As the COVID-19 pandemic continues to alter the day-to-day lives of humans across the globe in an unprecedented fashion, industries have made considerable adjustments to maintain their operations while protecting the health and safety of the workforce and the public. While some industries have had to cease operations to comply with “stay-at-home” orders, most states regulating cannabis have deemed cannabis essential, allowing cannabis businesses to continue operations during the COVID-19 quarantine period. The fact that cannabis was deemed essential in states such as California, Colorado, Illinois, and Michigan, demonstrates a major shift in public perception of cannabis and its utility. While challenges remain as they do for all industries, the cannabis industry appears poised to withstand the pandemic and to solidify its role in the economy.
Despite being deemed essential, adult-use cannabis sales have begun decreasing in states such as California, Colorado, and Nevada. Washington, however, reported record sales in April highlighting the diversity of legal markets throughout the United States. States that derive considerable sales for cannabis tourism like Nevada and California may see losses due to travel restrictions and mandatory self-quarantine periods. Although early sales reports suggest that the industry is equipped to weather this crisis, April sales only reflect the market one month into the pandemic that is likely to extend through the summer and potentially into next year. Thus, much remains unknown about the industry’s potential to stave off the impacts of an increasingly likely economic recession. Still, reports show that demand for cannabis remains strong and could potentially increase as the nation grapples with the significant financial and emotional duress associated with the pandemic.
States have taken proactive measures to ensure that patients and customers may safely access cannabis. States including California and Nevada have issued official guidance on best practices for cannabis businesses to observe to mitigate the spread of infection and preserve and promote public health. This guidance has largely prioritized the reduction of person-to-person interaction and adherence to heightened sanitation and hygiene protocols. Best practices for reducing person-to-person interaction include conducting sales by pick-up or delivery where possible, reducing the number of individuals allowed at the dispensary at any one time, and controlling the flow of visits to reduce the potential for exposure. Retailers have used space indicators like chalk, tape, and stanchions to demarcate 6-feet of separation between customers standing in line. Best practices for maximizing sanitation and hygiene include the promotion of contact-free systems such as tap-and-pay payment technology where possible, and the removal of handheld menus, tablets, and iPads, and aroma jars from dispensary surfaces. Retailers are advised to clean and sanitize commonly touched surfaces on a routine basis and to provide hand sanitizer to all employees and patrons in conspicuous locations to encourage frequent sanitization. Additionally, employers are required to monitor their employees’ health and hygiene practices. Employers should require any employer showing a COVID-19 related symptom to stay home from work.
While some businesses can rely on federal stimulus programs such as SBA loans for COVID-19 related relief, cannabis businesses cannot. Despite being equally harmed by the pandemic as other law-abiding, tax-paying small business operators, cannabis operators are ineligible for such funding because the cultivation and sale of cannabis remains illegal under federal law. While cannabis businesses are not currently eligible for federal relief programs, it appears that cannabis businesses may be eligible to defer the deposit and payment of their share of Social Security tax.
Nonetheless, as further proof of the growing bipartisan support for cannabis, multiple senators and congress members have requested that future COVID-19 relief packages include accessibility for cannabis businesses. One of the main reasons cited has been the cannabis industry being deemed “essential,” thereby allowing it to provide much-needed support to various states’ economies.
While the details of a post-COVID-19 world remain to be seen, one thing is clear – cannabis will continue to play a growing and important role in the U.S. economy.
Sahar Ayinehsazian is an attorney in Vicente Sederberg‘s Los Angeles office, where she focuses on corporate transactions, cannabis banking, and regulations. With her specialized knowledge, Sahar helped to establish and currently co-leads Vicente Sederberg’s Banking and Financial Services Department. As a member of the National Cannabis Industry Association’s Banking Access Committee, Sahar also works on strategy and educational advocacy to enable state-licensed businesses to obtain accounts at depository institutions.
Kelsey Middleton is a Regulatory Specialist in Vicente Sederberg’s Los Angeles office, where she focuses on licensing and regulatory compliance. Kelsey is responsible for assisting a dynamic range of cannabis clients in obtaining state and local cannabis licenses, permits and approvals, and navigating the complex and rapidly evolving regulatory landscape of the cannabis industry. She routinely helps clients prepare the requisite applications and documentation for state and local licensing and permits, and facilitates communications with cannabis industry regulators to promote efficiency and compliance throughout the licensing process.
Prior to joining VS, Kelsey interned at the Los Angeles Department of Cannabis Regulation where she analyzed proposed cannabis legislation and approaches for enhancing the efficacy of cannabis social equity programs.
Kelsey obtained her Juris Doctor from the UCLA School of Law, where she was the Co-Founder and Co-President of the Cannabis Law Association, and External Relations Chair of the Black Law Students Association.
Member Blog: Cannabis Cons – Ten Signs of a Cannabis Scam
There are many wonderful things about the cannabis industry – creation of new jobs, legal access to medicine, and reduction of drug war harms, to name a few. Every rose has its thorn though, and the cannabis industry is no exception. Like any industry pushed into the shadows, in this case by a misguided prohibitionist policy, unsavory individuals have found an opportunity to prey upon those without full access to the legal system or to legitimate sources of capital. All cannabis entrepreneurs need to be on the watch out for the tell-tale signs the person or business they are talking to is a scam artist. Below are ten common signs that something might not be legitimate in your business transaction. Not all these signs indicate something is foul, but they should be a red flag that the business dealings bear further investigation.
Extremely Tight Timeframe:
You’re given twenty-four hours to make a key business decision and you may have only just received the legal documentation formalizing the proposed deal.
There are many legitimate reasons why business decisions must often be made on short notice. And providing an opposing party with legal documents at the last moment is a time-honored negotiating tactic. However, the less scrupulous will often tell business owners (often in dire straits) that they need to decide in twenty-four hours, or in an even shorter time frame. This frequently means there’s no time for proper due diligence or legal review – exactly what someone with something to hide (e.g., they are trying to run a scam) wants.
Vague Website:
A website contains a lot of bold claims about a service or financing source, but is short on physical addresses, names of principals, or legal company names.
A lot of websites are vague. But scam artists like to leave out key information – which means it will be hard for you to report them to the investigators or sue them. Most legitimate companies will list a real street address that is associated with a business, not a residence. Why would a scam artist want to hide their real address? Well, think about trying to sue someone. You need to serve documents on them – not an easy feat when you have no idea as to their real name or address.
Pump and Dump:
Someone tells you they have a hot (marijuana) stock tip – it’s guaranteed to go up.
There are many problems with this scenario. If someone does have material insider information about a publicly traded company, they cannot legally trade on that knowledge. Nor can they tell someone else the information and have them buy or sell stock. Both persons are in violation of securities laws and subject to civil and criminal penalties. A common way this plays out is through a “pump and dump” scheme. This scam involves convincing the marketplace that an OTC stock (also known as a penny stock – a public stock that does not trade on a major exchange like the NYSE or NASDAQ) is a surefire win. As people buy into the hype, the stock price of the company soars (the pump part of the scam). Once the price climbs high enough, insiders of the company sell all their shares, making a tidy profit (the dump part of the scam). Everyone who bought shares of the company is then left with worthless penny stock as the share price tumbles after the major sell-off. Even people who don’t buy the stock can become accomplices to the scheme. Just by repeating rumors regarding the potential success of the company, they can help create the atmosphere necessary for the artificial inflation of the stock price. When it comes to OTC stocks, if it sounds too good to be true, it probably is.
Wire Money First:
An investor or other potential business partner has a great opportunity for you. The only catch is that you must first wire them money as a down payment for the process to get started.
