Recent Federal Cannabis Cases Involving Raising Capital

Federal securities regulators recently obtained judgments in two enforcement actions brought in federal court in California and Illinois involving cannabis-related businesses raising capital. At a high level, the recent trend we have observed in these recent securities enforcement actions is the general emphasis, as we would expect, on (i) accuracy and completeness of material disclosures to investors, (ii) investor solicitation activities, including use of unregistered broker-dealers by issuers, and (iii) properly conducting compliant securities offerings.   

1. SEC v. Geoffrey J. Thompson, No. 1:20-cv-05205 (N.D. Ill. Jan. 20, 2021)

Geoffrey Thompson, a repeat securities law violator, and his company Covalent Collective, Inc., a supposed cannabis company, allegedly conducted numerous offerings of unregistered securities from 2014 to 2019, ultimately raising more than $19 million from approximately 500 investors. The Securities and Exchange Commission (SEC) alleged that Thompson diverted over $2.7 million of funds from investors while serving as CEO of Covalent Collective, a Canadian corporation operating out of Longmont, Colorado.

Among other allegations, the SEC alleged that investors were lured in by Covalent’s use of unregistered broker-dealers; an investor relations firm; a call center maintained by Fortress Legacy LLC, another of Thompson’s companies; and other fraudulent investor-facing solicitations, including audio updates … Keep reading

Eaze Case Puts Financial Institutions on Notice

On March 24, 2021, Defendants Hamid (Ray) Akhavan and Ruben Weigand were found guilty of defrauding banks as part of a scheme they had set up to help cannabis company Eaze accept credit card payments for marijuana purchases. During the trial, former Eaze CEO James Patterson testified that he and other Eaze employees, Eaze board members, and even the dispensaries they served, knew that they were disguising the payments to appear as if they originated from non-cannabis businesses because banks and the major credit card networks did not allow credit cards to be used for marijuana. The Defendants argued that although banks may claim that they do not want nor allow marijuana transactions, they, in fact, know they are facilitating marijuana-related payments and profit from doing so.

Although a prosecution witness from Bank of America testified that the bank’s policies strictly prohibit doing business with cannabis-related companies, he also admitted that Bank of America profits from marijuana credit card purchases when customers maintain balances on their cards. Bank of America stated that it monitors for cannabis-related transactions by screening merchant names and if an investigation reveals that a merchant is a cannabis-related business, it reports the merchant to Visa … Keep reading

Vape Shipping Ban Looms Ahead

In December, President Trump signed a 5000+ omnibus bill into law titled the Consolidated Appropriations Act of 2021 (CAA). The bill was highly publicized for extending certain COVID-relief measures to small businesses, such as revitalizing the Paycheck Protection Program. Another facet of the CAA was a provision which bans the United States Postal Service (USPS) from shipping Electronic Nicotine Delivery Systems (ENDS).

Cannabis vaporizers are captured in the CAA’s broad and vague definition of ENDS, which are defined as “any electronic device that through an aerosolized solution, delivers nicotine, flavor, or any other substance to users inhaling from the device.” The definition includes a component, liquid, part or accessory of the vaporizer device, without regard to whether the component, liquid, part or accessory is sold separately.

The CAA provided that the USPS must develop regulations within 120 days on how it will implement its ban on shipping and handling ENDS.

The USPS released its proposed rule on February 19, 2021 titled “Treatment of E-Cigarettes in the Mail.”

Currently, shipping cigarettes and smokeless tobacco through the USPS is prohibited unless, as set forth in the exceptions, they are mailed between authorized tobacco businesses or are small shipments between individuals … Keep reading

Mexico Inches Closer to Legalization

Early this week, two special committees in the lower house of the Mexican Congress signed off on a draft bill to decriminalize cannabis nationally. Members of the chamber’s Health and Justice committees approved the cannabis bill in a combined vote of 34-11, with 12 abstentions.

The bill – which has been revised significantly since its passage in the Senate last November – will now be sent to the full chamber for a vote. After a 2018 Supreme Court ruling held that the prohibition on cultivation and personal possession of marijuana was unconstitutional, lawmakers were tasked with implementing a decriminalization policy, though Congress has repeatedly postponed its deadlines. If passed, the legislature will be close to establishing one of the world’s largest cannabis markets. The floor vote is expected to take place this week.

