Investing in a Cannabis Operation? Consider your D&O Exposures First

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Across North America, cannabis businesses are rolling in green. Cash, that is.

In 2018 alone, investors funneled $10 billion into marijuana businesses across the U.S. and Canada — twice what was invested in the last three years combined. The North American market is expected to reach more than $19 billion in investments this year.1

With Canada and more U.S. states legalizing marijuana, investors, shareholders and directors and officers will be tapped to participate further. Whether that involves sitting on a board of directors, or financing adjunct ventures, there are a few things you need to consider when investing or joining a cannabis operation.

Always the biggest fear for investors in any fast-growing industry is the overvaluation of assets. The cannabis market is no different, and producers like Canada’s Aphria have been under fire for allegations of fraud and overvalued earnings. Peer companies have been cited for breach of conduct or fiduciary duty by shareholders and investors as well.

Before investing or taking on an advising role in a cannabis operation, ask the following three questions:

1. Does the company have a D&O policy?
   Without a D&O policy, the company may not be in a position to protect their balance sheet, indemnify the directors and officers, advisors or employees in the event of a claim against the company. Before signing on to invest or advise, make sure the company has a policy and review its limits. Is it enough to indemnify you and your fellow directors in the event of a lawsuit?
2. Was the policy negotiated by a qualified broker to minimize exclusionary language?
   Cannabis D&O exposures are unique and can’t be treated the same way as traditional D&O exposures. Additionally, the market is still fairly limited when it comes to D&O offerings for cannabis companies. Therefore, make sure the company retains a qualified, industry-knowledgeable broker to negotiate the right language in the D&O policy. Because cannabis is only legal in certain US states and still illegal federally, you’ll want the D&O policy to respond in jurisdictions where individual D&Os sit, or where litigation could potentially take place. Different D&O exposures exist where cannabis is federally legal, as in Canada, and a broker familiar with the local exposures and carriers is best suited to place a policy.
3. Should I purchase an Independent Directors Liability policy?
   Active investors or advisors who sit on multiple boards should consider an independent D&O policy. Having one will protect your personal assets should you be caught in a lawsuit and the organizations you’ve invested in are unable to fully indemnify you. Without one, a plaintiff can go after your personal assets.