This scam is a favorite of “Nigerian royalty” and now is making its way to the cannabis industry. Legitimate lenders do not require a prepayment prior to underwriting a loan. They will charge you fees for the work they do, and the work their lawyers do, but this is typically taken directly from the loan amount when funding occurs (this is called funding net). Except in exceptional circumstances that have been vetted by counsel, you should not wire money to someone on the promise they will help you raise money.
As a side note, many law firms and other businesses, will require a deposit before starting work. The difference is that these deposits are legitimate, and are refundable if no work is performed (always ask about refundability). Scam artists, on the other hand, are highly unlikely to return a deposit, even if a deal falls apart.
Refusal to Interact with Attorneys:
You’ve got a great source of financing lined up. The financier is telling you what you want to hear and you’re ready to sign on the dotted line. The only catch is she won’t speak to your attorneys (which may not necessarily take the form of outright refusal – it could also be a deliberate refusal to return or schedule calls), only directly with you.
Scam artists are understandably loathe to subject themselves to questioning from a skeptical lawyer. Sunlight is the best disinfectant and most scams will not stand up to a thorough vetting. Legitimate business professionals, however, while not always happy about it, accept that dealing with lawyers is the price to be paid to get deals done.
Multiple Company Names:
Every time you interact with a potential business partner you discover a new business name or web portal.
This is one of the harder red flags to interpret and on its own it may not mean there is something nefarious occurring. Almost every company of any size contains multiple legal entities. These legal entities often legitimately serve to contain liabilities (e.g., holding different real estate properties in separate LLCs so that a slip and fall claim on one property doesn’t result in a lawsuit against an entire portfolio of real estate assets). What most legitimate companies are not doing, however, is playing a shell game – setting up and shutting down companies to stay one step ahead of the law and angry creditors and customers. If you think this might be occurring, you should discuss your concerns with counsel before proceeding.
Unsubstantiated Claims:
You’re being told buying into a certain grow method will triple your yields, guaranteed, or someone claims they underwrite a tremendous dollar value of loans annually, but can’t give you names of past deals.
Beware unconditional guarantees. Sure, everyone knows the “best” grower and no one wins business by saying they are the worst in their field. When it comes to bold claims, trust but verify. Ask for concrete examples of a product’s or advisor’s success. Ask to speak directly to existing or previous customers. If they are offering payment processing solutions, ask which banks they work with and which credit card companies. Fate is fickle and the future is uncertain. No one can predict it with absolute certainty, especially not when it comes to the cannabis industry.
Ignorance of Basic Cannabis Laws:
When asked about the impact of certain laws or policies like the Cole memo priorities, the FinCen memo, or 280E on proposed business plans, someone responds these are not significant issues or, worse yet, they do not appear to have a strong grasp on what these items are.
It’s one thing to state that these obstacles can be overcome. Business are succeeding despite them every day. To cavalierly suggest they are not issues, or to somehow remain ignorant of their existence, however, is a major red flag. It may not always be a sign of fraud – it could also be the sign of rank amateurism. Either way, you should be hesitant to go into business with someone who does not fully appreciate the federal legal risks inherent in the cannabis industry, especially considering the current political environment.
Deliberately Opaque Documentation:
The definitive documentation for a deal is extremely poorly drafted and it’s not clear what business deal is being documented or the business deal you thought you had struck is not clearly reflected.
Legal documentation is, admittedly, frequently long, dense, and filled with antiquated terms. And for a non-lawyer, legal agreements can be hard to understand. Some of this is a consequence of the fact that complicated concepts are being addressed, and part of this is because lawyers adhere religiously to previously drafted documents, which results in the survival of Latin terms, clumsy turns of phrase, and other habits that make agreements hard to read for the layperson. With a scam, however, an agreement may be drafted to be deliberately obscure. Even unreadable documents could have a legitimate provenance – the cannabis industry is full of poorly trained transactional lawyers (or criminal lawyers moonlighting as transactional lawyers) and principals that don’t understand basic business concepts. What you need to be concerned about is a document that someone doesn’t want you to understand because they intend to fleece you.
Unclear Background of Principals:
The principal of a business claims he or she has 20 years of business experience and deep industry ties. However, when pressed, he or she cannot name an actual business they have worked for and no one in the industry has heard of them or their organization.
The cannabis industry certainly contains many successful people with eclectic backgrounds, but beware the individual with an unclear past. They may elude to successful enterprises, but never give specific names. They claim to be involved in other businesses, but never give enough information for you to track these down. The cannabis industry is still small and many of the pioneers of the industry have known each other for years. If someone claims to have been deeply involved in the industry, but can’t point to any specific businesses or individuals who they know, it’s a red flag.
If they come from the traditional business world, but don’t have a clear history (e.g., before they worked in cannabis, they were at X company for five years), be extra vigilant. There are often legitimate reasons not to name current or former employers (e.g., perhaps their employer doesn’t approve of the cannabis industry and it could put someone’s employment status at risk), but there are also many illegitimate reasons to obscure your past.
Final Thoughts
If you think you’re being scammed, step back and reevaluate the situation before proceeding. Do not sign anything or wire any money. Ask for items in writing and save relevant emails. Consider reaching out to an attorney. Better to spend time and money evaluating a deal upfront than to experience the heartache and headache that comes with trying to mitigate the damage of a scam. Remember, in the cannabis industry, the old expression caveat emptor remains as true as ever.
Charlie Alovisetti, Vicente Sederberg LLC
Charles Alovisetti is a senior associate and co-chair of the corporate department at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Mr. Alovisetti worked as an associate in the New York offices of Latham & Watkins and Goodwin where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Mr. Alovisetti has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Mr. Alovisetti has experience in both U.S. and cross-border transactions, and has advised clients across a range of industries including cannabis, technology, manufacturing, software, digital media, energy and clean tech, healthcare, and biotech. In addition to his corporate work, Mr. Alovisetti has worked with clients on multiple competitive licensing applications, including in Maryland, Hawaii, Pennsylvania, and Texas. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar. Mr. Alovisetti is admitted to practice in both Colorado and New York and is a Level One Interprener. He can be reached at charlie@vicentesederberg.com. Follow him on Twitter @CAlovisetti.
Jessica Scardina, Vicente Sederberg LLC
Jessica Scardina is an associate at Vicente Sederberg, LLC’s Denver office. Prior to joining Vicente Sederberg, Jessica worked at a small Denver law firm specializing in corporate law, business planning, and taxation. Jessica currently focuses her practice on corporate, licensing, and regulatory matters. Jessica is a graduate of the University of Denver Sturm College of Law, where she served as a staff editor for the University of Denver Law Review. Prior to moving to Denver in 2004, Jessica lived in Santa Cruz, California, where she received her Bachelor of Arts, cum laude, from the University of California at Santa Cruz.
Madeline Currie is a marketing professional working at Vicente Sederberg’s Denver office. Prior to joining the firm, she was a Senior Marketing Associate at Crystal & Company in their New York office. She has also worked with several other organizations to define and execute their brand strategy. Madeline has a Bachelor of Arts in Sociology & Policy Studies from Rice University.
Raising Money 101: Accredited Investors and Fundraising in the Cannabis Industry
*Updated to reflect new Rule 147A and Amendments to Rule 147
When raising capital from outside investors, companies are faced with several choices regarding terms, structure, filings to make or not make, and type of investor, among other decisions. One choice – whether or not to include unaccredited investors – should be easy to make. For the reasons outlined below, it is strongly advised that only accredited investors be allowed to participate in a fundraising process.
What is an accredited investor? An accredited investor can be an individual or an entity. An individual can be considered accredited if he or she meets one of the following criteria:
net worth of at least $1,000,000 dollars (excluding the value of his or her primary residence); or
income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.
For entities, different criteria can apply depending on the form of the entity, but generally speaking, an entity will be considered accredited if all of its equity holders are accredited or it has greater than $5,000,000 in assets. Persons or entities that do not meet the above standards are referred to as unaccredited or non-accredited investors. While this is not an insignificant amount of money, the threshold is not very high. Especially if the person in question is considering investing a substantial amount of money in an uncertain venture that, even in the best of circumstances, may not make any money for years to come.
