Investing in the future of cannabis in the UK - lessons from the German model

The growth in sales of legal cannabis derivatives such as CBD, and the view from jurisdictions which have already taken greater strides towards deregulation, in particular with Canada's full legalisation in late 2018, has persuaded companies and investors that there is real opportunity in the UK market.

The question for investors looking at the UK cannabis market is – how will it develop over time? Will deregulation continue apace, or will it stagnate? Will medicinal cannabis really begin to take off, or will it remain restricted to a few niche medicines, as it has been for the last fifteen or so years? Even on a brief survey, there is such a range of business models being touted, that selection of the right model to get behind is incredibly challenging, with the future appearing so uncertain.

A potentially profitable approach is, we suggest, to examine the path trodden by Germany, which, three years ago, was in a similar regulatory situation to the UK. After gradual and measured deregulation, however, the prescribing of medicinal cannabis is now widespread and becoming routine, and, in April 2019, the first two licences to grow medicinal cannabis in Germany were granted. In 2018, there were over 185,000 prescriptions for medicinal cannabis in Germany, with around 60-80,000 patients using medicinal cannabis products ranging from unrefined cannabis flowers to licensed medicines.

In this note, we seek first to set out the current legal and regulatory position of cannabis in the UK. Niels Lutzhoeft, from our Frankfurt office, who assisted Canadian company Aphria in beating over 75 other bidders to secure one of the two German cultivation licences for medicinal cannabis, then takes us through the recent evolution of the German cannabis industry, allowing us to imagine how the UK might look in a few short years.

Finally, we briefly examine the current law governing investment by UK-based investors in companies involved in the growth, processing and distribution of medicinal cannabis products, to give a flavour of what investments can be made right now to be in prime position to profit from the potential market growth which, on the German model, the UK cannabis market can be hoped to enjoy in the near future. Given that the UK is some way from legalising the recreational use of cannabis, we will not be commenting on UK investment into companies involved on the recreational side, including where only part of the company's operations take place in the recreational sphere.

The UK cannabis regulatory picture

Under UK law, plants of the genus Cannabis and cannabis resin (cannabis) are Class B controlled drugs under Part II, Schedule 2, of the Misuse of Drugs Act 1971 (MDA 1971). Additionally, they are listed under Schedule 1 to the Misuse of Drugs Regulations 2001 (MDR 2001, and together with the MDA 1971, the Misuse of Drugs Laws). Several derivatives of cannabis (Controlled Cannabinoids), including the primary psychoactive component, tetrahydrocannabinol (THC), are also Class B controlled drugs under the Misuse of Drugs Laws.

Under the Misuse of Drugs Laws, it is unlawful to possess, supply, produce, import or export cannabis or Controlled Cannabinoids except under a licence from the Home Office of Her Majesty's Government of the United Kingdom (the Home Office). It is also an offence to cultivate any plant of the genus Cannabis except under a Home Office licence. Penalties for supply and production of cannabis or Controlled Cannabinoids are up to 14 years in prison and/or an unlimited fine. Further, under Section 21 of the MDA 1971, where a corporate body commits an offence under the Act, including supply and production of cannabis or Controlled Cannabinoids, with the knowledge or due to the neglect of an officer of that corporate body, both the corporate body and the relevant officer(s) can be held liable under the MDA 1971 and liable to the penalties set out above.

Other, non-psychoactive derivatives of cannabis, including cannabidiol (CBD), are listed as Uncontrolled Cannabinoids under the Misuse of Drugs Laws, and are not controlled substances in the UK. However, the difficulties of separating, for example, CBD from THC when processing cannabis, mean that there are very strict (in theory) controls around the acceptable levels of THC in CBD products sold in the UK.

In addition to the Misuse of Drugs Laws, the Human Medicines Regulations 2012 (HMR 2012) govern the use of human medicines in the UK, and are enforced by the Medicines and Healthcare products Regulatory Agency (MHRA). A medicinal product can only be provided for human use in the UK if it is a licensed medicine, or if it meets the very limited set of exceptions under the HMR 2012 for the prescription of unlicensed medicines.

