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Marijuana plants are seen in this file photo.

Matthew Staver/Bloomberg

Canada's top securities regulator is turning up the heat on a small Ontario marijuana producer after it failed to disclose to investors that its chief executive officer is under investigation for his actions at another company.

The Ontario Securities Commission is also raising questions about why two directors of the company, Maricann Group Inc., sold about $8-million worth of shares just days before it announced a large equity financing in late January.

Maricann is a small producer of medical marijuana with production facilities in the town of Langton, Ont., about two hours southwest of Toronto. Like many new companies in the cannabis business, it has been taking advantage of a burst of interest from investors in the sector to raise new money and expand in the months before Ottawa legalizes the drug for recreational use.

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The OSC's inquiry comes as the cannabis sector broadly faces more scrutiny. Early in 2018, the industry saw a flurry of financings, after investors showed remarkable interest in the emerging sector, which sent share prices soaring. But in recent weeks, marijuana company valuations have suffered as the broad market turned more volatile and questions arose about the likelihood of cannabis producers to meet investors' lofty expectations.

On Jan. 29, Maricann announced a sale of new shares and warrants that was to raise $70-million, and perhaps as much as $80.5-million, with investment banks Eight Capital and Canaccord Genuity underwriting the deal.

But on Feb. 8, the OSC wrote to Cassels Brock & Blackwell LLP asking the company whether it will disclose to investors that its CEO, Ben Ward, is under investigation for his actions at a previous company that is also in the pot business. Cassels Brock is serving as the deal's lead legal adviser.

"We understand that Ben Ward is the subject of an investigation, by the staff of the OSC Enforcement Branch, into his activities while he was the CEO of Canadian Cannabis Corp.," the letter stated. From 2013 to 2016, Mr. Ward was CEO of Canadian Cannabis.

The deal's future is now in question. According to one source familiar with it, the financing in its current form has been pulled, but it is unclear whether the transaction has been cancelled altogether, or will come back in a different structure.

It's unclear why the OSC has been investigating Mr. Ward.

The letter asks if Maricann "would be prepared … to disclose" the investigation in the final prospectus that would go to investors who were buying the new shares.

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The OSC sent another letter on Feb. 9, also to the law firm, inquiring about trades made by chairman Julian Neil Tabatznik and another director, Raymond Stone. Insider trading records show that Mr. Tabatznik sold 850,000 shares of Maricann for nearly $3.6-million on Jan. 23 and 24. Mr. Stone sold 1.04 million shares for $4.4-million on Jan. 22 and 23.

The two directors sold all of that stock at prices of $4.15 per share or more. After the financing deal was announced, Maricann shares dropped to $3.42 the next day. They were at $2.49 on Tuesday before trading in them was halted by the Investment Industry Regulatory Organization of Canada (IIROC).

The OSC's letter asked Maricann to explain if the sales contravened the company's corporate disclosure and insider trading policy or Ontario securities law. It is possible the share sales were onside with the law; it isn't known at this point whether the directors were aware of a potential financing at the time of their trades.

A Maricann spokesperson declined to comment on Tuesday afternoon, but said the company would release a statement shortly. By publication time nothing had been released. Cassels Brock, Eight Capital and Canaccord Genuity did not respond to requests for comment.

Independent investment banks have been the major beneficiaries of the recent financing spree in the cannabis sector. Canada's bank-owned dealers have mostly avoided the marijuana sector, often because they or their parent companies have American operations and and U.S. federal law prohibits marijuana even though some states allow it. That has left most of the advisory fee revenue for smaller outfits.

Maricann was founded in 2013 and obtained a Health Canada licence to cultivate plants in March, 2014. The company started trading on the Canadian Securities Exchange in April, 2017.

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