To understand why this definition is important, you must understand how sales of securities are regulated in the United States. At a high level, federal securities law requires that any sale of securities must either be registered with the Securities Enforcement Commission (SEC) or issued pursuant to an exemption. A full description of each exemption available to companies is beyond the scope of this article. But most private offerings of securities make use of the safe harbor exemption from registration known as Regulation D (in the parlance of our times, Reg D). There are three exemptions under Reg D (note the descriptions below only address the accreditation and disclosure issues discussed in this article and ignore issues related to general solicitation and restricted securities):
Rule 504: Allows for an exemption for the offer and sale of up to $5,000,000 of securities in a single twelve-month period.* Unlike some other exemptions, this exemption allows for a private sale without any specific disclosure requirements (note that the anti-fraud provisions of the federal securities laws still apply). Sales can generally be made to an unlimited number of accredited or unaccredited investors.
*Prior to adoption of new rules on October 26, 2016, the aggregate amount of securities that could be sold pursuant to Rule 504 was $1,000,000. The new rules also eliminated Rule 505.
Rule 506(b) and (c): Has the same criteria and guidelines as Rule 505, with one additional requirement – in the case of a 506(b) offering, all non-accredited investors must be sophisticated (i.e., “must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment”). This is an amorphous standard and creates yet another potential issue for the company offering securities. While beyond the scope of this article, it is worth mentioning that a Rule 506(c) offering, which permits general solicitation and advertising (normally not allowed under a 506(b) offering), cannot include any non-accredited investors.
The most important takeaway from the descriptions of the exemptions above: if you wish to undergo an offering without limitations on the number of investors, size of amount raised, or without specific disclosure requirements, you must sell only to accredited investors. Any offering which includes unaccredited investors, whether done under 504 or 506, will impose at least one of these restrictions on the offering.
Beyond the above-mentioned restrictions, there are other reasons not to include unaccredited investors in an offering. For one, it is not unusual to give investors the right to invest in future financing rounds – often referred to as a preemptive right. This is fine, provided no investors are unaccredited, but would be an issue for a company that has existing unaccredited investors with the right to invest in future rounds. Suddenly, a future financing round may inadvertently involve unaccredited investors and this may require a company to spend time and money developing fulsome disclosure documents or risk violating securities law. Another concern, while not immediate, is that if the company wants to go public, the SEC may evaluate all prior issuances of stock by the company and require that it take remedial actions to cure any past violations of securities laws, which might delay or imperil the IPO.
While any emerging company would be wise to restrict its offering to accredited investors, cannabis companies should be especially vigilant. Securities regulators, both on a federal and on a state level, made it clear that they consider the cannabis industry to be an area of special concern. Not because of the ongoing federal illegality of cannabis, but because of the increased risk of fraud in such a new and dynamic industry. The last thing any cannabis company should want to do is take any action that could expose them to the ire of regulators.
What if your investors are Canadian? After all, almost $500,000,000 Canadian dollars were raised last year in the Canadian public markets, and many Canadian investors are eagerly eyeing U.S.-based assets. Setting aside any Canadian securities laws issues, which are beyond the scope of this article, a Canadian or Canadian entity can certainly qualify as an accredited investor and allow an issuer to rely on Reg D. But be sure to have any Canadian investors carefully review their accredited investor questionnaire (a document issuers should require investors to fill out certifying what criteria marks them as accredited) they provide in connection with the offering – while Canadians are familiar with their version of accreditation, the qualifications differ just enough from US qualifications to be a potential issue. Note that there can be additional complications involved with accepting foreign investment, both for the investors and the company raising capital beyond those related to securities law.
It is also worth mentioning that the underlying policy arguments for restricting offerings (in the absence of fulsome disclosures) to accredited investors become even stronger in the cannabis industry. The risk of failure, and the total loss of investment, is undoubtedly present in an industry and remains federally illegal and operates based on federal guidance that could be changed at any moment. And investing in a cannabis company requires an even higher level of sophistication than a typical deal because of the challenges involved. A company should not accept money from investors who cannot handle the risk of losing their entire investment – not only is this unfair to the prospective investor, but any burned investors who end up in a financially precarious situation increase the risk of damaging litigation. While it may be tempting to accept funds from non-accredited investors, all the above issues can be readily avoided if non-accredited investors are not permitted to participate in a company’s offering.
This information is educational only and shall not be construed as legal advice. Please consult your attorney prior to relying on any information in this article.
Charles Alovisetti is a senior associate and co-chair of the corporate department at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Mr. Alovisetti worked as an associate in the New York offices of Latham & Watkins and Goodwin where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Mr. Alovisetti has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Mr. Alovisetti has experience in both U.S. and cross-border transactions, and advised clients across a range of industries prior to focusing on the cannabis space. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar. Mr. Alovisetti is admitted to practice in both Colorado and New York and is a Level One Interpener. He can be reached at charlie@vicentesederberg.com. Follow him on Twitter @CAlovisetti.
Michael Heyward is a law student at the University of Denver Sturm College of Law and a law clerk at Vicente Sederberg LLC. He holds a Bachelor of Arts in History and Political Science, and a Master’s Degree in History from Florida Agricultural and Mechanical University.
Member Post: Raising Money 101 – Introduction to U.S. Public Cannabis Stocks
Most readers are familiar with the two major U.S. stock exchanges – the New York Stock Exchange (NYSE) and NASDAQ. But in the world of cannabis, almost all publicly traded companies are not listed on a stock exchange. Instead they trade over-the-counter (OTC). In fact, as of the date of publication, only a handful of cannabis companies (or at least cannabis-touching companies, as for most of these companies, cannabis is only a small part of their overall business) are traded on a U.S. stock exchange. There are publicly traded cannabis companies outside of the U.S., but those are beyond the scope of this article.
These companies primarily trade on NASDAQ: GW Pharmaceuticals (GWPH), a UK-based pharmaceutical company best known for its drug Sativex, a cannabinoid-based treatment for multiple sclerosis spasticity; Insys Therapeutics (INSY), an Arizona-based pharmaceutical company that has a number of cannabinoid-based drugs in development; Cara Therapeutics (CARA), a Connecticut-based pharmaceutical company that has a cannabinoid product in preclinical development; Zynerba Pharmaceuticals (ZYNE), a Pennsylvania-based pharmaceutical company that has synthetic cannabinoids for transdermal delivery under development; and Arena Pharmaceuticals (ARNA), a California-based pharmaceutical company that has a pain relief cannabinoid drug in development. There is also a largely non-cannabis company, 22nd Century Group, Inc. (XXII), with a cannabis-focused subsidiary called Botanical Genetics, LLC, that trades on NYSE MKT, the NYSE’s emerging company marketplace for smaller-cap companies. NYSE MKT has lower listing requirements than the NYSE.
MassRoots (MSRT), a Denver-based social networking company for cannabis users, made headlines when it was denied approval to be listed on NASDAQ. According to MassRoots, the stock exchange justified the decision by claiming that the company was aiding and abetting the distribution of an illegal substance. Some speculate, however, that the decision considered the company’s low share price, although MassRoots stated it did meet the listing requirements with a market capitalization in excess of $40 million and more than 300 shareholders. NASDAQ did not publicly provide the grounds for its rejection.
As of the date of publication, the New York Stock Exchange has approved the listing of Innovative Industrial Properties, Inc. (IIPR), a newly-formed real estate investment trust focusing on the cannabis industry, though the SEC has not yet approved the offering prospectus of the company and no shares of Innovative Industrial Properties currently trade publicly. This seems to indicate that NASDAQ’s rejection of MassRoots may not have been entirely based on its alleged aiding and abetting.
