Numerous public companies in Israel have issued reports in the past year about their intentions to engage in the field of medical cannabis. For the most part, the very publicizing of such a report has led to a surge in the reporting company’s value. However, only a small ratio of these companies actually closed deals that led to actual operations in the medical cannabis market. Furthermore, quite a few legal and regulatory issues are involved with regard to operating in this market in Israel.
In light of the above, the Israel Securities Authority published an announcement to investors with various emphases about public companies operating in the medical cannabis market. The Israel Securities Authority does not express any position in its announcement with regard to the propriety of medical cannabis companies’ operations or with regard to the profitability of investing in their securities. Rather, its announcement calls investors’ attention to several parameters they should consider when deciding whether to invest in securities of public companies operating, or expecting to begin operating, in the medical cannabis market.
Companies looking to operate in the medical cannabis market are subject to supervision and regulation of cannabis treatment for medical and research purposes by the Ministry of Health’s Medical Cannabis Unit. This unit is responsible for issuing appropriate permits for every operation relating to the cannabis plant: propagation, cultivation, manufacturing, distribution, transport, and storage.
According to a document published by the Medical Cannabis Unit, corporate separation must be maintained between every stage in medical cannabis operations, including propagation, manufacturing, and distribution, whereby one legal entity is allowed to hold either a permit for propagation and cultivation or a permit for another stage in the operations (manufacturing or distribution), but not more than that. Furthermore, any party engaging in this market must hold a certificate of compliance with standards (the Israeli Medical Cannabis – Good Agricultural Practices – IMC-GAP Standard for a propagation farm and/or a cultivation farm, the IMC-GMP Standard for the manufacturing plant, the IMC-GDP Standard for storage and distribution, or the IMC-GSP Standard for compliance with security conditions). Furthermore, an operating license must be obtained from the Medical Cannabis Unit in compliance with the Dangerous Drugs Ordinance [New Version], 5733 – 1973.
Consequently, before deciding to invest in one of the “public medical cannabis companies” operating in Israel, it is highly advised to ascertain whether such company is in possession of the requisite permits and licenses for its operations in this sector, and what the practical implications of such permits are.
Transfer of rights in companies holding the appropriate permits
The appropriate permits issued by the Medical Cannabis Unit are not transferable. Consequently, a transfer of operations from the company holding an appropriate permit, or a transfer of control over the company holding an appropriate permit, to another company, without obtaining approval in advance from the Medical Cannabis Unit, is liable to result in the immediate expiration of that permit.
Israeli exports of medical cannabis and operations abroad
Even if exports of medical cannabis become possible (regulation of this matter is currently underway), there is no certainty public medical cannabis companies will receive permits to export medical cannabis. Even public medical cannabis companies already operating abroad are required to specify the regulatory arrangements in effect in those countries and their capabilities to operate under the regulations relevant to them, as well as to specify the regulatory amendments that are expected to be enacted, to the best of their knowledge, in the foreseeable future.
Letter of intent and memoranda of understandings
The Israel Securities Authority emphasizes to investors that a letter of intent is not a binding document, and that reports about intentions to enter the medical cannabis market, or about intentions to consider entering this market, in no way guarantee that that company will eventually actually operate in it. Consequently, investors should treat such reports with an appropriate degree of caution.
Some of the public companies looking to enter the medical cannabis market are publishing valuations related to their future operations. In a series of cases, the Israel Securities Authority found that the valuations published failed to provide adequate disclosures, and demanded that said companies publish additional information for the public regarding the principle assumptions underlying their valuations. The Israel Securities Authority also notes to investors’ that the value of public medical cannabis companies may be materially affected by a variety of factors involving uncertainties. These include the licensing process, the export possibilities, the volume of prescriptions for medical cannabis in Israel and in other countries, the size of the future market, the future price levels, the future cultivation and manufacturing costs, competitors, etc.
Considering the uptrend in the number of public medical cannabis companies, and since at issue is an emerging market impacted by a variety of material risk factors, including regulatory uncertainty in Israel and in many countries around the world, the Israel Securities Authority is calling investors’ attention to the importance of thoroughly scrutinizing contemplated investments in this field.