Following a good deal of controversy, campaigning and public outcry in the UK in 2018 surrounding children with rare forms of epilepsy, whose symptoms appeared to be very greatly eased by the use of cannabis oil, the UK government amended the MDR 2001 with effect from November 2018. A new definition of 'cannabis-derived medicinal products' (CDMP) was placed into Schedule 2 of the MDR 2001, meaning that CDMP (which are not licensed medicines) can now be prescribed as Specials in the UK by specialist doctors (i.e. consultant doctors) without a Home Office licence. Schedule 2 also includes drugs like morphine and fentanyl. Cannabis which is not in the form of a CDMP (e.g. cannabis flowers) remains in Schedule 1 (meaning that any prescription would require a Home Office licence).

Translating regulation into business

Taking the above laws and applying them practically, what activities can be undertaken legally in the UK in relation to cannabis and its derivatives at the present time?

First off, cannabis plants can technically be grown and processed in the UK provided a licence from the Home Office is obtained. However, in line with the EU legal framework, the Home Office policy is to issue licences only to grow 'industrial hemp', which means varieties of cannabis with very low levels of THC (no higher than 0.2% by weight). This is a productive and established industry in the UK, which in fact has, for several years, been one of the largest legal cannabis producers in the world.

There is also a rapidly-growing market for CBD, which, as an Uncontrolled Cannabinoid, can be sold legally. Inevitably, however, with the growth of the CBD industry has come an increase in scrutiny and regulation. The MHRA took issue with the large number of medicinal claims being made for CBD products, and in 2016 issued guidance that any CBD product for which medicinal claims are made will need to be licensed as a medicine under HMR 2012. Obtaining such a licence is prohibitively expensive for the vast majority of CBD producers and distributors, and so they are forced to market their products without any accompanying medical claims, relying on 'word of mouth' and the internet to make the claims for them. Further difficulty for CBD companies has come with a recent move by the European Food Standards Agency to classify CBD (along with other cannabis derivatives) as a 'novel food', meaning that it needs to be shown (through an expensive administrative process) that CBD is safe for human consumption. This is a rapidly-evolving situation, but if confirmed, many CBD food products would need to be taken off the shelves until novel food approval was obtained, which may take up to 18 months.

Notwithstanding these difficulties, the UK CBD market is a vibrant multi-million pound industry which is continuing to grow and diversify. Whilst the demand for CBD does appear to be attracting the notice of the regulators, for serious investors the grey areas which currently surround the legality and regulatory status of CBD products add uncertainty and risk to the market – clarity in these areas, even if it means a certain increase in compliance requirements, should be welcomed as adding certainty and lowering such risk.

Despite the recent re-scheduling of cannabis-derived medicinal products, a flood of prescriptions has not resulted. Despite the demand for them, there has been great reluctance from the medical establishment in general to prescribe 'medicinal products' for which there are no official prescribing guidelines and a lack of clinical data. In particular, the Royal College of Physicians and NHS England have issued guidelines for medical practitioners stating that there is currently limited evidence of the effectiveness of CDMP, except in very limited cases. This has made specialist doctors loathe to prescribe CDMP against this explicit guidance, with only a trickle of prescriptions for CDMP being written in England to date. In any case, the use of the Specials mechanism, being individually prescribed and tightly controlled, is not a 'mass-market' product which would sustain a valid pharmaceutical business on its own. There is, however, clear evidence that tens of thousands of people in the UK already use cannabis and CDMP (obtained illegally) to self-medicate for a wide variety of conditions, mirroring the position where such use is legal in places like Germany and Israel.

