CSA calls for better disclosure from cannabis sector

Companies, executives and directors in the fledgling cannabis sector need to step up their disclosure, regulators say.

In a notice published on Tuesday, the Canadian Securities Administrators (CSA) outlined a variety of disclosure failings that they’ve seen in the cannabis sector. These include hidden conflicts of interest and a lack of director independence that may be harming investors — particularly when it comes to firms’ merger and acquisition plans.

“As the market has expanded, many cannabis issuers and their directors and executive officers have participated in the financing of other cannabis issuers, resulting in higher than usual crossover of financial interests. These interests may include overlapping debt and equity, or other business relationships,” the CSA stated in its notice.

The regulators said that these arrangements can create significant conflicts.

“The cross-ownership of financial interests results in conflicts of interest that may lead investors to re-examine other variables such as purchase price, transaction timing or contingent payments,” the CSA said. “Non-disclosure of the cross-ownership of financial interests may also cause investors to question whether the M&A transaction occurred on its own merits.”

The regulators also noted that they’ve seen deficient corporate governance disclosures and a lack of board independence.

“We have observed instances where cannabis issuers have identified board members as being independent, without giving adequate consideration to potential conflicts of interest or other factors that may compromise their independence,” the CSA said.

The CSA issued new guidance on Tuesday that aims to enhance the disclosure provided by cannabis issuers.

“Investors need to understand the conflicts of interest that could arise when issuers have crossover of financial interests, because those conflicts could have implications for the possible M&A transaction,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers, in a statement.

“Strengthening governance disclosure is important to providing investors with information to make an informed decision,” he added.

The CSA also noted that while the new guidance focuses on cannabis companies, it is “equally relevant to other issuers, including those operating in emerging growth industries.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.