The cannabis industry in Canada is rapidly growing and Exchange Traded Funds (“ETFs”) trading Canadian public companies that produce medical marijuana and/or service the industry are currently listed on Canadian stock exchanges. The same cannot be said of the U.S. where banking and SEC regulations have created numerous hurdles for investment companies trying to form ETFs comprised of U.S. cannabis companies. For this reason, investment companies are racing to launch the first cannabis focused ETF on a U.S. stock exchange.
I was recently retained by a foreign corporation to file a Verified Complaint and Order to Show Cause in the Superior Court of New Jersey, Chancery Division, seeking temporary restraints and a preliminary injunction preventing a private label ETF fund (“Fund”) from proceeding on its application before the SEC for the approval of a medical cannabis focused ETF.
As a matter of background, ETFs are essentially mutual funds that trade on a stock exchange, allowing investors to buy and sell them cheaply and immediately like a stock equity instrument. Without utilizing the services of a private label fund, it generally takes an ETF creator like my client over a year to form and introduce the ETF into the market and costs the creator approximately $1,000,000.00 to set up, with hundreds of thousands of dollars in maintenance fees incurred thereafter. Private label companies are able to launch ETFs in two to three months and only charge ETF creators approximately $100,000.00 in set up fees, with a minimum of about $25,000.00 in continuous maintenance fees due thereafter.
My client engaged the Fund in December 2016 to assist it with forming and bringing to the U.S. stock market a medical cannabis focused ETF that tracks a stock index created by my client. Before starting their engagement, my client and the Fund executed a Mutual Evaluation and Non-Disclosure Agreement (“NDA”) drafted by the Fund to govern the parties’ disclosure of confidential and proprietary information. My client alleged that after it had provided the Fund its confidential investment strategy and the methodology behind the companies selected for its stock index, i.e. “basket theory,” the Fund abruptly terminated the parties’ relationship and represented that it was no longer interested in my client’s ETF idea. Approximately two months later, my client discovered that the Fund had filed for approval before the SEC a cannabis focused ETF and stock index that were allegedly created by using my client’s trade secrets and confidential information.
Shortly thereafter, I was retained to file an emergent lawsuit seeking an injunction against the Fund and its officers for allegedly breaching the NDA by misappropriating and using my client’s confidential and proprietary investment strategies to form a competing cannabis focused ETF and stock index. At the conclusion of oral argument on the TRO application, the Fund consented to certain temporary restraints in my client’s favor delaying the SEC’s approval of the disputed ETF for one month.
This was certainly a novel case considering that cannabis law jurisprudence is still in its infant stage and because there no ETFs of this kind currently trading on a U.S. stock exchange. I will discuss other issues relating to misappropriation of trade secrets and non-disclosure agreements that arose in this case in future blog articles.
If you are interested in cannabis law and its impact on New Jersey attorneys, click here and here for my previous articles on this subject and check out this link for information regarding the New Jersey Supreme Court’s amendment to RPC 1.2(d) permitting attorneys to counsel clients regarding their compliance with New Jersey’s medical marijuana laws or the marijuana laws of other States.