to protect public health and public safety, including to reduce and deter illicit activities in relation to cannabis. Thus the responsible Minister can – and arguably only should – disclose the information where:

  • It’s in the public interest to do so.
  • The Minister considers it’s necessary to protect public health or safety.
  • It’s necessary to fulfill Canada’s international obligations in relation to cannabis.
  • To enforce the Cannabis Act and Regulations.

Access by the public & the media. All information in the federal government’s custody or control, which includes the key investor information an LP is required to disclose, is subject to the federal Access to Information Act (ATIA). It’s unclear how the government will respond to an Access to Information Act request for key investor information. However, the ATIA does have exceptions designed to protect personal information and certain confidential business information from public access that could apply to key investor information, although these exceptions are still subject to the overriding ability to disclose information if it’s in the public interest to do so or the Minister considers it’s necessary to protect public health or safety.

Disclosure. The Cannabis Act authorizes the Minister to disclose certain information, in certain circumstances; however, these relate primarily to the protection of public health or safety, fulfilment of Canada’s international obligations, and enforcement of the Cannabis Act and Regulations.  

  • Personal Information. The Minister can disclose any “personal information” obtained under the Act, without either consent or notice, if it considers the disclosure is necessary to protect public health or safety.
  • Confidential Business Information. The Minister can also disclose any “confidential business information” (as the Act defines it) obtained under the Act, without either consent of or notice to the person to whose business or affairs the information relates, if it considers the disclosure is necessary to protect public health or safety.
  • Other Information. The Minister can disclose to the International Narcotics Control Board any information relating to cannabis it obtained under the Cannabis Act (or under the Controlled Drugs and Substances Act before the Cannabis Regulations took effect) if the disclosure is necessary to enable Canada to fulfill its international obligations in relation to cannabis. The Minister can also disclose certain information to a public authority of a foreign country authorized by that country to approve the importation or exportation of cannabis into or from that country for the purposes of the administration or enforcement of the Cannabis Act or Regulations, or if necessary to allow Canada to fulfill its international obligations in relation to cannabis.

Please contact your McInnes Cooper lawyer or any member of the Cannabis Team @ McInnes Cooper to discuss this topic or any other legal issue.


McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

© McInnes Cooper, 2019. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at publications@mcinnescooper.com to request our consent.

By Jeffrey Hoyt, Corporate Finance & Securities, Partner, Practice Group Leader; David Fraser, Privacy Lawyer, Partner; Sophia Mapara, Lawyer; and Elizabeth McIsaac, Lawyer, McInnes Cooper

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