As regular readers (or anyone involved in distilling anything that needs to be aged) already know, the hooch business has a bit of a cash-flow problem. Startup costs are substantial. And once you’ve paid for that shiny copper behemoth, as well as the raw materials for your product, you have the pleasure of sitting it in a warehouse for a few years (or more than a few) before it is ready for bottling and sale to the consumer. In the meantime, your product literally evaporates. Not the best way to manage cash flow, really. And so it isn’t much of a surprise when distilleries try to get creative in finding new and better ways to finance their operations.
One such producer was Tasmania’s Nant Distillery. Nant, founded by Australian businessman Keith Batt, began production in approximately 2008, and rose to prominence in 2012 when Jim Murray scored the Nant Single Malt Whisky a 95.5/100. It was reportedly very good whisky. But while Nant was taking off, Batt’s other business interests were suffering. In fact, they were apparently suffering quite badly. And since Batt had personally guaranteed some of the debts of those businesses, that meant he was suffering too – leading to his personal filing for bankruptcy protection in 2016. At the time of this filing, Batt disclosed that he had debts of roughly $16.2 million (AUD) and cash on hand of approximately $5,700. In addition, the filing apparently disclosed efforts by Batt over the years preceding the bankruptcy petition to shield his assets from creditors, including placing the Nant business and several other significant assets into trusts in the names of family members.
While Batt was struggling with his personal finances, Nant was still trying to operate. And at some point in roughly 2012 Nant began generating cash by selling barrels to investors with a promise to buy them back four years later – promising the buyers a 9.55% return on their investment. The efforts were successful, as Nant apparently sold approximately 1,700 barrels to eager investors.
But something went wrong.
According to an audit conducted by Australian Whisky Holdings, which purchased the Nant estate on which the distillery was located and either did or did not purchase the distillery and brand itself – depending on whether you believe AWH or Batt – over 700 of the barrels that were sold to investors simply don’t exist. Well, that isn’t exactly true. The barrels exist – but don’t contain any whisky. Some of the ones that do contain whisky seem to be full of watered-down whisky (45% ABV compared to the expected barrel strength of 63.4% ABV). And some others seem to have been filled with spirit following the investor’s purchase only to have the spirit bottled and sold by the company without the investor’s knowledge.
Nant – on its Facebook page, disputes the idea that anything is amiss, and claims to still own the distillery, barrels and all intellectual property related to the brand. But at the same time, Nant also states that its contract didn’t actually require the company to fill the barrels with spirit at the time it entered into the contract with the investors. This appears to be a tacit admission that the barrels were not, in fact, filled in accordance with investors’ expectations. So what have we got? We’ve got a mess.
This whole dispute will be governed by the laws of the local jurisdiction – which likely means the governing law selected in the investors’ contract with Nant as well as the law of each investor’s residence. And while I can’t speak with certainty about the laws of Tasmania – I can say one thing for certain. This feels a lot like securities fraud – or at least it would under the laws here in the states.
Under the securities laws of the United States (particularly the Securities Act of 1933), it is generally a violation of federal law to make a material misstatement (or to omit to state a material fact – the omission of which makes other statements materially misleading) in connection with the purchase or sale of a security.
But wait, you say, Nant was selling whisky – not securities!
You have much to learn, grasshopper. The definition of “security” under our laws is quite broad, and includes the term “investment contract.” As defined by our courts, an investment contract likely exists any time there is an investment of value in a common enterprise with an expectation of profit to be derived by the actions of another party. That’s a mouthful, so we should break it down and apply it to the Nant situation.
- An investment of value (Nant investor forks over $25,000 in exchange for ownership of two 225-liter barrels of whisky);
- in a common enterprise (the investor and Nant or – alternatively – the investors as a group);
- with an expectation of profit (Nant investor is told she will receive $36,000 from Nant 4 years later when the whisky is mature and Nant buys it back);
- to be derived by the efforts of another party (Nant is distilling the whisky and will be buying it back for marketing to consumers).
Note that courts here in the U.S. differ on how they look at the “common enterprise” portion of this test – giving rise to the alternative approaches above. But either way, it seems likely that the Nant scenario would fit the bill under our laws.
I would like to tell you that the application of investment contract analysis to things that don’t seem like securities is novel – but it isn’t. The seminal case in this area SEC v. Howey (328 U.S. 293 (1946) for all you law junkies out there) dealt with the sale of interests in an orange groves – and a corresponding service contract to pick the fruit and sell it – in Florida. Other cases have focused on chinchillas, viatical settlements and worm farms. And yes, there have been reported cases in the U.S. in which these securities law concepts have been applied to investment in whisky.
So what is the upshot here? First, I am personally interested to continue to watch this case to see whether the securities and financial regulatory authorities pursue the matter. If Batt made a material misstatement to investors in the scheme (or if he caused Nant to make such a material misstatement), it is possible that he will be subject to civil or criminal prosecution. And here in the U.S. it isn’t so easy to leave those problems behind in bankruptcy.
Second, this situation serves to remind us all that any time you are seeking investment from a third party you need to be careful. You might think you’re selling whisky when you’re really selling a security. And while the rules for selling whisky are quite stringent, the penalties for improperly selling securities can be absolutely draconian.