Even before the recent change in the scheduling of CDMP, there has been the option to obtain a marketing authorisation from the MHRA to sell CDMPs as licensed medicines. This is a path some pharma companies have already gone down in the UK, with varied success. There is currently one licensed UK medicine derived from cannabis – nabiximols, which is used to the treat the symptoms of multiple sclerosis, was developed by GW Pharmaceuticals and is marketed in the UK by Bayer under the trade name Sativex. Another medicine, Epidiolex, produced by Greenwich Biosciences, is a purified CBD medicine for the treatment of certain rare forms of epilepsy. Epidiolex has been approved for use by the US Food and Drug Administration and is part-way through the UK licensing process. Obtaining a licence is not a guaranteed route to widespread use, however – Sativex is not currently recommended for use by the UK National Institute for Health and Care Excellence (NICE), which acts as gatekeeper to reimbursement of NHS prescriptions and assesses the clinical and cost effectiveness of medicines. Without NICE approval, NHS hospitals are reluctant to prescribe medicines, and it is therefore currently very difficult to get a prescription for Sativex in the UK.

In summary, the market for cannabis-derived nutritional products and CDMP in the UK is a picture of significant demand, currently being legally permitted in some respects (e.g. CBD), and only met (legally) in very small part when it comes to CDMP. The regulatory environment around all cannabis products is currently in flux, often moving towards tighter regulation, but we would argue that this is a positive thing, reducing the risk for potential investors by creating certainty around what can and can't be done. For investors who are able to successfully anticipate regulatory changes and 'future-proof' their products, there may be very great rewards as and when the UK market crystallises in this respect.

The evolution of cannabis policy in Germany

Liberalization of the German market for medicinal cannabis: focus on domestic growing and processing

In 2017, the Federal Government passed its bill amending narcotics legislation to legalize the importation and domestic manufacture and distribution of cannabis for medicinal purposes. Since the entry into force of this novel legislation on 10 March 2017, cannabis is listed in Annex 3 to Sec. 1(1) of the Federal Narcotics Act (Betäubungsmittelgesetz, BtMG) as "marketable narcotic suitable for prescription". As expressly set forth in Annex 3 to Sec. 1(1) BtMG, such legalization only applies to cannabis "stemming from cultivation for medicinal purposes under State control subject to … the Single Convention of 1961 on Narcotics." This paved the way for importation of cannabis for medicinal purposes as well as related domestic growing.

Technically, "cannabis (Marihuana, plants and parts of plants belonging to the cannabis genus)" qualify as controlled substances under Sec. 1(1) BtMG in conjunction with Annex I, and are generally not marketable in Germany, save for narrowly-tailored exceptions. These include, first and foremost, (i) the cultivation of industrial hemp, as well as (ii) medicinal purposes as specified under Annex 3.

Following the 2017 legislative amendment on medicinal cannabis, the Federal Institute for Drugs and Medical Devices (Bundesinstitut für Arzneimittel und Medizinprodukte, BfArM) published a call for tenders under which lots for growing specified types of cannabis in a greenhouse plantation in Germany and the subsequent sale and delivery to BfArM have been awarded.

Ruling on a total of 79 bids within the tender proceedings, BfArM has issued corresponding licences for domestic growing and processing of cannabis flowers to manufacturers Aphria and Aurora by mid-April 2019. A final and binding decision on four lots within the tender is still pending, as third parties have challenged the provisional decision that had been announced to the bidders in early April. This appeal procedure has no impact on the nine lots awarded by mid-April 2019. The lots awarded so far amount to an annual production of 1,800 kilograms of cannabis flowers in total. The remaining four lots would further add 800 kilos per year in total. Medicinal cannabis grown domestically in Germany will be manufactured for and distributed by the BfArM as State authority under the Single Convention on Narcotic Drugs, 1961 as amended (the UN Narcotic Convention).

Technically, the "winners" are now required to set up fully operational indoor plantations with considerable safeguards against unwarranted removal of cannabis plants and plant parts, the first deliveries being due by the end of the year 2020. Cannabis will be grown domestically and manufactured under the requirements of Good Manufacturing Practice (GMP). This distinguishes the procedures to be followed here from the regime applicable, for example, in Canada. The Canadian requirements pertaining to cannabis are seen as constituting an "intermediate" standard between pharmaceuticals and foodstuffs. Accordingly, bidders in the German tender were facing considerable challenges to draw up concepts governing the growing and processing of cannabis flowers in full compliance with applicable pharmaceutical standards and GMP on the one hand, and the stringent regime for narcotics on the other. A considerable amount of know-how had thus to be generated and developed.