The language of publicly traded cannabis companies
If these companies aren’t on stock exchanges but still trade publicly, where and how do they trade? It’s best to start with an introduction to the vocabulary of publicly traded cannabis companies. Here are several terms you will see discussed frequently in this area:
OTC: An acronym for “over-the-counter” and refers to securities (both debt and equity) that are traded in a context other than a formal exchange. It may refer to stocks, debt securities, or other financial instruments such as derivatives. In general, the reason why a stock is traded over-the-counter as opposed to on a stock exchange is because the company is too small to meet exchange requirements. The overwhelming majority of publicly traded cannabis companies trade OTC.
Pink Sheets: The National Quotation Bureau (now the OTC Markets Group) formerly published price quotations for stocks on pink-colored paper called the Pink Sheets. The National Quotation Bureau renamed itself Pink Sheets LLC in 2000 and subsequently Pink OTC Markets in 2008. In 2010, the name was again changed to its current one, OTC Markets Group. Because of this historical background, people will often refer to OTC stocks generally as trading on the Pink Sheets. Another synonym is Penny Stocks, based on the low price of some OTC stocks. There remains an official reference to the color pink – the OTC Pink® Open Market.
SEC: Shorthand for the Securities Enforcement Commission, a government commission created by Congress to regulate the securities markets and protect investors. Any public offering of stock is subject to review by the SEC.
Stock Exchange: A marketplace (which could be a physical location or an electronic platform) in which securities are traded. The core function of a stock exchange is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. Exchanges give companies, governments, and other groups a platform to sell securities to the investing public. Each stock exchange will have certain listing requirements – such as regular financial reports and audited earnings reports. The New York Stock Exchange (NYSE) is an example of a stock exchange.
OTC Markets Group (formerly known as the National Quotation Bureau, Pink Sheets LLC, and Pink OTC Markets): Operates an electronic quotation system called OTC Link that displays pricing for many over-the-counter securities not listed on a national stock exchange. All transactions are carried out between dealers. The companies listed on the OTC Market are broken into three tiers based on the quality and quantity of information the companies have made available. These tiers, starting with the designation for the most established companies, are as follows: OTCQX® The Best Market, OTCQB® The Venture Market, and OTC Pink® The Open Market.
OTC Bulletin Board or OTCBB: A system run by FINRA (Financial Industry Regulatory Authority). Broker-dealers who subscribe to the non-electronic system can buy and sell OTC stocks. Companies on the OTCBB must make all required SEC filings, but there are no other size or corporate governance requirements. Most OTCBB companies are quoted on both the OTCBB and one of the OTC Markets Group marketplaces.
Gray Market: Refers to securities that are not listed on any stock exchange or on the OTCQX, OTCQB or OTC Pink marketplaces. There is likely little investor interest in or information available about such securities.
Liquidity: Refers to how easy it is to buy or sell a security. This is a function both of the market for the security and of the legal restrictions on resale.
Bid-Ask Spread: The difference between the highest price that a buyer is willing to pay for a share of stock or another asset (the highest bid price) and the lowest price that a seller is willing to accept to sell it (the lowest ask price).
Broker-Dealer: An individual or firm who is engaged in the business of buying and selling securities. When the individual or firm is executing orders on behalf of clients (i.e., acting as an agent), it is acting as a broker. And when the person or firm is acting as a principal (i.e., trading for its own account) it is acting as a dealer.
Reverse Merger: In the OTC context, this refers to a transaction whereby the stockholders of a private company acquire the majority of the shares of a public shell company, which is then merged into the purchasing entity. As a result of the merger, the private company exchanges shares with the public entity, making the purchaser a public company. Reverse mergers allow the private company to become public without raising capital, as opposed to a traditional initial public offering (or IPO) which combines going public via an S-1 and undertaking fundraising. A reverse merger is also quicker than a full-blown IPO or an S-1 filing. The full legal ramifications of a reverse merger versus an IPO or direct S-1 filing are beyond the scope of this article.
S-1: The traditional method for taking a company public is by filing an S-1, which is an offering prospectus for the shares to be listed publicly. This can be accomplished as part of an IPO, which also involves a fundraising process typically run by an investment bank, or it can be done by a company directly without the involvement of a bank. A company wishing to become publicly traded will file an S-1 with the SEC. Once filed, the company and the SEC will then go through a process of comments and revisions. When the SEC is satisfied with the revised S-1, it will declare the offering prospectus effective and the company can sell shares to the public.
Why cannabis companies trade OTC
Why would a company want to trade OTC? The simple fact is that it’s very difficult to trade on the NYSE or NASDAQ. In addition to limitations that apply specifically to cannabis companies, as may have been the case with MassRoots, though not with Innovative Industrial Properties, both NASDAQ and NYSE have high financial standards that most cannabis companies are too small or too unprofitable to meet. It’s also not free to list on these exchanges; while both exchanges have multiple revenue streams, one way they make money is by charging fees to the listed companies. There are other, smaller stock exchanges (note that NASDAQ, for example, has three different tiers domestically: The Nasdaq Global Select Market®, The Nasdaq Global Market®, and The Nasdaq Capital Market®, with different standards for each tier, and has other international markets beyond the scope of this article), but each will have requirements that companies need to meet to be listed. That leaves the OTC markets as the main alternative to a company that wants to be publicly listed, but has not yet achieved the size necessary to be listed on a stock exchange.
But why would a company want to be publicly listed in the first place? There are several reasons, most of which only apply to a company that is listed on a major stock exchange (e.g., the prestige of being a public company or additional liquidity), but the primary reason offered for becoming an OTC-traded company is that it allows the company a way to increase the amount of capital it can raise and offers existing equity-holders greater liquidity. With limited exceptions, a private company can only freely sell its securities to accredited investors (i.e., institutions or people who meet certain income or asset thresholds). And, prior to the JOBS Act, private companies were prevented from any kind of widespread public advertising (which they can now engage in, but only if they take steps to ensure only accredited investors purchase the equity for sale). A publicly registered company, in contrast, is largely free to offer and sell its stock to all interested parties, regardless of whether they are accredited. It is also far less restricted in its ability to advertise the fact that its stock is for sale.
Buying publicly traded stock is also far easier – investors don’t need to know anyone at the company in question. If a potential investor has access to a computer or phone, buying OTC stock is straightforward. In theory, this opens a far larger marketplace for a company’s stock, providing liquidity and allowing it to sell additional equity to finance growth and operations.
The risks of OTC cannabis stocks
There are other, less honorable reasons why a company might want to trade OTC. When a public stock is widely traded, it’s difficult to influence the price of the stock. Imagine trying to materially change the price of Google’s stock – it would require a vast sum of money. But when a company’s stock is infrequently traded and information about that stock is limited, it’s much easier for an individual or group to influence a stock’s price. And information does tend to be quite limited when it comes to OTC stocks. In contrast to stocks listed on the major exchanges, not all stocks that trade on the OTC Link are required to be registered with the SEC. As a result, the overall level of information available for OTC stocks is both less detailed and less up-to-date than that of stocks traded on the NYSE or NASDAQ. It is also not uncommon for an OTC stock to be deficient in providing the limited information that is required.
Several government agencies have sought to warn the public about the risks inherent in cannabis OTC stocks. On May 16, 2014, the SEC’s Office of Investor Education and Advocacy published a press release that specifically warned investors about the risks of cannabis-related stocks. The SEC highlighted the fact that five cannabis OTC stocks had recently been suspended from trading due to concerns about the accuracy of publicly available information about their operations. Two of these companies were also implicated in potentially illegal activity involving the sale of securities and market manipulation. And on November 12, 2015, the Colorado Division of Securities issued a warning to investors to be cautious when considering investments in marijuana-related companies, binary options, and digital currency. The Colorado Division of Securities noted that marijuana-related investments “could be particularly susceptible to scams, such as ‘pump-and-dump.’” A “pump-and-dump” scheme is an illegal scam where people holding equity in a company convince the market that the shares are worth far more than they are by spreading false or misleading information, a process made easier by the thinly traded nature of OTC stocks and the lack of good information about them. Before the public catches on, they sell all or a portion of their shares for a significant profit.
