One-Hit Wonders

Canada: Quebec Court Dismisses Proposed Class Action Against Cannabis Company

Published

2 years ago

February 8, 2023

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On January 23, 2023, the Quebec Superior Court denied leave to pursue a class action against HEXO Corp. The proposed class action raised various allegations of misrepresentation and breaches of disclosure obligations over the period of April 2018 to March 2020.¹

The decision determined that the announcement of negative news followed by a decline in a public issuer’s stock price is not enough on its own to satisfy the requirements of claims for statutory misrepresentation. Arguments based on backwards reasoning with the benefit of hindsight will not meet the evidentiary burden on plaintiffs to show a reasonable possibility that the action will be resolved in their favour.

A. Factual Background

i. Supply Agreement

In April 2018, HEXO issued a press release announcing that it entered into a supply agreement with what became the Société québécoise du cannabis (the “SQDC“) to be the preferred supplier of cannabis products in Quebec for five years (the “Supply Agreement“). The press release stated that the Supply Agreement required SQDC to purchase 20,000 kilograms of product in the first year following the legalization of cannabis. It disclosed that the SQDC had the right to terminate the agreement under certain circumstances and included cautionary language regarding the reliance on forward-looking statements.

The company’s Management Discussion and Analysis (“MD&A“) underscored the strategic importance of its relationship with SQDC and estimated that potential revenue under the Supply Agreement could reach $1 billion.

ii. Corporate Acquisition

In March 2019, HEXO issued another press release announcing that it would acquire Newstrike, another publicly traded cannabis company. With that acquisition, HEXO estimated its net revenues from the sale of cannabis in Canada would be more than $400 million.

The announcement included that the acquisition of Newstrike would add approximately 470,000 square feet of additional production space in Ontario’s Niagara Region and achieve annual synergies of approximately $10 million.

The day after this announcement, in a call with analysts, the company stated that 250,000 square feet of the Niagara production space was licensed and operational.

iii. Revenue Estimates

Following the announcement of the acquisition, the company made statements about estimated revenues. For example, in the company’s MD&A dated June 12, 2019, it estimated that revenues would double in Q4 2019 because of, among other things, the Supply Agreement and the Newstrike acquisition.

iv. String of Bad News

Over the course of the following nine months, the company issued a series of negative announcements that caused repeated drops in the company’s stock price. These announcements included:

The company was withdrawing its revenue guidance of $400 million and was right-sizing its operations, including winding down operations at the Niagara facility acquired from Newstrike.
“Block B” of the Niagara facility (approximately 17 per cent of the facility) was discovered as not being adequately licensed. Cultivation and production activities in the unlicensed space were immediately stopped. The company subsequently announced it would sell the Niagara facility.
HEXO’s Q4 2019 financial results were approximately 40 per cent lower than forecasted.
HEXO recorded three separate impairments on inventory in the range of $265 – $280 million. The company identified material weaknesses in its internal controls of its financial reporting in various areas including its year-end inventory count.
SQDC failed to purchase its 20,000-kilogram commitment under the Supply Agreement in the first year and HEXO was not going to enforce this commitment because of its overall business relationship with the SQDC and its position in the Quebec market.

B. Alleged Misrepresentations

Owing to the decline in the company’s stock price, the plaintiff sought authorization to institute a secondary market claim against HEXO, filed under the Quebec Securities Act, and further sought leave to pursue a class action against the company for damages arising from statutory and civil misrepresentations.

