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Jul 8, 2020
Legal and Regulatory Landscape for Psychedelics Companies Considering “Going Public” in Canada
Overview of the Psychedelics Sector
Over the past few months, many of the most actively traded stocks on the Canadian Securities Exchange have been shares of companies involved in the psychedelics industry. Companies working in the psychedelics industry have also listed on the TSX Venture Exchange and the NEO Exchange in Canada. Several other companies in the sector are actively raising capital from the investment community to develop their business, and have plans to “go public” in Canada.
While the companies listing on stock exchanges in Canada, raising capital from investors and garnering attention in the media are all generally described as “psychedelics” companies, the companies in the sector are not a homogenous group. The business models and growth plans of each of these companies vary significantly. The legal and regulatory framework also varies depending on the jurisdiction of operations for each company and the market segment in which it operates.
Generally speaking, from our perspective, companies in the sector can be broadly divided as operating in one or a combination of four market segments, namely:
- Pharmaceutical – the activities of these companies include research and development activities, clinical trials and other similar activities with both hallucinogenic and non-hallucinogenic compounds and their delivery systems;
- Clinic or treatment centres – the activities of these companies include the treatment of various conditions, including mental illness and addiction, in a clinical, treatment centre or wellness centre setting;
- Nutraceutical/wellness products – the activities of these companies include the development and formulation of various nutraceutical or wellness products using non-psychoactive substances; and
- Medical tourism/recreational usage – the activities of these companies include medical tourism activities, such as microdosing psilocybin, and recreational usage, such as truffles, in jurisdictions where such activities are legal.
In this article, we provide a high-level overview of the legal and regulatory requirements associated with these four market segments in Canada and draw from our experience internationally. For the purposes of this article, the broad classification of “psychedelics” will be applied as “a class of drugs that produce changes in thoughts, emotions, and perceptions–including hallucinations, dream-like states, and intense spiritual-like experiences.”1 “Psychedelics” will include “psychedelics such as Psilocybin, LSD, Mescaline, and Ayahuasca as well as non-psychedelic hallucinogens like Ketamine and MDMA.”2
History of Psychedelic Research and Regulation
It would be a dramatic understatement to suggest that we can capture all of the activities and important achievements of the pioneers of the psychedelics sector in just a few short paragraphs, and far be it from us to try. An attempt to do so is well beyond the scope of this article.3 Instead, we have included a brief history of psychedelics to shed some light on the current legal and regulatory landscape.
The history of psychedelic use, research, regulation and public policy is a long one, with scientific investigation being documented as early as 1877. This research continued through to Dr. Hoffman’s work with LSD in the late 1930s and early 1940s. By the early 1960s, scientists and researchers isolated and/or synthesized a number of psychedelic substances, such as mescaline, MDMA, LSD, psilocybin and ketamine.
It wasn’t until the early 1960s when the current international and domestic prohibitionist legal and regulatory stance started to be instituted. By the 1970s, psychedelics were made illegal in most jurisdictions in the world, including Canada, as part of the post-1960s “war on drugs”.
International Treaty Obligations
International policies related to psychedelics were set forth in, and continue to be governed by, three key UN Conventions, namely:
- the Single Convention on Narcotic Drugs of 1961, as amended in 1972 by the Protocol amending the Single Convention on Narcotic Drugs of 1961 (the Single Convention);
- the Convention on Psychotropic Substances of 1971 (which classifies all psychedelics as Schedule I drugs and deems them to be a serious risk to public health and having limited therapeutic value); and
- the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988 (the Trafficking Treaty).
Countries who have signed on to the UN Conventions pledge to make their national drug legislation consistent with the Conventions’ provisions, but have latitude in the implementation of the UN Conventions in domestic law. Generally speaking, there are three principled grounds under which the legal and regulatory landscape in Canada with respect to psychedelics could deviate from the mandates set forth in the UN Conventions, while still arguably permitting Canada to comply with its obligations under the UN Conventions, namely:
- Human Rights Grounds – certain of Canada’s human rights obligations supersede the obligations set out in the Single Convention and the Trafficking Treaty, and render them inapplicable;
- Constitutional Grounds – after giving “due regard to [the] constitutional, legal and administrative systems” set forth in Canada’s constitution, certain of Canada’s constitutionally protected grounds supersede the obligations set out in the Single Convention and the Trafficking Treaty, and render them inapplicable; and
- Medical and Scientific Research Purposes – certain exemptions can be relied upon under the UN Conventions “for medical and scientific research purposes”.
Canadian and International Regulatory Landscape
All businesses operating in Canada and internationally are impacted by laws of general application. Laws of general application include those related to corporate and securities laws, tax laws, intellectual property laws, labour and employment laws and environmental laws, to name just a few. In addition to these laws, companies operating in the psychedelics industry need to consider laws of specific application. It is examples of these laws of specific application relating to the four market segments identified above that make up the remainder of this article.