With some exceptions, most cannabis OTC stocks have minimal analyst coverage, if any coverage at all. Most major companies that are publicly traded, in contrast, are studied regularly by analysts, who frequently publish reports about the status and direction of the companies they cover. Academic literature has shown that analyst coverage can decrease informational gaps between investors and management of companies. But if no one is covering an OTC stock, then shareholders must either study the company themselves or risk being left in the dark about the condition of the company. In addition, many institutional investors do not invest in OTC stocks, so the investor base of an OTC company will have far fewer, if any, institutional investors, and more retail (i.e., ordinary individual) investors. This means that holders of OTC stocks, absent the benefits of analyst coverage, cannot count on their fellow shareholders to be sophisticated or committed to monitoring the company either. OTC investors must often do their own due diligence on the companies in question.
Finally, it is important to understand the liquidity issues of OTC stocks. To return to the example of Google mentioned earlier, it is very easy to dispose of Google stock (or to be more accurate, Alphabet Inc. Class A stock) since there is a very active trading market for those securities. It would not be difficult to sell all the Google stock you hold at, or very close to, the current publicly listed price – unless the stock was currently reacting to major news or you were trying to sell a material number of shares. For an OTC stock, however, an investor should not take any of these advantages for granted. OTC stocks typically have significant bid-ask spreads since they are typically far less liquid than stocks traded on public exchanges – meaning that they are not as actively traded. That means in the event you decide to sell your stock there may not be a buyer readily available. And even if you could find a buyer for your stock, there is also the risk that your sale of stock could impact the quoted price, forcing you to sell at a lower price. This is why, unless there is an active market for an OTC stock, the quoted price may not be the price at which you can liquidate your position.
This is not to suggest that all OTC stocks are scams or even poor investments. But investors need to be particularly careful when evaluating these types of stocks and should be aware that not all publicly traded stocks are the same.
Key takeaways
In short, when it comes to OTC stocks:
A publicly traded stock by any other name: Any investment in an OTC stock is inherently riskier than an investment in a blue-chip stock trading on a public stock exchange. If you want to sell an OTC stock, it may not be possible to find a buyer. And OTC stocks can be subject to high volatility and at greater risk of fraud. This doesn’t mean that buying stock in a cannabis company trading OTC is necessarily a bad idea. But these kinds of investments demand an understanding of the risks involved.
OTC company beware: Any company considering listing as an OTC stock, whether by way of a reverse merger or otherwise, should carefully evaluate the costs and benefits of being publicly registered. Consider drawing on the private equity markets instead of the public markets. Please bear in mind that as a cannabis company, you will likely face heighten scrutiny by the SEC.
Know your terms: Not all OTC stocks are alike. The OTC Link has three marketplaces which are tiered based on the quantity and quality of information provided by the companies:
OTCQX® The Best Market: This is the marketplace with the most stringent requirements. To qualify, companies must meet financial standards, demonstrate compliance with US securities laws, be current in their disclosure, and be sponsored by a third-party professional advisor.
OTCQB® The Venture Market: Entrepreneurial and development-stage companies that are unable to qualify for OTCQX trade on this marketplace. Companies must undergo an annual verification and management certification process and be current in their reporting to be eligible.
OTC Pink® The Open Market: Defaulting or distressed companies trade on this marketplace, although some companies trade on The Open Market by design. Companies are further sub-categorized into one of three tiers by the level of information they provide: Current Information, Limited Information, and No Information.
Other Designations: Caveat Emptor: A concern exists about the stock, company, or person(s) controlling the company. The quotes will be blocked on OTCBB while a stock is labeled Caveat Emptor. OTC, Other OTC or Grey Market: Securities not traded on the three OTC Link exchanges. Public quotes are not provided by Broker-Dealers.
This information is educational only and shall not be construed as legal advice. Please consult your attorney prior to relying on any information in this article.
Charlie Alovisetti, Vicente Sederberg LLC
Charles Alovisetti is a senior associate and co-chair of the corporate department at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Mr. Alovisetti worked as an associate in the New York offices of Latham & Watkins and Goodwin where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Mr. Alovisetti has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Mr. Alovisetti has experience in both U.S. and cross-border transactions, and has advised clients across a range of industries including cannabis, technology, manufacturing, software, digital media, energy and clean tech, healthcare, and biotech. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar. Mr. Alovisetti is admitted to practice in both Colorado and New York and is a Level One Interprener.
Guest Post: Changes to Colorado Residency Requirements
By Charles Alovisetti, Senior Associate at Vicente Sederberg, LLC.
This is article is the second in a series, which will provide a general overview of the laws that impact raising money in the cannabis industry.
Introduction
Colorado currently has the strictest residency requirements for ownership of marijuana establishments in the United States, imposing a two-year residency requirement for any owner of a licensed business. In addition to the constraints imposed by such a lengthy residency requirement, the Colorado Marijuana Enforcement Division (the “MED”), which is the regulatory body concerned with the marijuana industry, takes a broad view of what constitutes ownership (e.g., guarantying the debt of a licensed entity can constitute ownership). Earlier this year, on May 11, 2016, in order to address the funding difficulties created by the strict residency requirements (note that because the changes to the residency requirements apply to both medical and retail marijuana businesses, this article will not distinguish between the two when discussing the legislative changes and will simply refer to licensed entities, which shall mean both medical and retail licensed entities), the Colorado Senate passed Senate Bill 16-040, as amended by the House, commonly referred to as the “Residency Bill” (the “Bill”). The Bill was subsequently signed into law by Governor Hickenlooper on June 10, 2016. The Bill, which goes into effect on January 1, 2017, will radically change the residency requirements imposed on licensed businesses. These changes are addressed in detail below. This article, with limited exceptions, only addresses the changes explicitly described in the Bill and does not address the further complexities raised by draft rules promulgated by the MED regarding the Bill since these rules are not yet final.
Current State of Colorado Law
As noted above, in addition to requiring that all owners of a licensed business be at least two-year Colorado residents (and must also meet certain background requirements), Colorado takes the view that a person or entity that has a beneficial interest in a marijuana business and/or substantial control over a marijuana business is considered an “owner.” A beneficial interest has been informally defined as being paid based on profits (whether gross or net). In determining if a person or entity has an ownership interest in a marijuana business, the state considers a non-exhaustive list of factors, including whether a person or entity 1) bears risk of loss and opportunity for profit; 2) is entitled to possession of the licensed premises; 3) has final operational decision-making authority over business; 4) guarantees the businesses’ debts or production levels; 5) is a beneficiary of the business’s insurance policies; 6) acknowledges tax liability for the business; 7) acts as an officer or director of the business; 8) is contracted to manage the overall operation of the business; 9) has a licensing agreement with the business (note that it is possible to structure licensing agreements so as to avoid triggering the determination of ownership, but this can be complicated); 10) has ownership of shares or other equity interests of the licensed business; 11) has a secured interest in furniture or fixtures directly used in the manufacture or cultivation of marijuana; or 12) has a secured loan with the business. In addition, any security interest in the furniture, equipment, or fixtures used directly in the manufacture or cultivation of marijuana or marijuana product may be considered ownership depending on the circumstances. Given the thoroughness of the foregoing list, it’s not difficult to understand why licensed entities have had difficulty raising capital from out-of-state investors.
