Due Diligence Required for Cannabis Businesses and their Investors by Richard Fechter, JD, CAMS, CFE

Posted on October 10, 2020 by Richard Fechter

Although the U.S. government postponed its plan last week to vote on a bill that could legalize marijuana use at the federal level, the rapidly growing cannabis business remains alive and well at the state level. There are currently 33 states that have legalized marijuana for medical use, 11 of which have also legalized use for adult recreational purposes, and five states will vote on descheduling cannabis use in some form this November. However, as this green tide continues to swell across the country, it has become an increasing target for financial fraud, requiring business owners and investors to tread very carefully and conduct thorough due diligence.

Earlier this year, a leading provider of business-management and point-of-sale software for the cannabis industry suffered a breach of its unsecured and unencrypted database, exposing the personally identifying information of more than 30,000 individuals, including their private medical records. In two recent cases brought by the SEC, defendants used the growing popularity and legalization of cannabis to trick investors out of millions of dollars. In April, the SEC charged a Florida resident for defrauding more than 60 retail investors out of $5.5 million for what he purported would be used to acquire a marijuana dispensary network that he would take public or merge with another entity to yield significant profits to investors. Earlier in the year, the SEC filed charges against a Ponzi-like scheme that sold to investors nearly $5 million of fictitious interest in a marijuana company.

These incidences provide investors, cannabis entrepreneurs and their legal counsel with important lessons for researching, investigating and identifying a wide range of potential risks that can arise within the maturing marijuana industry. Forensic accountants, including computer and technology analysts, are especially well-suited to help legal counsel conduct exhaustive examinations and due diligence on the financial and technical aspects of a cannabis business, including the experience and qualifications of the owners and related parties. Engaging these professionals from the onset can help to avoid potential future issues that could expose business owners to legal liabilities or cheat unsuspecting investors out of savings.

For more information on how Berkowitz Pollack Brant’s Forensic and Advisory Services Group can help you and your clients avoid fraud in the cannabis industry, please call (305) 379-7000 or email