Canadian cannabis company faces securities lawsuit in the U.S.

Cronos Group is a Canadian-based publicly traded cannabis company that operates within Health Canada’s Access to Cannabis for Medical Purposes Regulations and distributes globally. Cronos issued a press release in August 2018 announcing its supply agreements for retail distribution, both government-operated and private, across Canada in anticipation of the launch of the legalized recreational cannabis market in October 2018. On 30 August 2018, a damaging public article was published which claimed that Cronos was omitting critical facts about the size of its distribution agreements, alleging that the company was purposely deceiving the investing public.   

The article went on to state that “because the [distribution] agreements are so small they could never justify the premium investors are paying for the stock”. Cronos’s stock, traded on NASDAQ, subsequently dropped more than 28% in reaction to the report.
Cronos was then hit with two securities class action lawsuits in the first half of September 2018, both filed in the Sothern District of New York against the company and its CEO. The lawsuits contained substantially similar allegations – namely, that the defendants violated federal securities laws by failing to disclose that the size of Cronos’s distribution agreements with the various Canadian provinces was relatively small, and, as a result, the defendants’ positive statements about the company’s business, operations, and prospects were materially false and/or misleading, and/or lacked a reasonable basis.
A directors’ and officers’ (D&O) liability insurance policy can provide coverage for defence costs, settlement and judgement amounts for a public company, and its board and management, when faced with a securities lawsuit. However, Canadian based cannabis companies seeking to operate in both Canada and the U.S. may face an uphill battle when procuring D&O insurance, as the uncertain regulatory environment south of the border poses a significant concern for underwriters. Specifically, cannabis remains illegal at the federal level in the U.S., as well as some individual states. Insurance capacity for cannabis companies operating solely in Canada is available, albeit with an extensive application process and comparatively higher premiums.