However, Colorado laws do allow for out-of-state residents to invest in marijuana businesses through a permitted economic interest (“PEI”). A PEI is a financial interest in the form of an unsecured debt instrument, option agreement, warrant, or any other right to obtain ownership interest in a marijuana business, provided the conversion or transfer right is contingent on the holder qualifying as an owner and obtaining licensure as an owner by the MED – this could be upon the occurrence of either the holder meeting the two-year residency requirement or a change in law (which the Bill represents). A PEI may only be held by a natural person who is a U.S. resident. Holders of PEIs are subject to fingerprinting and criminal history background checks and must disclose financial and personal information with the MED in their applications. As of today, PEIs remain useful to licensed businesses since they allow them to accept out-of-state investment in advance of the Bill going into effect. On January 1, 2017, PEI holders will become eligible to have their interests converted into equity holdings in licensed businesses. After the Bill goes into effect, any kind of option, warrant, or similar convertible instrument will still be required to take the form of a PEI.
New Residency Bill
Before delving into the specifics of the Bill, it is worth noting that the summary attached to the Bill contradicts the actual law, as it was written prior to the passage of the final version of the Bill, and it should be ignored.
The Bill adds a number of new defined terms. Understanding these new terms is the key to understanding the Bill:
Direct Beneficial Interest Owner: Prior to the Bill, there was only a defined term for “Owner”; that concept has now been split in two – Direct Beneficial Interest Owner and Indirect Beneficial Interest Owner. Under the existing system, any level of control that the MED, using the 12-factor test outlined above, determined rose to the level of ownership resulted in the entity or individual being listed as a zero percent Owner (e.g., an individual who guaranteed the debts of a licensed entity might be considered as a zero percent Owner of that business, despite owning no equity in that entity). The term Direct Beneficial Interest Owner is meant to cover existing Owners who directly hold equity in a licensed entity. Direct Beneficial Interest Owners are subject to residency requirements and full background checks (except for Qualified Limited Passive Investors, a type of Direct Beneficial Interest Owner described in detail below). A Direct Beneficial Interest Owner must be either a resident of Colorado for at least one year or a US citizen. Publicly traded companies are explicitly barred from holding licenses.
Indirect Beneficial Interest Owner: The second new category that was previously included in Owner is Indirect Beneficial Interest Owner. No residency requirement exists for an Indirect Beneficial Owner. An Indirect Beneficial Interest Owner includes the following individuals and entities: (a) a holder of a PEI, (b) a recipient of a commercially reasonable royalty associated with the use of intellectual property by a licensee, (c) a licensed employee who receives a share of the profits from an employee benefit plan, (d) a qualified Institutional Investor (defined below), or another similarly situated person or entity as determined by the state licensing authority. The Bill does not explicitly state what kind of background check will be required for an Indirect Beneficial Interest Owner. Currently, the draft rules set forth an identical set of criteria to determine suitability to those for Direct Beneficial Interest Owners, but this may change in the final rules.
Institutional Investor: Up to 30% of a licensed business can be held by an Institutional Investor, and the Bill does not contemplate any residency requirement for an Institutional Investor since an Institutional Investor will be considered an Indirect Beneficial Interest Owner and residency requirements only apply to Direct Beneficial Interest Owners. The Bill sets out a list of entities that meet the definition: banks, registered investment companies, ERISA funds, and any other entities to be identified during the rule-making process. The current draft rules do not list any types of entities not specifically identified in the Bill. While not discussed in the Bill, the draft rules and legislative history make it clear that an Institutional Investor must be passive and may not have any control over a licensed company beyond voting its shares (meaning that the minority protections present in a typical non-control transaction cannot be present).
Qualified Limited Passive Investor: This is defined as a natural person who is a U.S. citizen and is a passive investor owning five percent or less of the equity of a licensed business.
New Residency Rule
In place of the existing rule that requires all Owners to be at least two-year residents of Colorado, the Bill now allows an entity to be either (i) held by an unlimited number of Direct Beneficial Interest Owners, each of whom must meet the one-year Colorado residency requirement, or (ii) if one or more Direct Beneficial Interest Owners do not meet the one-year residency, then the following conditions must be observed: (a) At least one officer of the licensed entity must be a Colorado resident of at least one year, (b) all officers with day-to-day operational control over the business must be Colorado residents of at least one year, and (c) there must be no more than 15 Direct Beneficial Interest Owners (this limitation is measured by natural persons on a look-through basis). A licensed business, whether wholly held by Coloradoans meeting the residency requirement or held by one or more Direct Beneficial Interest Owners who do not meet the residency requirement, may also have up to 30% of its equity held by qualified Institutional Investors.
Reasonable Royalties Now Allowed
One additional major change in the Bill is the allowance for commercially reasonable royalties to be paid to Indirect Beneficial Interest Owners. As the law currently stands, a royalty would be considered a form of ownership by the MED (as the royalty would likely be based on the profit of the licensed entity) and would thus make the recipient of the royalty subject to residency and other ownership requirements. In addition, the current system requires all of the Owners to be present at MED meetings—which presents a major obstacle to the operator of a licensed business who wants to enter into multiple licensing agreements since any licensor could potentially put a license at risk by refusing to attend a meeting or by committing a bad act. However, Indirect Beneficial Interest Owners, while still subject to background checks, are not subject to residency requirements or the limitation of 15 natural persons (as is the case for Direct Beneficial Interest Owners when one or more equity holders does not meet the one-year Colorado residency requirement). It may also be the case, though we will need to wait for the final rules, that removing an Indirect Beneficial Interest Owner is easier than removing a Direct Beneficial Interest Owner from a license.
Conclusion
As noted above, the MED is granted authority to promulgate rules pursuant to the Bill, and final analysis of the Bill will require careful study of these new rules. The MED is currently accepting written comments to the draft-proposed rules in advance of a formal, public hearing regarding the permanent rules on Friday, September 2, 2016. In addition, as with any other change in a regulatory regime, we will need to pay close attention to how the Bill plays out when actually put into practice.
This information is educational only and shall not be construed as legal advice. Please consult your attorney prior to relying on any information in this article.
Charlie Alovisetti, Vicente Sederberg LLC
Charlie Alovisetti is a senior associate and co-chair of the corporate department at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Charlie worked as an associate in the New York offices of Latham & Watkins and Goodwin where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Charlie has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Charlie has experience in both U.S. and cross-border transactions, and has advised clients across a range of industries including cannabis, technology, manufacturing, software, digital media, energy and clean tech, healthcare, and biotech. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar. Charlie is admitted to practice in both Colorado and New York.
Guest Post: Raising Money 101 – What’s an Offer and Why Does it Matter?
This is article is the first in a series, which will provide a general overview of the laws that impact raising money in the cannabis industry.
Any business owner planning to raise capital should consider the federal Securities Act of 1933, commonly referred to as the “Securities Act.” In addition to federal law, each state has its own set of laws that regulate securities sales, commonly referred to as the “Blue Sky Laws.” Both the Securities Act and any applicable Blue Sky Laws must be complied with in connection with the sale of securities – a security being proof of ownership or debt that has been assigned a value and may be sold (stocks and bonds are examples). Both the Securities Act and the Blue Sky Laws regulate the sale of securities by prohibiting the offer and sale of unregistered securities (other than pursuant to specified exceptions) and requiring companies to provide investors disclosure of all material facts concerning the securities for sale.
Crucially for business owners, it’s not only the actual documents to raise money that are governed by the Securities Act: so are those initial business plans and executive summaries that might be circulated to gauge interest. Ensuring that your business plans are not violating any securities laws is the focus of this article.
In analyzing whether a transaction or communication is in compliance with the Securities Act and Blue Sky Laws, it’s helpful to think through the following questions:
Does the transaction or communication constitute an offer or sale?
Is the offer or sale of a security (as defined in the Securities Act and the Blue Sky Laws)?
