Could Brit Investors In Legal Cannabis Companies Be Breaking The Law?

Published On: July 27, 2019Categories: Latest News3 min read

Legal experts have warned that UK-based investors in the legal cannabis market could, in fact, be potentially interpreted as breaking the law even if their investments are shares in stock market-listed companies. The grey area is a result of the fact that cannabis is still illegal in the UK, despite a law change last year that means specialists can now prescribe medical cannabis in isolated cases where conditions such as rare forms of epilepsy have failed to respond to other treatments.

Across the world, regulations and laws around the use of cannabis are changing quickly. A domino effect is taking place with more and more countries and territories legalising the drug for either medical or recreational use. Or both. Canada fully legalised cannabis last year and in the USA, cannabis is legal in one form or another in 30 states with more set to follow over the coming months and years. New Zealand will hold a referendum in 2020 to decide if personal, recreational use of cannabis will be legalised in the southern hemisphere country.

These changes to the legal status of the cannabis, which for decades was categorised alongside drugs like cocaine and ecstasy and only obtainable on the black market, has opened the floodgates to a huge and brand new market. By 2025 the legal cannabis market is forecast to hit an international value of $60 billion and is expected to keep growing as legalisation reaches countries where the attitude of authorities is changing more slowly.

The market for legal cannabis is almost unique in the fact that there is proven, previously black market, demand despite the legal market only being a few years old. The size of the opportunity, backed up by relative certainty of demand for a fresh market, has inevitably piqued the interest of investors, many of whom are likening what is happening to the end of Prohibition.

London’s financiers and institutional investors, as well as private individual investors, are as keen as anyone for early exposure to the legal cannabis market. However, especially those regulated by the FCA, are being stymied by a lack of regulatory guidance. Quoted in The Times newspaper, Alison Saunders, a former head of the Crown Prosecution Service now working for city lawyers and compliance specialists Linklaters as dispute resolution partner commented:

“Companies are all lined up wanting to invest, but they don’t want to cross the line and be disqualified.”

And non-regulated investors, either VC or other kinds of private equity funds and individual investors, are also not in the clear. At least, to the letter of the law. Because cannabis is still illegal in the UK, even investments in companies in a jurisdiction where it is legal could be categorised as in breach of the Proceeds of Crime Act. That could, again in theory, mean that if investors repatriate any returns, such as dividends or a profit on shares in publically listed legal cannabis companies, it could be considered money laundering. Investments in cannabis companies would be illegal in the UK and returns under UK law technically defined as ‘proceeds of crime’.

Experts say the likelihood of prosecution is very low but that “the risk cannot be ruled out”. There are reports of British banks closing the accounts of investors in Canadian cannabis stocks as a precaution against being implicated in in legal activity. Michael Lyons, a partner at Clifford Chance, explains:

“Banks may have a lower risk appetite than investors and may not process the payments, could report them to the authorities or potentially could ‘de-bank’ the customer if they determine the customer is engaging in activities which attract criminal law risk.”

The FCA has stated that it has no official guidance for UK-based investors in the legal cannabis sector. That almost certainly means no action would be taken if investments are made in companies operating legally in international jurisdictions. But investors will, nonetheless, be demanding the rules are clarified to prevent unexpected consequences such as a bank account being surprisingly shut down.

About the Author: Jonathan Adams

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