Prediction Markets: Compliance Frontier for Public Cannabis and Psychedelics Companies

Will Company X receive a New York dispensary license this year? Will Company Y launch in Florida before Q3? Will Company Z report statistically significant Phase 2 results? Will DOJ bring enforcement action against a major cannabis operator? Will Pennsylvania legalize recreational cannabis in 2026? Will Company A acquire Company B this quarter? Would you consider placing a bet on any of these types of questions? Many already have. 

Prediction markets, which are platforms allowing users to wager on the occurrence, timing, or outcome of real-world events such as those listed above, are creating a novel compliance challenge for public companies. This is particularly true for highly regulated sectors such as cannabis and psychedelics. While these prediction markets may appear distinct from traditional securities trading, and they are facing some legal challenges in their operations, they raise overlapping legal risks that existing compliance frameworks were not designed to address. 

At a foundational level, prediction markets expand the economic value of information. Employees can now monetize non-public knowledge without buying or selling securities. For example, a company insider aware of an impending regulatory approval, clinical trial result, executive departure or even non-material events such as whether a CEO will appear at a certain conference, could place a wager on a platform tied to that outcome. Although such conduct may fall outside classic insider trading doctrine, which generally requires trading in securities based on material (in other words, important) non-public information, regulators could still characterize it as a misuse of confidential information. 

Potential Causes of Action

Several legal theories may apply, even if the law has not fully evolved to address prediction markets directly: 

• Insider Trading Analogues: While traditional insider trading claims under SEC Rule 10b-5 require a securities transaction, regulators may attempt to extend “misappropriation theory” arguments where confidential information is used for personal gain, even outside securities markets. Polymarket, a popular prediction market, recently codified this transition by updating its rule book to explicitly bar trades based on stolen confidential information or illegal tips. Their new standards prohibit trading where using information would violate a preexisting duty or obligation of trust or confidence owed to another person or entity. This move mirrors the misappropriation theory used by federal regulators to prosecute the misuse of non-public data. 

• The Shadow Trading Doctrine: Regulators are increasingly pursuing “shadow trading” theories, where an insider uses confidential information about their own company to trade in a competitor or a closely related peer. For example, a scientist at a psychedelics firm who knows a clinical trial succeeded might place a bet on the entire industry’s growth on a platform like Polymarket. 

This is no longer a theoretical risk: in the recent case of SEC v. Panuwat, the Securities and Exchange Commission advanced this shadow trading theory, claiming that an employee misappropriated non-public information about his employer to trade in a related company. Therefore, such actions can trigger enforcement under the misappropriation theory. 

Furthermore, Polymarket’s 2026 rule book now explicitly bars anyone in a "position of authority or influence" from trading on events they can affect, signaling that platforms are now actively closing the loopholes that shadow traders once exploited. 

• Wire and Mail Fraud (18 U.S.C. §§ 1343, 1341): These statutes are intentionally broad. Using interstate communications to execute a scheme to defraud, such as monetizing confidential corporate information through prediction markets, could fall within their scope, particularly if there is deception or breach of duty involved. 

• Commodities and Derivatives Violations: Prediction trading platforms like Kalshi operate under Commodities Futures Trading Commission (CFTC) oversight. While Polymarket previously operated offshore, it has recently returned to the U.S. after acquiring a registered derivatives exchange and clearinghouse. This return marks a significant transition to engage its new compliance infrastructure including a first-of-its-kind information-sharing agreement with the CFTC, signaling that the agency is now actively working with platforms to ensure market integrity and to surveil for manipulative activity. Consequently, trading on these platforms based on non-public information could potentially implicate anti-manipulation or fraud provisions under the Commodity Exchange Act. 

• Breach of Fiduciary Duty: Employees, officers and directors owe duties of loyalty and confidentiality. Even absent regulatory action, companies could pursue internal discipline or civil claims for misuse of proprietary information. 

• State Law Claims: Given the fragmented regulatory environment, certain jurisdictions may pursue gambling-related or unfair competition claims tied to prediction market activity. 

Importantly, the law in this area remains unsettled. Prediction markets occupy a gray zone between financial instruments and gambling products. As a result, enforcement may be uneven, and liability theories may be tested in novel ways over the coming years. 

Why This Matters for Cannabis and Psychedelics Companies

Public cannabis and psychedelic companies are uniquely exposed due to their regulatory sensitivity. Material developments, such as the pending DEA cannabis rescheduling decision, state licensing approvals, or clinical trial milestones, often hinge on non-public timelines. These are precisely the types of events now actively traded on prediction platforms. 

Additionally, these companies already operate under heightened scrutiny from federal and state regulators. Any perception that insiders are profiting from confidential information, even through unconventional channels, could trigger investigations, reputational harm, and shareholder litigation. 

Practical Compliance Considerations

Given these risks, public companies should consider proactively updating their compliance frameworks. Of course, companies should consult with their attorneys and compliance advisors, but we believe some suggested measures could include: 

1. Policy Expansion:  Organizations should proactively update insider trading and confidentiality policies and consider explicitly prohibiting wagering on event-based platforms. These policies must clarify that the misuse of non-public information is strictly forbidden regardless of the trading medium or the technical materiality of the information.  

2. Employee Disclosure Requirements: Require employees, particularly those with access to sensitive information, to disclose accounts on prediction market platforms, similar to brokerage account disclosures. 

3. Training and Education: Incorporate prediction markets into compliance training programs. Employees should understand that even seemingly informal “bets” can create legal exposure. 

4. Monitoring and Controls: Consider implementing monitoring mechanisms for high-risk roles, including periodic certifications that employees are not using confidential information in external markets. 

5. Event-Specific Blackout Periods: Extend blackout concepts beyond securities trading to include key corporate events (e.g., earnings calls, regulatory submissions, clinical data releases). 

6. Coordination with Legal and Compliance Functions: Ensure cross-functional coordination between legal, compliance, and investor relations teams to identify categories of information that could be exploited in prediction markets. 

7. Incident Response Planning: Develop protocols for investigating and responding to potential misuse of information, including escalation procedures and documentation practices. 

Conclusion

Prediction markets represent a structural shift in how information can be monetized. Although the legal framework has not fully caught up, regulators are likely to rely on existing fraud, fiduciary duty, and anti-manipulation doctrines to address perceived abuses. 

For public cannabis and psychedelic companies, the prudent approach is not to wait for regulatory clarity, but to assume that existing obligations extend to these new contexts. As Polymarket's legal chief Neal Kumar stated regarding their 2026 rule enhancements, "Markets thrive on clarity." By updating policies, educating employees, and implementing targeted controls, companies can mitigate risk while demonstrating the governance maturity expected of public issuers. 

Feel free to contact our team if you are interested in learning more about developing compliance procedures related to these prediction markets. 

This article was written by Magnolia Mullen and David Feldman, is for informational purposes only and does not constitute nor should it be relied upon as legal advice.