If there is an offer or sale of a security, is the security properly registered with federal and state authorities?
If there is an offer or sale of a security and the security is not registered, does the transaction fall within one or more of the specified exemptions to registration?
As you assess your materials for compliance, begin by asking whether an offer has been made. If a transaction or communication does not constitute an offer, then compliance with state and federal securities law is not a concern. However, if an offer is unintentionally made – a common mistake – it may trigger a violation of securities law since it is unlikely that the unintentional issuer will have taken into account the necessary disclosure items and determined the relevant exemption to registration. Note that in the context of securities law, “issuer” means any company that issues or proposes to issue a security.
What, then, is an offer, from the federal standpoint and from that of the state of Colorado? Section 2(a)(3) of the federal Securities Act defines “offer” as “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.” Under the Colorado Securities Act, “offer to sell” includes any attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value and “offer” means an offer to sell or an offer to purchase. What constitutes an offer, furthermore, may be a matter of perceived intent rather than explicit proposal: the SEC has noted that “[t]he publication of information and statements, and publicity efforts, generally, made in advance of a proposed financing, although not couched in terms of an express offer, may in fact contribute to conditioning the public mind or arousing public interest in the issuer or in the securities of an issuer in a manner which raises a serious question whether the publicity is not in fact part of the selling effort.” As a practical matter, these definitions, as well as the SEC’s guidance, mean that many communications that would not be considered offers under contract law may well be considered offers for purposes of state and federal securities law.
From a practical point of view, then, how should an entrepreneur approach an action that might be considered an offer – distributing information about a new company, for example? To mitigate risk of a securities violation, consider the following factors before circulating information about your business:
Include Appropriate Disclaimers: If you do proceed with distribution, any documentation provided to potential investors should contain disclaimers that clearly indicate that the provided information is not an offer or a solicitation of an offer to buy securities. Note that such disclaimers do not necessarily mean the document will not be considered an offer.
Require Further Information: Any documentation should also state explicitly that further information about a purchaser will be required before an offer can be made.
Minimize Details: Generally speaking, the fewer details provided about a potential security, the better. Even high-level details can result in a document being considered an offer.
Ensure Accuracy: Make absolutely sure that any information provided is correct and not misleading (i.e., do not claim that cannabis is legal in the United States, note that it remains illegal at the federal level). Avoid selective disclosure and be prepared to stand behind any claims made.
Follow Best Practices: Every communication should adhere to best practices regarding offerings in general (e.g., avoiding general solicitations, keeping track of distributed documents, etc.)
Seek Legal Counsel: When in doubt, speak to a qualified securities attorney. It’s always easier to do things right the first time, whereas it may not be possible to fix certain mistakes.
This information is educational only and shall not be construed as legal advice. Please consult your attorney prior to relying on any information in this article.
Charlie Alovisetti, Vicente Sederberg LLC
Charlie Alovisetti is a senior associate at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Charlie worked as an associate in the New York offices of Latham & Watkins and Goodwin Procter where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Charlie has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Charlie has experience in both U.S. and cross-border transactions, and has advised clients across a range of industries including technology, manufacturing, software, digital media, energy and clean tech, healthcare, and biotech. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar.
*Currently only admitted in New York
Cannabis Carnival II: The Fusion of Art & Activism
Written by Brooke Gilbert, Director of Events & Education
For the second year in a row, the National Cannabis Industry Association set the stage for a night of fun, music, mischief, and the celebration of cannabis with our acclaimed benefit concert, Cannabis Carnival II. Held at Denver’s historic Fillmore Auditorium, the Carnival featured a wide-ranging group of world-class musicians and performers, including headliners Medeski Martin & Wood, Everyone Orchestra featuring an all-star ensemble of accomplished musicians, performance troupe Quixotic, and Rob Garza of Thievery Corporation.
Funhouse Facilitator Bhang Corporation gave the interior of the already impressive Fillmore Auditorium a new life through the creation of an inviting, Bhang-branded Funhouse Lounge space complete with seating, psychedelic fine art by Don Callarman and Android Jones, plus even a chance to get your fortune told by the mighty Zoltar!
Filling out the raised viewing area along the east side of the Fillmore were our Cannabis Cavalcade of supporting sponsors and our Non-Profit Village. Attendees had the chance to stop by Mountain Medicine, O.PenVAPE, Mahatma Concentrates, and Terrapin Care Station booth setups to pick up goodies, play carnival-themed games for a variety of prizes, and meet those who make these wonderful products. On top of all this, attendees could also visit the booths of harm reduction heroes Dancesafe and Harm Reduction Action Center to learn more about practical measures to stay safe at live music events and give back by entering into Share Your Cloud’s art raffle to raise money HRAC’s lifesaving local efforts.
The party continued outside with even more carnival fun. Whether taking a chance at soaking someone in the 300-gallon Dunk Tank or showing off your strength by taking a swing at the High Striker, there was plenty of excitement to go around. O.PenVAPE topped it all off by providing a stilt-walker to entertain guests throughout the night in hosting their tricked-out Volkswagen bus where attendees could take a break to play everyone’s party favorite, Mario Kart™.
Opening up the musical portion of the evening was Rob Garza, multi-instrumentalist and founding member of Thievery Corporation. His engaging mix of deep house and nu-disco during his set got everyone warmed up while exploring the venue. Intensely mesmerizing, highly skilled, and visually stunning, Quixotic took the stage next and stole the show for many who were unaware of what they were about to witness. Based out of Kansas City, this group of performers masters the fusion of dance, high fashion, aerial acrobatics, projection mapping, and original live music, producing a multi-dimensional experience unlike any other. You can view highlights from their performance in our official photo album found on our Facebook page here.
The constantly revolving improvisational supergroup Everyone Orchestra took the stage following Quixotic. Matt Butler, a masterful entertainer who also served as our jovial ringleader for the evening, conducted the highly anticipated lineup of musicians, including members of The String Cheese Incident, Big Gigantic, Papadosio, The Motet, Tea Leaf Green, Elephant Revival, The Bridge, and The Congress, through an hour-long improvisational journey which did not disappoint. Combining an eclectic mixture of funk, rock, bluegrass, soul, jazz, and audience participation all guided by the meticulous mind of Matt Butler, Everyone Orchestra got everyone dancing and letting loose to the collaboratively created soundtrack.
A surprise guest for the evening came out during the setbreak before Medeski Martin & Wood closed out the show. Few people knew beforehand that Representative Dana Rohrabacher (R-CA), a longtime champion of cannabis policy reform, also plays guitar and is no stranger to songwriting. In what might have been a first for a member of Congress, Rep. Rohrabacher jumped on stage and shared a personally penned song about freedom at a cannabis-centric concert. This rare moment was definitely a highlight of the evening as it reflected the merging of a political movement, art, and activism that Cannabis Carnival means to encompass.
World-renowned jazz funk trio Medeski Martin & Wood took the stage last, joined by a late night rush of local cannabis enthusiasts who weren’t going to miss their last stateside appearance in 2015. This increasingly rare performance by the jazz fusion pioneers was a real treat for all and the diverse audience once again demonstrated the role cannabis can play in crossing cultural boundaries. With never a dull moment, MMW’s set showcased their wide range with Billy Martin providing an ever-changing canvas of beats and percussive sounds for Chris Woods to build upon, while John Medeski took things deep through his expansive selection of vintage pianos, organs and synthesizers.
As attendees left with smiles on their faces, we couldn’t have been happier with another successful year of throwing Cannabis Carnival. In case you didn’t hear, NCIA will be taking the Cannabis Business Summit and Cannabis Carnival to the Bay Area in 2016. Stay on the lookout for date and location announcements for next year’s edition in the coming months!
Join the Marijuana-Infused Product & Extraction Revolution!
