Canadian cannabis industry at risk of lawsuits, regulatory enforcement

Even small cannabis companies in Canada should begin building an internal compliance regime to avoid increasing regulatory enforcement and securities class action suits, according to the Canadian Securities Litigation Outlook report published last week by Cassels Brock & Blackwell.

Wendy Berman, a Cassels partner in Toronto who co-authored the report with fellow partner Lara Jackson and lawyers across the firm’s national securities litigation group, said in an interview that there will be a greater focus from Canadian securities regulators.

“There is a lot of interest and a lot of investment [in the cannabis industry],” Berman said.

In September, Health Canada suspended CannTrust’s license to produce its own cannabis products. Since then, the company has faced class-action suits, and the Ontario Securities Commission indicated it began an enforcement investigation relating to CannTrust’s disclosure. Berman said before the CannTrust enforcement investigation, the commission put out a report finding the majority of cannabis companies’ disclosures to be weak.

In light of these developments, Berman said, now is the time for smaller companies without the resources to begin looking at building a compliance program.

“You have to make sure you’re complying with a number of regimes,” Berman said.

She said the compliance effort should begin with an enterprise risk assessment and in-house counsel needs to make sure their company’s quarterly disclosures are in order. Because of how new the industry is, compliance may not be immediately feasible.

“It’s difficult,” Berman said. “[The companies are] not generating revenue and as a result, they have to be wise on how they spend their dollars. You’re going to have companies that don’t comply because they don’t have the resources to direct toward compliance.”

The problem with not working toward compliance, Berman said, is it taints the newly legalized industry, Berman said.

Another issue outlined in the report surrounding disclosures is that a handful of securities class action suits are being filed against cannabis companies in Canada.

“Almost immediately following CannTrust’s stock tumbling, four Canadian law firms and as many as 14 U.S. law firms launched class-action lawsuits against the company and certain directors and officers alleging misleading and inaccurate disclosure by the company regarding its operations and financial position,” the report says.

Berman said companies and their counsel should be making sure their disclosures are truthful and not misleading. Much of the work to become compliant with Canadian federal securities law will help companies mitigate the risk of a securities class action suit.

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