While the tender procedure was intended to ensure the primacy of domestic supplies over importations, manufacturers and healthcare professionals agree that the allotted quantities are by far insufficient to cater for ever-rising patient needs.

In fact, the BfArM imported over 3.1 tons of cannabis flowers in 2018, compared with 1.2 tons in 2017. Current estimates have calculated a total of approximately 40,000 to 60,000 cannabis patients in Germany. According to information provided by the public-service health insurers, more than 185,000 prescriptions for medicinal cannabis preparations, flowers or finished drugs had been issued last year. 71,000 prescriptions concerned flowers, amounting to costs of approximately 33 million euros.

All medical doctors are eligible to issue cannabis prescriptions without further professional requirements. Under applicable social security legislation, public service insurers are required to reimburse patients for the supply of cannabis "in the form of dried flowers or extracts in standardized quality" under a twofold
condition: First, no "generally recognized therapy under medicinal standards is available" or, "according to the medical doctor’s conviction, available therapies could not be applied for their side effects or for the patient’s performance standard". And second, "a not totally remote chance of an appreciable positive effect on the patient’s medical condition or on severe symptoms may be found". Accordingly, cannabis medicine may be prescribed for a wide array of conditions and disorders, including for relief of side effects under chemotherapy, or chronic pain.

Distribution of imported medicinal cannabis

Medicinal cannabis imported under the UN Narcotic Convention subject to a licence under the BtMG is generally only made available to the final consumer by pharmacists as an individual preparation upon individual prescription (so-called magistral preparation). Typical preparations are for inhalation upon evaporation, or as teas. Medical doctors may issue prescriptions of dried cannabis flowers of up to 100,000 mg, or 1,000 mg of cannabis extracts – the latter on a THC content basis – per patient each month. Furthermore, preparations derived from cannabis are also marketable as a finished drug, as has been the case since legislative amendment in 2017. This requires pre-market authorization and prior extensive studies and testing.

Magistral preparations fall under the "compounding" exemption and are thus exempt from the obligation of pre-market authorization. While this is the default path contemplated by the Federal legislator and the BfArM as regulator, the compliance with this distribution channel with applicable authorization requirements relies on the assumption that pharmacists will perform some final manufacturing steps, e.g., grinding, dosing, and packaging. The Düsseldorf Court of Appeal has recently emphasized this in a case involving a cannabis extract in a bottle with a childproof closure, equipped with a dosing aid and labelled with dosage instructions. Drawing on general principles governing the distinction between finished drugs and magistral preparations, the Court found that the child-proof closure and dosage information suggest that the product needs no further manufacture and is fit for delivery to the patient. Pre-market authorization under pharmaceutical law would thus be necessary for placing this extract on the German market.

Importation and exportation of cannabis

The current regime permits the importation of cannabis plants and plant parts for medicinal purposes under State control, subject to the requirements under the UN Narcotic Convention. German legislation has not generally set up any quantitative restrictions on importation so far, but requires importers to apply for licences under the BtMG.

Whilst these requirements also apply to the exportation of cannabis for medicinal purposes, as a matter of principle the regime for the domestic growing of medicinal cannabis still prevents any sales to third parties domestically and internationally other than BfArM. Sec. 19(2a) BtMG vests BfArM with the power to act as State authority under Art. 23(2) d) sentence 2 of the UN Narcotic Convention under which the respective domestic authority shall "purchase and take physical possession of such crops" in their entirety.

The distribution of CBD products

CBD is not caught under narcotics legislation and therefore does not qualify as a controlled substance. Depending on concentration as well as labelling and related claims, CBD-containing products may qualify as foodstuffs or food supplements, as a tobacco additive (or related products), or as prescription drugs.