The field of cannabis extraction and marijuana-infused products has quickly emerged as one of the fastest-growing and most consistently innovative sectors of the cannabis industry. It’s also become one of the most scrutinized and highly regulated. NCIA wants to help you capitalize on the infused product revolution while staying committed to the best, most responsible practices and highest quality products.
That’s why we’re hosting our first-ever Infused Product & Extraction Symposium at the Hyatt Regency Denver Tech Center in Denver, CO, from October 27 to October 29. There will be no better opportunity for industry professionals, entrepreneurs, and newcomers alike to learn about best practices and cutting-edge technologies in this booming field.
Haven’t gotten your tickets yet? Lucky for you, we’ve compiled this short summary of who should attend and why to help make your decision a little easier!
Who Should Attend?
Infused product manufacturers
Extraction scientists and business pros
Investors & entrepreneurs
Experienced dispensary owners & operators
Attorneys & legal experts
Industry consultants
Policymakers and regulators
Why Should You Attend?
Gain insight into the rule-making process around infused products regulations from industry leaders who are directly involved.
Julie will be speaking on the “Intellectual Property, Labeling, & Branding” panel on Tuesday, October 28 from 1:00-1:45 p.m.
Receive unparalleled access to thought leaders with advice on maintaining and establishing a legitimate business within the infused products & extraction sector.
You can register for a ServSafe® Food Handler workshop taking place on Wednesday, October 29 from 9:00 a.m. – 12:00 p.m when you register for the symposium.
Take a guided tour of two of Colorado’s premier infused product & extraction manufacturing facilities.
We are offering tours of both Dixie Elixirs and Auntie Dolores state-of-the-art production facilities located in Denver on Wednesday, October 29 from 9:00 a.m. to 12:00 p.m. and 1:15 to 4:15 p.m.
The morning tour is already sold-out so register now to reserve your spot!
You don’t need anymore convincing, do you? Well, just in case, we are happy to tell you that all NCIA members get a $150 discount on registration! Not a member of NCIA yet? Don’t worry! You can join today starting at the low cost of $100 a month or $1000 a year. Don’t miss this opportunity to join the first national event dedicated to infused products, while supporting the growth of a legitimate cannabis industry on the national level.
Register today for this great opportunity to connect with fellow industry leaders while learning about best practices for operating a responsible and successful infused product or cannabis extraction business.
Start Making Sense – A Cannabis Industry Fundraiser for SSDP
The National Cannabis Industry Association is proud to be hosting “Start Making Sense,” a cannabis industry fundraiser for Students for Sensible Drug Policy (SSDP) on Tuesday, September 9 at the NCIA/Vicente Sederberg offices in Denver.
SSDP, the leading student-led drug policy reform organization in the country, is currently engaged in extensive voter education and get-out-the-vote efforts in Florida to support the passage of Amendment 2. This important voter initiative, if passed, would legalize and establish a comprehensive medical marijuana program for the first time in a southern state. We at NCIA are proud to support those efforts and all of the other great work of SSDP, so we hope our members and supporters will join us for this very special evening of music, food, and drinks while supporting sensible reform.
We wanted to throw this event not only to support our friends at SSDP but also to show our appreciation for our dedicated Colorado members who have been helping lead this burgeoning industry and supporting NCIA’s phenomenal growth over the last few years. Colorado has been a focal point for reform and helped set the example for responsible business practices. Now we invite our Colorado members to help this industry grow in an state where support is still very much needed.
We will also be hosting a silent auction throughout the night with multiple signed art prints from Black Ink, a Philadelphia-based art and design company founded by former SSDP members. They have been longtime supporters of SSDP, donating their design skills over the years to SSDP’s live-music-based program, the AMPLIFY Project. Their ongoing collaboration, the “Prints Not Prisons” Art Drive, has raised hundreds of dollars for sensible reform throughout the years. (You can view a full catalog of their work here.) Black Ink’s surrealistic style has been a huge hit among live music fans and is sure to gain some new fans during our event.
For musical entertainment we will be screening the landmark concert film “Stop Making Sense” by the Talking Heads. The movie will be projected onto the front side of our office building (better known as the Cannabis Cottage), so attendees can enjoy the last few days of summer outside before Colorado begins its annual cool-down. The inside of the Cannabis Cottage will be transformed into several themed networking rooms, each featuring different music and decorations to indulge your varied musical taste buds.
We aren’t skimping when it comes to food either! NCIA staff will be cooking up pork shoulder and beef brisket all day long (as well as a veggie option) so no one leaves with an empty stomach. In addition, a selection of fine Colorado microbrews will be on tap, along with a local wine selection and other non-alcoholic refreshments.
We hope you’re excited to join us for an evening supporting sensible reform while enjoying each others’ company and timeless music. Everything will be provided, but we are strongly urging all attendees to donate the suggested $40 for admission. Every dollar you contribute will have an exponential effect and impact on the spread of sensible reform. Please REGISTER TODAY and we’ll see you on Tuesday!
Cannabis & Community: The Industry Gives Back to Medical Research and the Arts
The National Cannabis Industry Association was founded in order to foster a legitimate, responsible, and socially-engaged cannabis industry. We continue to advocate for these values both within the industry and to the outside. As part of this ongoing message, we encourage our members to engage with their communities and support charities in addition to the marijuana policy reform efforts that advance the industry directly. Cannabis businesses that engage in philanthropy are not only helping important causes and earning a tax deduction — they are demonstrating tangible benefits of legally regulating cannabis businesses to policymakers and the public. After all, criminal drug dealers don’t usually give back to their communities.
Voter support for legal marijuana is at an all-time high but a lot of work still needs to be done before public perception and the legal environment reach the point where the cannabis industry is treated like any other legitimate American business sector. Successful cannabis businesses can help move us in the right direction by publicly supporting mainstream causes that resonate with the general public in addition to helping lay the foundation for a culture of corporate responsibility within the emerging industry.
Colorado’s burgeoning legal cannabis industry is leading the charge on this front with two great examples of philanthropic activity this summer.
NCIA director of education and events Brooke Gilbert (left) poses with director of government relations Michael Correia (right) at this year’s Clinic Charity Classic.
On August 16 the Clinic Marijuana Center held its 5th Annual Clinic Charity Classic, a golf tournament benefitting the Multiple Sclerosis Society. The sold-out tournament was sponsored by dozens of cannabis businesses — including NCIA — and raised over $80,000 for the M.S. Society’s Colorado-Wyoming Chapter.
Our support for these important community benefits strengthens our relationship with those who may not have any direct experience with cannabis or the industry and generates positive news coverage across the nation.
Let us know how your business is engaging with your community in the comments below or tell us if you have an idea for new ways to get philanthropically involved.
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Sahar Ayinehsazian is an attorney in Vicente Sederberg‘s Los Angeles office, where she focuses on corporate transactions, cannabis banking, and regulations. With her specialized knowledge, Sahar helped to establish and currently co-leads Vicente Sederberg’s Banking and Financial Services Department. As a member of the National Cannabis Industry Association’s Banking Access Committee, Sahar also works on strategy and educational advocacy to enable state-licensed businesses to obtain accounts at depository institutions.
Kelsey Middleton is a Regulatory Specialist in Vicente Sederberg’s Los Angeles office, where she focuses on licensing and regulatory compliance. Kelsey is responsible for assisting a dynamic range of cannabis clients in obtaining state and local cannabis licenses, permits and approvals, and navigating the complex and rapidly evolving regulatory landscape of the cannabis industry. She routinely helps clients prepare the requisite applications and documentation for state and local licensing and permits, and facilitates communications with cannabis industry regulators to promote efficiency and compliance throughout the licensing process.
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former SSDP members. They have been longtime supporters of SSDP, donating their design skills over the years to SSDP’s live-music-based program, the 