The plaintiff alleged HEXO misrepresented that:

1. The Supply Agreement guaranteed revenues associated with the sale of 20,000 kilograms of cannabis in the first year;

2. The acquisition of Newstrike:

a. included fully licensed and operational facilities;

b. would generate more than $10 million in annual synergies;

c. along with the Supply Agreement, would result in the doubling of HEXO’s net revenue between Q2 and Q4 in 2019;

3. HEXO would achieve revenue of greater than $400 million for the 2020 fiscal year;

4. HEXO’s inventories were accurate and its internal controls were effective.

C. Why the Suit Failed

i. Supply Agreement

The Court disagreed that HEXO’s statements regarding the SQDC’s purchase commitment of 20,000 kilograms of cannabis amounted to a “guarantee” of first-year revenue under the Supply Agreement. The impugned statements were found to simply provide a description of the SQDC’s purchase commitment in the first year under the Supply Agreement. The Court expressly commented that courts do not make assessment with the benefit of hindsight. The fact that the SQDC did not fulfil its first-year purchase commitment or that the defendants decided not to enforce the take-or-pay feature are not evidence that the public statements were untrue or misleading at the time they were made.

The Court reached its decision after considering these factors, which effectively qualified the alleged misrepresentation:

(i) HEXO disclosed that the SQDC could terminate the Supply Agreement under certain circumstances rebutting any notion of guaranteed sales;

(ii) HEXO’s statements about “strong business certainty through Year 1 post-legalization” referenced several factors and not just the SQDC’s commitment under the Supply Agreement;

(iii) HEXO’s press release contained cautionary language that forward-looking statements “should not be read as assurances of future performance or results”; and

(iv) the plaintiff was aware that this was a “new and volatile market.”

ii. Newstrike Acquisition

Although the plaintiff alleged HEXO misrepresented the Niagara facilities were fully licensed and operational since March 2019, the plaintiff’s evidence demonstrated that the licensing deficiency only became known around July 30, 2019, which is when HEXO disclosed they were made aware of the deficiencies.

In respect of the impugned statements that operations at the Niagara facility would be licensed for cannabis production, HEXO announced on October 24, 2019, it had temporarily suspended its operations at the Niagara facility as part of cost-cutting measures. Hence, the fact that one section of the facility was not adequately licensed could not reasonably be expected to have any impact after October 24 on an investor’s decision to buy or sell HEXO securities.

The Court further noted that the mere fact that projected synergies failed to be realized was not evidence that the impugned statements were misrepresentations of material facts at the time they were made. In any event, HEXO clearly disclosed the risk that the synergies may not be achieved so that investors would not rely on the projections.

As for the fact that HEXO’s Q4 revenues were lower than forecasted and the lowering of HEXO’s financial guidance, the documents in question contained the assumptions underlying the forecasts and cautionary language that specifically warned readers that projections are not guarantees of future performance or results.

iii. Impairment Loss on Inventory and Internal Controls

In terms of the impairment loss on inventory, the Court found that the plaintiff failed to link any of the subsequent disclosures on impairment to a previous misrepresentation of a material fact at the time the statement was made. Although there was a restatement of certain financial statements, the Court accepted that the impairment loss was due to subsequent events and new and available third-party information about circumstances surrounding the ongoing development of cannabis use.

The plaintiff also failed to establish that the impairment disclosure concerned a material fact. The Court found the plaintiff failed to lead evidence that ties the decline in HEXO’s share price to the disclosure of the adjustments to the impairment loss on inventory.

The Court further determined that the plaintiff failed to identify any HEXO public statements which contain alleged misrepresentations regarding its internal controls. The company disclosed in October 2018 that it was implementing a new enterprise resource planning system and cautioned that the related design and testing process could result in errors and/or inaccurate information for management and financial reporting.

D. Conclusion

The Court’s decision demonstrates that courts will look deeper than simply pointing to a negative news release and corresponding stock price drop to demonstrate reasonable probability of success for leave to bring a statutory, secondary market claim for misrepresentation. The decision also highlights the importance of using robust safe harbour language for forward-looking statements and risk disclosures in MD&As.

