CBD DD: Key Considerations When Conducting Due Diligence on Cannabis Companies

While the regulatory atmosphere surrounding cannabis and cannabis-related products is still in flux, private equity and other investors have begun to consider the potential for transactions in the industry. This article explores the key due diligence and regulatory compliance considerations that both buyers and sellers should be aware of in the event of a potential deal involving the manufacture and/or sale of cannabis products, such as hemp and cannabidiol (“CBD”). …

Clearly Defined Product Lines

In the cannabis industry, a company must maintain well-defined product lines. The terms cannabis, hemp, CBD, and others are used rather loosely, despite the fact that they are distinct and regulated differently. …

Due to the intricate distinctions identified above, and with the understanding that the regulatory landscape surrounding cannabis and cannabis-derived products is under development, it is crucial for companies to be transparent about their products and the specific ingredients that they contain. During a public FDA hearing over the summer of 2019, various consumer advocates testified that, based on laboratory analyses of popular commercially-available CBD-containing products, most do not contain the exact ingredients or concentration of key compounds (i.e., CBD versus THC) disclosed on the label. False and/or misleading labeling can lead to enforcement action by both FDA and the Federal Trade Commission (“FTC”).

Therefore, potential buyers or investors conducting diligence on cannabis companies should request that the target company produce certificates of analysis supporting the composition of their products, and should also consider conducting independent analyses to confirm the company’s findings. It is also critical to evaluate the target entity’s manufacturing practices to ensure that quality control systems are robust and capable of ensuring consistency across batches and product lines.