Use the Lexology Getting the Deal Through tool to compare the answers in this article with those from other jurisdictions.
What private financing options are available for cannabis businesses in your jurisdiction, and what are their respective advantages and disadvantages?
While traditional banks have generally not been willing to finance cannabis enterprises, there are a growing number of private equity funds dedicated to the cannabis industry. If interested, these funds may able to provide equity or debt funding to bring a cannabis operation to the next level as well as furnish certain management expertise. However, some entrepreneurs are wary of ceding the amount of management control that such funds may require. However, with the assistance of qualified counsel it may be possible to raise funds from “friends and family” in a securities offering exempt from federal securities requirements under various “safe harbors” provided by Regulation D of the Securities Act. As discussed below, state securities laws in the states of the offerees should be consulted, but should not pose a serious impediment. For example, the applicable securities laws of California are briefly discussed below.
Section 25102(f) of the California Corporations Code provides an exemption from registration requirements for any offering where the following criteria are met:
- sales are made to no more than 35 persons;
- all purchasers have a pre-existing relationship with the issuer;
- each purchaser is purchasing for their own account and not for resale; and
- the offering is accomplished without any advertisement or publication.
This is typically characterized as a “friends and family” offering.
In addition, many California issuers have made interstate offerings under Regulation D of the Federal Securities Act 1933, with particular emphasis on Rule 506 of that exemption.
Rule 506(b) provides a safe harbor from securities registration for offerings of any dollar amount, as long as the following requirements are met with respect to the offering and sale:
- there is no general solicitation or advertising;
- there are no more than 35 non-accredited investors, plus an unlimited number of accredited investors;
- there is no false or misleading information, and any information made available to accredited investors must also be made available to non-accredited investors; and
- the company must make itself available to answer questions from prospective investors.
Rule 506(c) allows the offering to be made with broad solicitation and general advertising, as long as:
- all investors are accredited; and
- the company takes reasonable measures to verify that all investors are accredited.
Offerings are usually described in a document called a ‘private placement memorandum’, which is structured according to Securities and Exchange Commission regulations. The “Risk Factors” section, where the issuer is required to describe risks that are specific to the particular offering, presents some novel issues for companies in the cannabis business. In addition to the obvious, if remote, risk of federal criminal prosecution and seizure of assets, the issuer should consider mentioning a range of lesser but perhaps more probable risks, such as those associated with large volumes of cash, landlord or tenant issues, and interstate commerce and transportation.
What rules and restrictions govern cannabis businesses’ listing and admission to trading on recognised equity securities exchanges? What are the advantages and disadvantages of public listing?
At present, no cannabis company with U.S. operations has gone public in the United States by means of an initial public offering of securities. Therefore, while other federal agencies have indicated clear opposition (e.g., the Drug Enforcement Administration and the United States Citizenship and Immigration Services), the Securities Exchange Commission’s position on cannabis is unclear. One company reached the S-1 submission stage, and cleared the comment period without objection by the commission, but later withdrew its offering for other reasons.
Until another company decides to undertake the investment in money and effort necessary to stage an initial public offering, cannabis companies may explore reverse mergers or go public in Canada where cannabis is legal nationwide.