The amount of new headlines popping up regularly about United States based marijuana companies going public on a Canadian exchange through reverse mergers is pretty common these days. More and more US based marijuana companies are entering the Canadian public markets to gain access to private equity and public capital markets. This year we have seen MedMen Enterprises, a very popular and quickly growing marijuana dispensary company primarily located in California and Las Vegas, go public through a reverse merger on the Canadian Securities Exchange or CSE. MJardin, a Colorado based marijuana company also went public through a Canadian reverse merger on the CSE and everyone is anticipating both Acreage Holdings and LivWell to do the same in the near future.
- Risks or going through a Canadian reverse merger
- How D&O Insurance can help when a US based cannabis business completes a Canadian reverse merger
- How Professional Liability Insurance can help when a US based cannabis business completes a Canadian reverse merger
- How Employers Practice Liability can help when a US based cannabis business completes a Canadian reverse merger
As often as you hear about reverse mergers they are not as simple as they may first seem and they are certainly not risk free. The appeal to entering an exchange traded equity market through a reverse merger is that it can be a quicker and less expensive way of going public than a traditional initial public offering or IPO. These US based cannabis companies find businesses trading on a Canadian exchange like the CSE, TSX or CNSX that are struggling financially for some reason, buy the majority of the shares of what would now be referred to as a shell company, and exchange the shares of the private company with shares of the shell company. While a reverse merger into a Canadian public company may be quicker and cost less than an IPO, it also comes with some additional risks that certain marijuana insurance policies can help define.
Canada’s marijuana industry is booming and expected to add another $5 billion in marijuana sales now that the Cannabis Act has been passed legalizing adult-use marijuana in Canada nationally. In fact, the commercial sale of adult-use cannabis is set to start on October 17th, 2018. Some other countries like Russia have condemned the legalization of cannabis in Canada saying that it violates international trade treaties. Recently the United States Customs and Border Protection Agency threatened to issue lifetime travel bans to the US for Canadian marijuana employees and investors. Here in the United States, marijuana is a Schedule 1 drug and authorities are suggesting that Canadians involved in the cannabis trade that are looking to enter into the US could proliferate the state legal marijuana industry here. Whether you agree with this stance or not, the financial risks to a marijuana business are still very real. How these cross border threats play out financially are still an unknown which is the very nature of risk and what marijuana insurance policies are for.
Cross border threats aside, there are inherent financial risks associated with reverse mergers no matter where they take place. Again, a shell company typically has financial troubles which is why they are targeted for the acquisition. What are those financial liabilities? Some companies that have moved forward with reverse mergers have missed certain debts and liabilities of the shell company, in particular in cases where the shell company was in the process of being sued. Perhaps an acquisition is exactly what the shell company needed to get out from under certain debts. Another risk could be that without holding periods, the investors in the shell company could dump their shares right after the acquisition causing the price of the company to fall rapidly.
These are only a few of the potential challenges that US based marijuana companies face by establishing themselves as a Canadian exchange traded company. Finding out how marijuana Directors and Officers Liability Insurance could help to financially protect you from the unforeseen only makes sense for a US based cannabis company that is considering going public in Canada. As a Canadian public company you must now comply with Canadian securities laws which adds an entirely new layer of compliance and liability to consider. Insurance for marijuana companies, such as Directors and Officers Insurance, is always a good idea and would certainly be good to have when going public in Canada through a reverse merger.
The elements of the unknown are heightened through reverse mergers, especially those that happen on an international exchange that will have rules that differ from US exchanges. That is why reaching out to S2S Insurance Specialists for hard to place marijuana insurance policies can be the solution you need. S2S Insurance Specialists focus on providing clients with this critical early stage insurance for complex cross border deals. Let us assist in guiding you through the minefield of issues required to obtain proper coverage. Here are some of the policies that your cannabis business can specifically benefit from before executing a reverse merger in Canada.
A D&O Insurance policy protects you as a director or officer of marijuana company of wrongful acts that negatively affect the company’s profitability. It will also protect you if the company is sued as a result of these wrongful acts. The policy also covers legal damages and fees. Excess Limit Coverage Policies are available as well. Company executives, newly appointed officers and a board of directors should want adequate D&O insurance in place prior to moving forward with a reverse merger. Investors should require that any company they are investing in must have D&O Insurance to protect their investments from wrongful acts by the directors and officers. Again, when it comes to reverse mergers, it takes a lot of due diligence to ensure that the shell company does not have some hidden liabilities. Regardless of whether a wrongful act was truly intended, the liability still falls to directors and officers.
Who would be held accountable during a reverse merger if errors and omissions were discovered? As a cannabis accountant or attorney, those blames could be turned upon you. A PLI policy can cover traditional business professionals such as marijuana growers, trimmers but also marijuana accountants and lawyer.
If any of your employees file a claim against you for discrimination including age, race, disability, sexual discrimination, wrongful termination or some other type of discrimination; Employers Practice Liability coverage protects you from these types of employee-related claims. When a reverse merger occurs with a Canadian shell company, it is likely that your marijuana business may retain some of the shell company’s employees familiar with Canadian security laws. It may be challenging to judge their particular state of mind after their company has been acquired and the threat of discrimination claims cannot be ignored.
S2S Insurance Specialists is an international insurance broker for the cannabis industry. We will help you find the hard to place cannabis insurance policies that will protect you when taking such a big step by going public. Find the D&O policies, PLI and Employers Practice Liability policies by contacting Eric Rahn of David Rahn, the marijuana insurance specialists.