CBD as a medicinal product

CBD products may qualify as medicinal products by function or by presentation, depending on concentration, dosage, and product presentation. As a pharmaceutical, CBD has been introduced to the list of prescription drugs, albeit without specification of thresholds, dosage requirements, or type of administration.

In principle, CBD constitutes an active ingredient in a number of licensed finished drugs marketed, e.g., under the names Epidiolex or Arvisol. The Federal Office of Consumer Protection and Food Safety (Bundesamt für Verbraucherschutz und Lebensmittelsicherheit, BVL) concludes, in this regard: "The cannabinoid CBD … has anxiolytic, antipsychotic, antiemetic, neuroprotective, anticonvulsant, sedative and anti-inflammatory characteristics due to numerous interactions with biological receptors, some of which could be shown in animal models and some in clinical human studies, according to information provided by the Federal Opium Agency at the Federal Institute for Drugs and Medical Devices. These characteristics should be clearly described as pharmacological." Oral doses reported in relevant literature mostly range from 100 to 800 mg per day.

CBD as foodstuffs, vaping products or cosmetics

CBD products have been used in Germany for various other purposes, including foodstuffs, food supplements, additives for e-cigarette liquids, and cosmetics. The widespread sale of a variety of cannabis products, and CBD in particular, prompted regulators to subject current market practice to closer legal scrutiny – and sparked some doubts over the compliance with applicable legislation.

The BVL, as the responsible Food Regulatory Agency, has recently published its views on CBD products as novel food, judging that "We are currently not aware of any set-up where cannabidiol (CBD) in foodstuffs, thus including in food supplements, would be marketable", adding that "the marketability of CBD-containing products requires a pre-market authorization as a medicinal product or an application for admission as novel food." Relying on the recent inclusion of CBD products in the EU Commission’s Novel Food Catalogue, these statements have given rise to widespread discomfort in the industry. Industry experts have claimed that related products had been marketed in meaningful quantities before the 1997 start date set out on the Novel Food Regulation. In fact, German Government Agencies published a recommendation on the daily intake of THC with hemp-containing foods as early as October 1997, stating that "along with the increased cultivation of industrial hemp in Germany, the use of plant parts … in food processing has gained importance." Such statements may serve to challenge the Commission’s stand that "Cannabis sativa L., extracts of Cannabis sativa L. and derived products containing cannabinoids are considered novel foods as a history of consumption has not been demonstrated." In an authoritative ruling, the Federal Supreme Court (Bundesgerichtshof) held that the EU Commission’s Novel Food Catalogue constitutes a mere indication that may be rebutted (BGH GRUR 2015, 1140 – Bohnengewächsextrakt). The ability of manufacturers and importers of non-medicinal CBD to market their products will often rely on legal opinions provided to wholesalers and retailers, or corresponding warranties and representations.

From here to there

Comparing the UK with the current situation in Germany, it is clear that, in reality, there is not actually a vast difference in the legal and regulatory situation. In some respects – for example in having a thriving domestic cannabis-growing industry – the UK is in fact ahead of the German market. The gap which needs to be bridged is the acceptance by the medical establishment that the benefits of cannabis – although not strictly proven by clinical trials in the manner of 'standard' pharmaceuticals – can be significant. The use of CDMP either in unrefined form, or in the form of cannabis oil, to treat chronic pain, epilepsy, and many other chronic conditions for which other treatments are ineffective or problematic, is becoming increasingly widespread as countries like Germany and Canada remove restrictions, and has been going on in places like Israel for many years.

There is growing pressure for the regulators and the medical establishment in the UK to accept the growing body of evidence of medical cannabis use in these jurisdictions, and apply it to take the next steps in deregulating the UK market. This may happen gradually, but as the evidence for safe and effective use continues to grow, the UK government's willingness to reduce the regulatory roadblocks to CDMPs and even unrefined cannabis for medical use is likely to increase as public pressure grows. The long distance Germany has come in such a short time is a very positive model for where the UK might be in only a few years, and may provide a good deal of comfort to investors looking at opportunities to invest in UK medicinal cannabis and CBD companies.