Footnote

1. Dionne c. Hexo Corp., 2023 QCCS 162 (CanLII)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

https://www.mondaq.com/canada/cannabis–hemp/1278752/quebec-court-dismisses-proposed-class-action-against-cannabis-company?email_access=on

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One-Hit Wonders

Kentucky Bills Would Tax and Strictly Regulate Hemp-Infused THC Beverages Like Alcohol

Published

2 weeks ago

March 19, 2025

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In the years since the 2018 Farm Bill became federal law, a burgeoning industry of hemp-infused THC beverages has proliferated throughout the country, including in Kentucky. The 2018 Farm Bill legalized the domestic production of hemp and protected hemp and hemp products in interstate commerce. Likewise, Kentucky law has—for years—broadly allowed retail sales of hemp products, including food and beverages with hemp-derived THC.

Some states, however, perceive the 2018 Farm Bill to have created a legal loophole that allows hemp products with intoxicating amounts of THC to be sold, despite the 2018 Farm Bill’s restriction that hemp may not contain more than 0.3% delta-9 THC on a dry weight basis. To close the loophole, states have enacted laws or implemented regulations banning certain hemp products with intoxicating amounts of THC or restricting such products to adult-use channels like licensed alcohol stores or cannabis dispensaries.

Kentucky appeared poised to do the same when state Senator Julie Raque Adams introduced Senate Bill (SB) 202, which would have placed a one-year moratorium on the sale of hemp-infused THC beverages while the state developed a regulatory regime. Hemp beverage manufacturers and other hemp industry stakeholders loudly and quickly voiced opposition, arguing for narrower means than banning all sales. The next day, Senator Adams filed a floor amendment that removed the moratorium and instead imposed the three-tiered regulatory system that exists for alcohol.

The three-tiered regulatory system that will apply if the bill becomes law has robust requirements, including licensing, shipping, and signature-on-delivery requirements. Additionally, hemp beverages will be limited to five milligrams of intoxicating cannabinoids per serving and may only be sold or consumed by persons 21 years of age or older. Beverages that exceed the cannabinoid limit could be legally sold until May 1, 2025.

The Senate approved the floor amendment. The House passed a committee substitute retaining the Senate floor amendment’s provisions but that extends the sell-through provision until June 1, 2025, and makes the five-milligram per serving limit applicable per every 12-ounce serving. The House committee substitute allows hemp beverages to be sold at fairs, festivals, and similar events. The Senate concurred with the House’s version, and Governor Beshear received the bill to sign into law or veto.

Although SB 202 eschews a ban against hemp-infused THC beverages, it creates strict regulations that differ significantly from the current regulatory regime for hemp beverages, while also directing state agencies to develop further regulations. Ongoing compliance by manufacturers, distributors, and retailers will be critical.

In addition to SB 202, the House and Senate passed House Bill (HB) 775, which sets tax rates for hemp-infused THC beverages. The taxes must be paid and reported by both manufacturers and distributors. Among other provisions, the bill requires manufacturers to obtain a food manufacturer permit from the Department for Public Health and to register with the Department of Revenue, and requires sellers to obtain a retail package, distributor, or direct shipper license. HB 775 is headed to Governor Beshear’s desk.

As a nationally preeminent and leading firm for hemp legal and regulatory services, Frost Brown Todd is well positioned to assist hemp manufacturers, distributors, and retailers in navigating applicable federal and state laws. For more information about SB 202 or HB 775, or their implications for hemp beverages sold in Kentucky, please contact the author or any other attorney with Frost Brown Todd’s Consumable Goods Team.

You can also visit our Hemp Legally Speaking Blog for more insight into the legal and operational issues unique to the industrial hemp, CBD, and hemp-derived THC marketplaces.

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One-Hit Wonders

State Cannabis Banking Laws: Where Equity & Lending Access Stand Today – Eric Foster

Published

3 weeks ago

March 13, 2025

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By Eric Foster |

Cannas Capital Holdings

The Patchwork of State Cannabis Banking Laws

As federal cannabis banking reform remains stalled, states have begun taking independent action to address the capital access crisis for cannabis businesses. While some states like Illinois, Maryland, New York, and Virginia have created state-backed cannabis lending programs, others have taken different approaches, ranging from self-administered programs with no external banking involvement to state protections for financial institutions but no direct state capital support. This mishmash of approaches leaves both Social Equity Cannabis businesses vulnerable to predatory lenders and financial instability and Corporate Cannabis businesses without debt-financed lending options.

