Increasing Lawsuits Against Cannabis-Related Businesses Places Spotlight on Adequacy of Disclosures

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Class action lawsuits against publicly traded cannabis-related companies more than doubled from 2018 to 2019, with 13 class action cases filed in 2019 compared to 6 class action cases filed in 2018 – a staggering 116% increase. Lawsuits against cannabis-related businesses continue to grow concurrently with the expanding industry growth and mostly focus on disclosure issues. Such lawsuits are ordinarily filed by shareholders in an attempt to recover investment losses, often after a company’s stock price decreases, and are asserted, in the event that the company allegedly made false and misleading statements or omissions in connection with a securities offering, under the Securities Act of 1933 or the Securities Exchange Act of 1934 for public company disclosures.

For example, on January 16, 2020, Aurora Cannabis Inc. (TSX: ACB), in Warren v. Aurora Cannabis Inc., et al., No. 20-cv-00555, received claims for allegedly making false and misleading statements and/or failing to disclose adverse information regarding Aurora’s business and prospects. Claims against Aurora were brought under the Securities Exchange Act of 1934 after the company announced disappointing results for Q1 2020 (reporting a 25% sales decline) and that the company was halting construction on its operating facilities in various regions – the result of which was a 17% stock decrease. As a result, claimants asserted, among other assertions, that Aurora had failed to disclose that they had materially overstated the demand and potential market for the company’s cannabis products; that the company’s ability to sell products had been materially impaired by extraordinary oversupply, due in part to the company’s oversupply itself; that the company’s spending growth and capital commitments were scheduled to exceed its revenue growth; that, as a result, Aurora faced heightened liquidity concerns that could result in the cessation of development of several of its facilities; that the company had violated German law, threatening its primary European market access; and that all of the foregoing had negatively impacted the company’s business, operations, and prospects and impaired its ability to achieve profitability. As a result of this information being withheld from the market, the claimants asserted that the company’s securities traded at artificially inflated prices before ultimately crashing. The Aurora suit remains ongoing.

Cannabis-related companies seeking to raise capital, whether publicly or privately, must take note of the increasing vulnerability they face in light of rising lawsuits. Often, raising capital, whether as a public or private company, requires companies to disclose various risk factors, detailed financial and operational information, and other relevant information that some companies overlook or disregard as the result of low capital or lack of experienced counsel. Such disregard may be even further exacerbated in light of the cannabis industry’s dry equity market and the ongoing COVID crisis.

However, in order to ensure that the company is adequately protected, cannabis-related companies considering raising capital should work closely with its internal management team and seek out experienced legal counsel to ensure that its disclosures are carefully tailored to protect the company against legal exposure and, in some cases, the potential to lose the company’s operating licenses. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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