The Controlled Drugs and Substances Act (Canada) S.C. 1996, c. 19 (the CDSA) is Canada’s principal federal drug control statute, generally integrating the UN Conventions. For companies operating in Canada in any of the four market segments described above, the CDSA plays a prominent role in the legal and regulatory regime affecting those businesses. Generally speaking, subject to certain exemptions, the CDSA prohibits production, possession, trafficking (includes selling, administering and transporting), importing and exporting controlled substances. Psychedelics are regulated by the CDSA, with Ketamine and MDMA being included as Schedule I drugs, and DMT, Psilocin and Psilocybin being included as Schedule III drugs. One of the principal exemptions available under the CDSA, and one that has been relied upon in connection with medical and scientific research (and which is discussed in reference to Pharmaceutical activities below) with respect to psychedelics is Section 56 of the CDSA.
Those companies that can be characterized as having some or all of their business activities as pharmaceutical activities need to consider, among other things, the legal and regulatory landscape applicable to traditional pharmaceutical companies. For example, pharmaceutical psychedelics companies need to consider the CDSA, including Section 56 exemptions, and the Food and Drugs Act (Canada) with Health Canada being a key regulator for this market segment. Section 56 of the CDSA provides the federal Minister of Health with discretionary power to provide an exemption to enable a person to possess and administer controlled substances for the purposes of scientific research or clinical trials (i.e. medical purposes). In the United States, the Substance Abuse and Mental Health Services Administration, the Drug Enforcement Administration and the Food and Drug Administration (the FDA) can all play a role in the regulation of companies operating in this market segment. As always, depending on the precise nature of the business, regulated and non-regulated activities could be identified by the psychedelics company, with the potential to conduct any regulated activities by entering into a contract with an appropriately licensed entity.
Those companies that can be characterized as having some or all of their business activities as clinic or treatment centres need to consider, among other things, the legal and regulatory landscape applicable to physicians and other regulated professionals who are administering treatments within the clinic or treatment centre. Specifically, clinic or treatment centre companies need to consider the CDSA and Health Canada since both apply to the substance of many treatments administered at such clinics. Companies in this market segment may also need to adhere to organizations regulating health care professionals operating in these clinics, such as Colleges of Physicians and Surgeons, Colleges of Nurses and Colleges of Psychologists. This is true in Canada, the United States and many other international jurisdictions.
Those companies that can be characterized as having some or all of their business activities as nutraceutical/wellness products need to consider the legal and regulatory landscape applicable to food and supplement companies. Specifically, nutraceutical/wellness products companies need to consider the Food and Drugs Act (Canada) and its regulations related to, among other things, the production, advertising and labelling associated with their products, with some of the Canadian key regulators being Health Canada and the Canadian Food Inspection Agency. In the United States, with more targeted legislation relating to the nutraceutical industry, the legal and regulatory regime is more specific to these products, though such specificity has brought about a number of statutes related to nutraceuticals that are administered by the FDA.
Those companies that can be characterized as having some or all of their business activities as medical tourism/recreational usage need to consider the legal and regulatory landscape in the local jurisdiction to confirm that the business as conducted is not illegal. They may also need to consider requirements applicable to food and supplement companies. Specifically, medical tourism/recreational usage companies need to consider the CDSA, the Controlled Substances Act in the United States and their respective analogues in international jurisdictions. This market segment in particular has seen significant international interest, including microdosing psilocybin retreats in Jamaica where psilocybin in not illegal and the Netherlands where truffles containing psilocybin are legal.
Conclusion and Potential Reform
A company operating in the psychedelics sector may need to consider compliance with multiple laws and regulatory regimes depending on which one or more of the four market segments described above in which it is operating. The legal and regulatory landscape, as well as the underlying public policy underpinnings of this landscape, continues to rapidly evolve in Canada, the United States and around the world.
In Canada, changes could arise from (i) a successful court challenge under Section 7 of the Charter of Rights and Freedoms, (ii) a broader exemption under Section 56 of the CDSA for medical or scientific purposes, (iii) an exemption otherwise being in the public interest or on human rights grounds, (iv) through approvals granted by Health Canada under existing regulatory processes, or (v) enactment of legislation.
In the United States, multiple cities and states have undertaken decriminalization and other efforts to change laws related to psychedelics. The FDA gave breakthrough therapy designation for an MDMA-assisted psychotherapy to treat PTSD. In 2018 and 2019, two more psychedelic programs were granted breakthrough therapy designation, both of which are studying the use of psilocybin to treat depression. Internationally, a small, but growing number of countries have undertaken decriminalization efforts or have otherwise loosened their restrictions on the possession and personal use of psychedelics. With rapid progress developing scientifically, and with companies, investors and market participants engaged, we will continue to monitor the rapidly evolving legal and regulatory landscape associated with the psychedelics industry.
The Capital Markets Group at Aird & Berlis has the domestic and cross-border legal and regulatory expertise to advise companies, investors, advisors and other market participants who are pursuing opportunities in the psychedelics industry.