On 18 September 2020 the UK Financial Conduct Authority published guidance on the listing of cannabis-based businesses on UK stock exchanges after a lengthy internal review. This move will be welcomed as indicating that the London capital markets are “open for business”, particularly for companies operating in the medical cannabis space. In this article we consider the key issues set out in the FCA’s guidance and their impact on companies looking for finance in the UK, and discuss some practical concerns which remain to be addressed in further guidance to be issued by the FCA.
The issue – UK money laundering concerns
Medicinal cannabis was legalised in the UK in 2018, potentially creating a new and exciting investment opportunity.
However, legal complexities created by the UK Proceeds of Crime Act 2002 (POCA), which until now had been the subject of no regulatory guidance, led to significant uncertainties and therefore investment risk.
Under POCA, the concept of “criminal conduct” captures not only an offence in any part of the UK but also (and crucially) any conduct outside of the UK which would be criminal in the UK if carried out here. The impact of POCA may be to deem the proceeds of activities which are perfectly legal in an overseas jurisdiction to be “criminal property” in the UK. The consequence of such a legal characterisation would be that dealing with such proceeds or property representing it (such as shares or distributions to shareholders) could constitute money laundering in the UK.
As such, investing in overseas businesses (whether in the medical or recreational cannabis space) which have been fully legalised and licensed by the relevant authorities in their home jurisdictions could create a UK money laundering offence, the most obvious example being that of recreational cannabis businesses, as possessing and supplying cannabis for recreational use remains a criminal offence in the UK.
On 18 September 2020, the FCA published their approach to listing companies operating in this industry on the Official List which can be found hereand can be summarised as follows:
- Recreational Cannabis Companies: the proceeds from recreational cannabis companies, even when they are located in those jurisdictions that have legalised it, are proceeds of crime under POCA. The FCA would therefore not admit the securities of such a company to the Official List.
- UK-Based Medicinal Cannabis Companies: UK-based medicinal cannabis companies can have their securities admitted to listing on the Official List (provided they have the requisite Home Office licences).
- Overseas Medicinal Cannabis Companies: overseas-licensed companies may be listed on the Official List provided the FCA is satisfied that POCA does not apply and they satisfy the other eligibility criteria for listing. However, such companies will need to satisfy the FCA as to the POCA risk and that their activities would be legal if carried out in the UK.
Further clarity required
The fact that the FCA has issued this statement is clearly very welcome and supportive of investment and transactions in the London market. However, some questions remain.
The obvious first question to ask is how an overseas company can satisfy the FCA “that their activities would be legal if carried out in the UK”. Fladgate has been advising its clients that a legal due diligence process needs to be undertaken, by local counsel and English counsel, to confirm:
- that as a matter of local law, the company holds the necessary regulatory permissions and licences to operate under the local jurisdiction; and
- as a matter of English law, that the activities of the overseas company would be legal “if carried out in the UK”, taking into account equivalent provisions under the UK licensing regime.
We envisage that, in certain transactions, there may be a “grey area” in establishing the “equivalence” of the overseas medical / pharmaceutical licensing regime to the UK regime (not least when one considers that the process of granting a licence to a particular company may involve substantial bureaucratic discretion regarding “suitability” or “fitness” to operate). It may not, therefore, be possible to definitively confirm that the overseas “activities would be legal if carried out in the UK”, although this does not necessary preclude a conclusion that the overseas activities represent a negligible, or at least limited, “POCA risk” (ie. a risk of UK criminal enforcement). Exactly where the FCA stands on these related, but distinct, issues, both of which are referred to in the statement, is not yet apparent.
Additionally, it is not clear how the FCA’s guidance, and the principle of “UK equivalence”, applies to overseas “wellness” companies involved in CBD products with low THC content, which are non-medical and non-recreational. We assume, and have been advising our clients, that a similar POCA analysis to that set out above would need to be undertaken, and further that the FCA would need to satisfy itself as to local legality and UK equivalence in the same manner as for medical cannabis businesses.
To clarify these and related issues, we would welcome further guidance from the FCA on the confirmations that they require. The FCA’s statement was made pending a guidance consultation which will follow in due course, although no timetable has been set.
Finally, we note that there has not as yet been any guidance or announcement provided by AIM Regulation, in respect of AIM, or by AQUIS Stock Exchange in respect of the AQSE market, but we expect that they would adopt a similar approach to that taken by the FCA. In any event, and regardless of the views of the UK regulators, potential issuers and investors would be well advised to conduct a rigorous legal analysis of their cannabis operations for compliance with UK money laundering laws.