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Cannabis Investors: Time for Concern Over Potential Regulatory Changes?

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A review from the TMX Group Inc. (TSX:X) with regards to how it, the parent company of Canada’s Toronto Stock Exchange (TSX), will move forward with handling increased demand for cannabis-related publicly traded firms with assets in the U.S. market has caused quite a stir in financial markets of late. Market participants and analysts are attempting to understand how any proposed changes by TMX will affect equity offerings for marijuana companies in the future.

With the legal and regulatory landscape for cannabis-related firms relatively uncertain in many markets around the world, the openness of the Canadian stock exchange to listing such firms has been both financially lucrative for TMX as well as potentially dangerous from a legal standpoint. TMX is reportedly assessing the potential liability risk the exchange is taking on by facilitating equity issuances for cannabis companies which are increasingly diversifying into the U.S. market, a market in which marijuana is still federally illegal.

While this remains the case in Canada, the fact that the Trudeau government is intent on legalizing marijuana has the TMX group less concerned north of the border and more conscious of potential ramifications from south of the border.

With the Canadian Venture Exchange (CVE) now seeing more than 50% of its trading volumes stemming from marijuana issues. With new company offerings taking place almost daily, it may be hard for TMX to close the door completely on a revenue stream the exchange has relied on for some time now.

That being said, the potential liability stemming from any regulatory changes relating to how the Canadian exchange handles companies with U.S. marijuana operations has sparked speculation that it may suddenly get more difficult for some companies to raise money on the exchange — a risk perhaps not widely considered by the market until recently.

The ability of companies with substantial operations in the U.S. to raise money on Canadian exchanges and funnel the proceeds into its U.S. operations is one of the primary drivers for many of the U.S. companies to accept buyout offers from Canadian marijuana firms. The trickle-down effect of any tightening from the TMX group on equity issuances may begin to affect the acquisition-fueled growth models of many Canadian cannabis companies, including Canopy Growth Corp.  (TSX:WEED) and Aphria Inc.  (TSX:APH).

Bottom line

The most recent earnings release from TMX group was a mixed bag, and with the reported reduced revenue and cash flow from operations, it may be a difficult time for TMX to make any significant changes to its business model.

That said, the risk that TMX tightens restrictions on cannabis-related firms is real and should be taken seriously by investors.

Stay Foolish, my friends.

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Fool contributor Chris MacDonald has no position in any stocks mentioned.

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