This article breaks down state cannabis banking laws, highlighting:

Which states provide structured lending and financing support.
How different states approach social equity financing.
Key differences in state banking statutes and what needs improvement.

1. How States Approach Cannabis Banking & Lending

Since federal banks and credit unions remain hesitant to lend, state governments have adopted various models to facilitate financial access for cannabis licensees.

Four Common Models of State Cannabis Banking & Lending

✅ Model 1: State-Backed Cannabis Lending Programs (Best Practice) These states use cannabis tax revenue to fund capital access programs, creating low-interest or zero-interest loan funds and encouraging banks to participate through loan guarantees and risk-sharing mechanisms.

Examples: Illinois, Maryland, New York, Virginia
Best for: Social equity and minority-owned cannabis businesses needing fair access to financing.

✅ Model 2: State Self-Administered Loan & Grant Programs Without External Bank Partnerships Some states allocate funding for social equity applicants but do not involve external banks, credit unions, or CDFIs in the process. These programs:

Provide a limited total amount of funding per year, which must be replenished through annual appropriations.
Cap the maximum funding available per business.
Do not address the need for long-term lending partnerships that could expand financing options.
Examples: Connecticut, Michigan, Massachusetts, Colorado, New Jersey, New York
Best for: Short-term relief but not a scalable lending solution for long-term business growth.

✅ Model 3: State Legal Protections for Banks Without Direct State Capital Support These states allow banks, credit unions, and CDFIs to serve cannabis businesses without fear of state-level penalties, but they do not provide direct state financial backing for loans or banking relationships. As a result:

Banks must still manage all compliance risks independently, limiting participation.
No state-backed loan guarantees, lending facilities, or grant programs exist to make cannabis lending more attractive.
Only the most risk-tolerant financial institutions choose to engage with cannabis businesses.
Examples: California, Pennsylvania, Arkansas, Rhode Island, Texas, Oklahoma, West Virginia, Ohio, Missouri, South Dakota
Best for: Encouraging some legal banking relationships but fails to ensure broad financial access for cannabis businesses.

✅ Model 4: No State-Level Banking Protections for Cannabis Businesses Some states have legalized cannabis but have not enacted statutory protections for banks or credit unions working with marijuana-related businesses. As a result:

Financial institutions in these states face higher risks when serving cannabis businesses.
No clear legal framework exists to shield banks from potential enforcement actions.
Cannabis businesses in these states remain almost entirely cash-based, increasing security risks and limiting growth.
Example: Louisiana
Worst for: Any cannabis business seeking financial services.

2. State-by-State Breakdown of Cannabis Banking & Lending Programs

Illinois: The Gold Standard for State Cannabis Lending

Best for: Social Equity & Minority-Owned Cannabis Businesses Banking Model: State-Backed Lending & Capital Access Program

The Community Invest – Cannabis Banking Services Program provides state-backed capital to banks and credit unions, enabling them to offer low-cost banking services to cannabis businesses.
The Cannabis Social Equity Loan Program offers low- or no-interest loans to social equity applicants, helping minority businesses establish themselves in the market.

The Illinois Finance Authority administers state-funded loans and subsidizes loans through qualified Banks, Credit Unions and CDFI’s, prioritizing businesses in disproportionately impacted areas.

Maryland: A Strong Model with Loan Loss Reserve Protection

Best for: Small & Medium-Scale Cannabis Businesses Banking Model: State Loan Loss Reserve & Lending Program

Maryland’s Capital Access Program (Subtitle 14, Chapter 26 of 2022) provides loan loss reserve accounts for banks that lend to social equity cannabis businesses.
The state allows dispensaries to apply for loans up to $500,000 and growers/processors up to $1 million, reducing financial barriers.
Maryland’s cannabis tax revenue partially funds these lending programs, ensuring sustainability.

