Cannabis Co. Stoned by Potential Class Action After $143M IPO

On September 9, 2019, a proposed class of investors filed a complaint in the Supreme Court of the State of New York against Sundial Growers over its $143 million IPO. Named plaintiff, Trisha Peters, filed the complaint after news surfaced regarding a defective order of cannabis that contained visible mold, parts of rubber gloves and “other non-cannabis material,” according to the complaint.

On August 1, 2019, the Canadian-based cannabis producer’s IPO came to the Nasdaq Global Select Market, offering 11 million shares priced at $13 per share. The stock performed well, accumulating $143 million in investments in its first offering. The celebration was short lived, however, when on August 16, 2019, a report by Marketwatch surfaced that stated a corporate order by Zenabis Global totaling 1,200 pounds (554 kg) was returned to Sundial due to quality issues before the company applied for its IPO. Prior to the publishing of the report, Sundial’s stock opened at $11.06 per share on August 16. By closing, it had dropped to $10.54. On September 9, 2019, Sundial common stock closed at $7.71, about a 40% drop from the initial price of $13.

Plaintiffs allege that while the newsbreak by Marketwatch can have the optics of unlucky timing for a young stock, according to the facts set forth in the complaint, this is not the case. In Sundial’s registration statement submitted to the SEC, it stated that, “Failure in our quality control systems may adversely impact our sales volume, market share and profitability.” The statement failed to mention that the company’s quality control systems had already resulted in a negative impact. The omission of this material fact from the registration statement is alleged to be in violation of both section 11 and section 15 of the Securities Act, in which defendants can be held liable for damages caused by untrue statements of fact or material omissions of fact within a registration statement.

The defendants include are those who held positions as officers or directors and exerted control over the contents of the registration statement and who acted as signatories. Plaintiffs have been defined by the complaint as those “who purchased Sundial common stock pursuant and/or traceable to the registration statement issued in connection with the IPO,” which could include thousands of potential plaintiffs. Plaintiffs seek compensatory damages along with attorney costs and expenses incurred during the action.

The case is Trisha Peters v. Sundial Growers Inc. et al., case number 655178-2019, in the Supreme Court of the State of New York, County of New York.

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