On July 8, 2019, CannTrust (CTST), the Canadian cannabis grower and retailer, was shaken by regulatory action. Health Canada, Canada’s governing body responsible for cannabis, found CannTrust had failed to comply with regulations by cultivating plants in five unlicensed grow rooms in its Niagara greenhouse between October 2018 and March 2019. As a result, the company has been forced to cease all sales and shipments of its products until the matter can be sorted out.
As the news broke, executives failed to take responsibility for being non-compliant and instead issued a press release stating that the news was based on, “observations by the regulator regarding the growing of cannabis in five unlicenses rooms and inaccurate information provided to the regulator by CannTrust employees.”
It has since been discovered that former employees had been instructed to put up fake walls to hide the plants from the regulator. It was also learned that the illegal plants were obstructed from view by a carefully staged photo op.
These are tenuous times in the cannabis industry.
We are at a very exciting, yet tenuous place in the cannabis industry. As cannabis remains federally illegal in most of the United States, and has just become legal across Canada, all eyes are on every facet of the space.
The negative fallout from CannTrust is reverberating around the globe. Investors have taken a huge hit along with industry peers who have been fighting for respect and legitimacy in the industry. Consumer confidence in the legal cannabis market will also suffer due to the company’s regulatory breach.
While the Canadian government sorts through this significant breach, the effects will be felt for a long time to come as stock value takes a huge hit and the halt of sales will serve to intensify the already chronic problem of product shortages and inflated prices in Canada’s legal cannabis market.
Cannabis stocks take a nosedive.
The fallout CannTrust is facing from this news came both swiftly and severely, but it won’t be faced by CannTrust alone. In the week following the news, the Horizons Marijuana Life Sciences Index ETF – an index that tracks Canadian cannabis stocks – had its worst week since last December, losing more than 8.5%. U.S. cannabis stocks didn’t do much better, losing nearly 7% in the same timeframe.
CannTrust’s stock price fell nearly 50%, bottoming out a 3.34 CAD in the days following the news. The stock continues to take a hit, with some industry analysts predicting that should the company lose its license, the stock could fall below $1.
This market volatility should teach us two things. First, it shows that while investors are incredibly interested in cannabis space, they remain skittish. Second, it demonstrates how intertwined businesses are in this space. When a single company’s inability to comply causes international stocks to tumble, it further underscores the importance for all businesses in the legal cannabis industry to raise the bar on compliance. This is the only way to instill trust and confidence in regulators, investors and consumers.
Lawsuits have been filed.
As the world waits to see what sort of punishment the Canadian government will leverage upon CannTrust, the company has been named in at least 14 lawsuits. CannTrust is listed on both the Toronto Stock Exchange and the New York Stock Exchange, so lawsuits are being filed in both the U.S. and Canada.
According to the Financial Post, thirteen of the 14 lawsuits were “made by law firms south of the border. The sole class action lawsuit in Canada was launched by Windsor, Ontario-based Strosberg Sasso Sutts LLP, seeking $250 million. The lawsuit, which also names CEO Peter Aceto and each member of CannTrust’s board of directors as individual defendants, alleges CannTrust breached section 130 of the Ontario Securities Act which outlines liability for misrepresentation in offerings.”
We must be better.
CannTrust’s compliance failures are a reminder to the cannabis industry that in every aspect of our business – from how we grow plants and package products to how we promote brands and create ads – compliance is paramount and must come first.
The legal cannabis industry is in its infancy. At this stage, regulatory compliance is not only required by law, but is an absolute necessity as we continue to build the trust of lawmakers, mainstream businesses and consumers. We must demonstrate that businesses are being operated in a safe, legal and compliant manner.
There are countless systems in place and tools to ensure that companies are maintaining compliance. There is little to no excuse for these types of breaches. Allison Kopf, founder and CEO of Artemis, a cultivation management platform that helps cannabis growers ensure they are compliant with regulations, recently spoke with Bloomberg. “This is a pretty simple problem that’s going to lead to a lot of lost revenue for this company, you can already see it in the stock price,” said Kopf. “This is a massive issue that’s actually really easy to fix. Link up your data, trace it through the supply chain and make sure you’re following regulations. It’s not that difficult of a problem solve, you just have to commit to doing it and invest in doing it.”
There is a good chance that history will repeat itself and that another big brand will be forced to report a regulatory breach. At this time, competition should be thrown aside as we work together to bring this industry to the same level of repute as seen in technology, manufacturing, hospitality and healthcare.