New York: Social Equity-Focused Cannabis Lending

Best for: Justice-Impacted & Minority Entrepreneurs Banking Model: State-Facilitated Loan Fund & Private Investment Pool

New York’s Social Equity Cannabis Fund is structured to provide financial backing to social equity licensees.
The state works with private financial institutions and impact investors to co-fund cannabis business loans.
Loan repayment structures are designed to minimize early financial strain, helping startups succeed.

Virginia: A Developing State Banking Model

Best for: New Market Entrants & Small-Scale Cannabis Businesses Banking Model: State-Led Lending Initiative

Virginia’s State Cannabis Lending Initiative is has not started due to obstruction from Governor Youngkin rejecting the second State legalization bill in 2024 and 2025 but is modeled after Illinois & Maryland.
The state intends to offer cannabis business loans backed by state funds both directly and through Community Development Financial Institutions and Banks, supporting social equity businesses.

3. Where Other States Are Falling Short

Model 2 States: Self-Administered, Limited Loan & Grant Programs

Connecticut, Michigan, Massachusetts, Colorado and New Jersey provide funding for cannabis businesses but do not involve financial institutions, creating short-term solutions but no long-term lending structures.

Colorado self administers their lending program through the Office of Economic Development & International Trade

Model 3 States: State Protections Without Capital Support

California, Pennsylvania, Arkansas, Rhode Island, Texas, Oklahoma, West Virginia, Ohio, Missouri, South Dakota have legal protections for banks working with cannabis businesses but no direct lending or grant programs.

Model 4 States: No Legal Banking Protections

Louisiana has no banking protections for financial institutions, making cannabis businesses in the state almost entirely cash based.

4. The Path Forward: Expanding State-Level Lending Programs

As more states legalize cannabis, the best way to ensure equitable access to capital is to create structured lending programs that involve banks, credit unions, and CDFIs. States that only provide self-administered grants or legal protections for banks are not doing enough to ensure sustainable cannabis financing.

By following the models set by Illinois and Maryland, states can:

✅ Create state-backed cannabis lending facilities using cannabis tax revenues.

✅ Offer loan guarantees to banks and credit unions to reduce lending risks.

The Illinois Cannabis Capital Investment eco-system

✅ Adopt compliance & underwriting frameworks like the Bank Black Initiative & Cannabis Compliance Banking Solution to support financial institutions.

How Bank Black & Cannabis Compliance Banking Can Help

Cannas Capital’s Bank Black Initiative and Cannabis Compliance Banking & Capital Solution offer: ✅ AI-driven underwriting to de-risk cannabis loans. ✅ Regulatory compliance monitoring for banks & state agencies. ✅ Social equity-focused lending frameworks to ensure minority-owned businesses have fair access to capital.

Final Thoughts: Why State-Led Action is Necessary

The federal government isn’t moving on cannabis banking reform anytime soon. That means states must take the lead in creating sustainable, scalable lending programs for cannabis businesses. Expanding access to capital is not just about financing cannabis businesses—it’s about ensuring that social equity applicants and minority-owned companies have the same opportunities to succeed as well-capitalized corporate players.

With models like Illinois, Maryland, and New York, we already see effective solutions that prioritize social equity financing. The next step is expanding these programs to more states—and integrating compliance-driven solutions like the Bank Black Initiative to make them even stronger.

Citations & Key References

Source

Key Information Referenced

Link or Document

Illinois Finance Authority Act (20 ILCS 3501/801-5)

Illinois state-backed cannabis banking program

Illinois Finance Authority Act

Maryland Chapter 26 of 2022 & Chapter 254/255 of 2023

Maryland’s cannabis loan loss reserve and capital access program

Chapter 254/255 of 2023

New York Social Equity Cannabis Fund

State-backed cannabis investment fund