Investing in cannabis companies in the UK

Home grown investment: UK companies operating in the cannabis sector

Historically, the main UK player in the medicinal cannabis sector has been GW Pharmaceuticals. GW listed on the London Stock Exchange (AIM) in 2001 and has subsequently relisted in the US on NASDAQ in 2013. This is not controversial, as GW carries out its activities perfectly legally in the UK, in accordance with its Home Office licences. Its most recent offering raised an impressive US$345 million. Now, medicinal cannabis investment firms Ananda Developments and Sativa Investments have listed on the UK’s NEX market. These companies are carrying out activities which are legal in the UK (provided appropriate licences are obtained), and therefore there is no bar to investing in them. The same applies, of course, to companies selling CBD products (provided these comply with UK law).

What about overseas companies seeking UK investment?

Difficulties can arise when UK investors are seeking to invest in a company that operates outside of the UK. Such investors will need to ensure that they are legally permitted to do so. For example, a UK based investor wishing to buy shares in a Canadian company that grows and cultivates cannabis for medicinal purposes in Canada (which may sit outside what is permitted under English law) will need to make sure that it will not face criminal liability for (a) investing in the Canadian company and (b) receiving dividends or income from its investment in the company. The same would also be true if the Canadian company wanted to list on AIM or the London Stock Exchange.

1. Investing in an overseas company from the UK

The MDA 1971 creates a specific offence under section 20 for anyone who "assists in or induces the commission in any place outside the United Kingdom of an offence punishable under the provisions of a corresponding law in force in that place", which essentially means:

"[…] a law providing for the control and regulation in that country of the production, supply, use, export and import of drugs and other substances in accordance with the provisions of the Single Convention, on Narcotic Drugs signed at New York on 30th March 1961".

The UK, along with 60 other countries (including Germany), is a signatory to the UN Narcotic Convention, which places obligations on states to regulate controlled drugs through legislative and administrative measures to protect public health and welfare.

Under the MDA 1971, the activities of the overseas company would not be considered an "offence punishable under the provisions of a corresponding law" provided that:

(a) its activities are conducted in a country where they are permitted under local laws; and
(b) the country is a signatory to the UN Narcotic Convention.

In such circumstances, it is unlikely that the UK investor would be prevented from legally investing in such a company. A UK entity seeking to invest in a Canadian medicinal cannabis company, for example, would likely be permitted to do so given that producing cannabis for medicinal use is legal under Canadian law and that the country is a signatory to the UN Narcotic Convention.

2. Receiving dividends or income from an overseas company

UK investors receiving income or dividends from investments in overseas medicinal cannabis companies will also need to ensure that they do not fall foul of the Proceeds of Crime Act 2002 (POCA).

There are a number of offences under POCA, including:

• concealing, converting or transferring criminal property;
• entering into or becoming involved in an arrangement to launder; and
• using, acquiring or possessing criminal property.

Key to determining whether an offence has been committed is the meaning of "criminal property". Property will be considered "criminal" if it "constitutes a person's benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly)" and the "alleged offender knows or suspects that it constitutes or represents such a benefit" (section 340(3)). Conduct will be deemed "criminal" if it "would constitute an offence in any part of the United Kingdom if it occurred there" (section 340(2)).

It has been recognised that POCA has the potential to create dual criminality for persons who receive income in the UK from activities which occur legally abroad but which are unlawful in the UK. Defences to rectify such a situation were introduced by the Serious Organised Crime and Police Act 2005. However, this defence does not apply to the offences set out in the MDA, due to the maximum sentences for such offences exceeding the 12 month limit in the defence.

