Red flags at the term sheet stage don’t disappear during due diligence — they get worse. In cannabis, psychedelics, and other emerging industries, a counterparty's earliest behavior doubles as diagnostic data, giving you valuable insight into what a future relationship might look like.
First-time dealmakers should look for these five warning signs that savvy founders and investors spot. Pay special attention to these red flags so you know whether to take the deal seriously.
1. Inability — Or Unwillingness— To Confirm Formation and Authority
As a threshold question, it is critical to know who, exactly, you are dealing with. Formation and authority representations, such as entity name, state of organization, good standing, and signatory authority, are non-negotiable boilerplate.
If you get pushback from the other party, you are not in a negotiating position. Pushback is a signal that something is wrong. Either the entity is not in good standing, its governance is in disarray, there is an undisclosed cap table dispute, and/or the person across the table lacks the authority they implied. None of these problems resolve themselves. Insist on organizational documents and a certificate of good standing at the outset.
2. Resistance To Standard Regulatory Compliance Representations
In cannabis, a single licensing misstep can unwind an entire transaction. Requiring a counterparty to represent that it holds current, valid licenses, is in material compliance, and that the deal structure will not trigger a regulatory change-of-control issue is standard. Do not believe the other party if they tell you these requests are aggressive.
When a counterparty carves this language out, renders it meaningless, or pushes it to a post-closing obligation, there are three likely explanations:
- There is an undisclosed compliance issue.
- Their counsel is inexperienced.
- The operation is not as clean as represented.
Any of these can leave a buyer holding a revoked license and an unwound deal.
3. No Industry-Specific Language, Or Their Counsel Does Not Know The Cannabis or Psychedelics Industries
Cannabis is federally illegal. Many psychedelics are federally illegal. Transaction documents in these spaces require explicit federal law disclaimers, banking and payment carve-outs, state-specific regulatory representations, and risk allocation that accounts for shifting enforcement priorities. Experts in cannabis business law and psychedelic business law know to include these provisions in any deal.
If the other side produces a generic stock purchase agreement with none of this — no Schedule I acknowledgment, no jurisdiction-specific regulatory reps, no federal disclaimer — the conclusion is inescapable: they do not understand the industry, or their counsel does not. Either way, it is a problem.
4. Artificial Urgency
If you’re hearing "We have another offer,” "The window closes Friday,” or “You must review our offer within 48 hours,” it might be a good idea to move on.
A word of nuance here: Speed is sometimes the right instinct. Scarcity is real in limited-license jurisdictions. Adult-use dispensary licenses in states like New York are not abundant, and a serious buyer who hesitates may lose a legitimate opportunity to a competitor who does not. In these cases, urgency is not a sales tactic, but a very real part of doing business in the cannabis industry.
That said, everyone at the table must appreciate the risk they are accepting when they move fast. Regulatory approvals, change-of-control notifications, and license transfer processes operate on their own timeline; they are entirely outside the parties' control. No amount of deal enthusiasm changes that. A seller who compresses the diligence window before you have reviewed basic financials, or who manufactures urgency around disclosure schedules, is not the same as a market where licenses are genuinely scarce. Know the difference. If you are moving quickly because the opportunity is real, do so with eyes open and consult knowledgeable legal counsel who understands what you are potentially stepping over. The rush may be justified, but there must be a genuine appetite for the risk.
5. Evasive Or Incomplete Disclosure
Incomplete disclosure is not an oversight. It is either sloppiness or deliberate. Neither scenario is acceptable.
Disclosure schedules are where deals live and die. A prepared seller has an organized data room and knows where their exposure is. What is not normal are failure to produce basic financials, vague answers to direct questions about pending litigation or regulatory inquiries, and disclosure schedules that are conspicuously thin. In emerging industries, undisclosed liabilities, such as open enforcement actions, unlicensed activity, unpermitted build-outs, and ownership disputes, can expose buyers to direct regulatory liability long after closing.
In Cannabis And Psychedelics, Don’t Go Into Deal-making Alone
Good deals fall apart. That is an occupational hazard. What should not happen is investing months of time and legal spend only to discover that your counterparty could not tell you who they were or what they owned on Day One. Whether you’re buying a license or exploring a merger or acquisition, the most valuable thing a transactional lawyer does is not perfecting the purchase agreement. It’s to help clients determine — early, before sunk costs set in — whether the deal is worth doing at all.
Rudick Law Group represents founders, operators, and investors in cannabis, psychedelics, and other emerging industries. If you are preparing for a transaction — or already in one that is raising questions — we are here.
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