However, provided that:

(a) the foreign investee company carries out all of its cannabis related activities under local licences and in full compliance with local well-developed domestic laws and regulations; and
(b) the country in which such activities occur is a signatory to the UN Narcotic Convention and its controlled drug regulations are in compliance with its obligations regarding the lawful research, production and development of medicinal cannabis

it is unlikely that such activities "would constitute an offence in any part of the United Kingdom if it occurred there".

This is supported by the fact that there is already a framework for the legal cultivation, research and production of medicinal cannabis products in the UK. As previously mentioned, the Home Office has already granted a licence to GW Pharmaceuticals to manufacture its cannabis-derived drug, Sativex. Given that the same activity abroad can be conducted legally in the UK under a licence, it would be unrealistic of the UK government to insist that a UK investor cannot lawfully invest in a foreign company which has an equivalent state licence in its local jurisdiction. The UK government has also recognised (in moving CDMP to Schedule 2 of the MDR 2018) that derivatives of cannabis can have medical benefits, which further supports this notion.

Therefore, if all relevant laws and regulations are fully complied with, there should be no reason why dividends or income cannot be received and investments made by a UK investor in a foreign company operating in the medicinal cannabis sector.

That being said, it is impossible to completely exclude the possibility of some unforeseen circumstance arising to create a liability for a UK investor in a medicinal cannabis company. However, in light of the UK government's active engagement with the medicinal cannabis sector and the recent relaxation of restrictions on the prescription, research and development of medicinal cannabis, it would be surprising if the UK government began targeting the proceeds of foreign companies engaged in lawful medicinal cannabis supply and production. When it comes to the recreational use of cannabis, however, the UK government has taken no such steps towards legalisation and therefore the risks of investing in a foreign company producing recreational cannabis would be all the greater.

How does this impact private investment?

If a UK investor is considering making a private investment into a foreign medicinal cannabis company, they will need to ensure that they have robust contractual protections in place. Such protection may take the form of warranties, covenants or undertakings to seek comfort that the company they are investing in has fully complied with local laws and to ensure ongoing compliance. It is unlikely that any further protection in the form of indemnities would be provided and, in any case, such protection would not be effective against the risk of criminal liability.

What about public listings?

Any foreign companies in the medicinal cannabis industry wishing to list in London on AIM will need to bear in mind the requirement to appoint a nominated adviser or "nomad" under the AIM Rules. The nomad is responsible for assessing the company's appropriateness for admission to AIM, among other things. A guidance note to the Nomad Rules lists various factors that should be considered when assessing such appropriateness. The guidance lists potential issues such as when the legality of the applicant’s business operations in the UK is questioned and in any jurisdiction where such operations are materially carried on, or the applicant company has failed to secure the licences or government approvals necessary to conduct its business. Nomads will be particularly cautious in ensuring that the companies it is considering bringing into the market have no involvement whatsoever in recreational cannabis in light of the current legal and regulatory climate in the UK.

It is therefore crucial that any overseas company seeking admission to AIM ensures that it has complied with the local laws in which it operates, including territories where medicinal cannabis is grown, sold, supplied, exported and imported.

Whilst UK investors should take comfort in the surge of legal investment in the medicinal cannabis sector, care should be taken that any investments made comply fully with relevant laws and regulations, to avoid facing criminal liability.

Conclusion

Taking Germany as a model, the UK is, in our opinion, well set for further deregulation and an increase in the use of medicinal cannabis, alongside the already burgeoning CBD market. Whilst the latter may be subject to some increase in regulation as a corollary, this is to be welcomed by the sensible investor as providing greater certainty in respect of future regulatory change.

It is already very possible for UK investors to make investments in companies actively involved in the medicinal cannabis industry both at home and overseas in jurisdictions such as Canada, Germany and Israel, and for such overseas companies to list on the UK exchanges. These companies are developing the expertise and products to benefit most rapidly as the UK regulatory restrictions are further eased, but there is of course room for UK companies to bring new ideas to the table, and to build on the long history of those UK companies already making legal and healthy returns from cannabis.

For further information, please email: CannabisInterestGroup@twobirds.com