With support from the administration of President Andrés Manuel López Obrador, the bill marks what many hope might be a watershed moment in the history of a country long plagued by violence among competing drug cartels. Until now, the failed war on drugs has continued to fuel a massive cannabis black market. This new legislation is considered by many to be a solution: legalize, tax and … Keep reading

Eaze Criminal Case Underscores the Importance of Transparency in Cannabis Cashless Payment Transactions

This week, federal prosecutors in the Southern District of New York will try their case against Defendants Ruben Weigand and Hamid “Ray” Akhavan for one count each of bank fraud in violation of 18 U.S.C. § 1349 related to the purchase of marijuana through Eaze, a California cannabis delivery platform. Specifically, the indictment alleges that Defendants Weigand and Akhavan – along with co-conspirators – created a transaction laundering scheme that facilitated over $100 million of credit and debit card payments to licensed cannabis operators by disguising the transactions to appear as if they were unrelated to cannabis. Prosecutors allege that the scheme was executed due to the fact that most banks are unwilling to facilitate electronic payment transactions related to cannabis, even if those transactions are legal under state law.

Weigand and Akhavan have pleaded not guilty and are set to begin trial on March 1, 2021. However, on February 19, 2021, the former CEO of Eaze Technologies, LLC, James Patterson – who resigned from Eaze in 2019 – pleaded guilty to one count of conspiracy to commit bank fraud and agreed to assist prosecutors with their case against Weigand and Akhavan. In doing so, Patterson told the court … Keep reading

Massachusetts HCAs & Community (Excessive) Impact Fees

On February 3, 2021, the Massachusetts Supreme Judicial Court (SJC) heard a case that raised questions to a grievance cannabis operators in the Commonwealth have been grueling over for years. In the case of Mederi Inc. v. City of Salem, Mederi Inc. was denied a host community agreement (HCA) by the city of Salem after applications for the city’s five adult-use recreational marijuana retailer licenses were slotted. As a part of the Superior Court’s (Feeley, J.) ruling, the court found that the Massachusetts legislature did not intend for the Cannabis Control Commission (CCC) to have the authority to review the contents of HCAs under G. L. c.94G (the Statute).

Marijuana applicants are not only required to enter into HCAs with a host community as directed by the Statute but also are required by the CCC’s regulations in order to be accepted for licensure. During oral arguments, the justices of the SJC raised several questions against the regulatory scheme conducted by municipalities across Massachusetts, charging operators fees disguised such as “charitable donations” and “traffic enhancement fee[s]” that force such businesses to make annual obligations well over the maximum 3% community impact fee allowed by the Statute.

The panel highlighted … Keep reading

Delta-8-THC: Legal THC?

Delta-9-tetrahydrocannabinol (popularly referred to as THC) is widely considered the rock star of cannabinoids. However, Delta-9-THC isn’t the only cannabinoid with psychoactive effects that is emerging on the scene. In fact, it was forced to share the spotlight with its lesser-known cousin, Delta-8-THC, in a recent Rolling Stone article. Does this mean we should expect to see a new cannabinoid rising star on the horizon?

As Rolling Stone highlighted in its article, there is good reason to buy into the hype surrounding Delta-8.

In some ways, Delta-8 sounds too good to be true. But it isn’t. For people who want to feel the psychoactive effects of Delta-9 yet find it gives them paranoia or anxiety, Delta-8 is a quasi-legal option available online. And unlike Delta-9, Delta-8 is significantly cheaper, making it a viable option for some people looking for a short uplifting feeling without being intoxicated. But judging by how much attention Delta-8 has been getting by law enforcement, the trend might be short-lived. Despite the burgeoning success of Delta-8 over the past year, any day can be the cannabinoid’s last.

In fact, the two analog cannabinoids share a lot in common. They are nearly identical from … Keep reading

High on Cannabis: Outlook of the Industry Continues to Shine After Record-Setting 2020

Despite the ongoing COVID-19 pandemic, 2020 was a record-setting year for the cannabis industry, and indications suggest 2021 will continue the trend. Years of steady growth in the cannabis industry shined in 2020 with record levels of sales growth, significant legalization reforms, and re-emerging optimism in the cannabis capital markets.

Sales Growth:

Sales of medical and recreational cannabis set all-time records in both mature cannabis markets, such as Colorado (sales figures for medical and recreational cannabis exceeded $2 billion, up from $1.7 billion in 2019 and $1.5 billion in 2018) and Oregon (annual sales surpassed $1 billion for the first time in 2020), and emerging markets, such as Illinois (sales surpassed $1 billion for the first time). One factor that contributed to these all-time highs resulted from dozens of states – and the District of Columbia and Puerto Rico – declaring their cannabis industries “essential,” allowing cannabis operators to remain open and operational throughout the pandemic. Notably, one exception was the Commonwealth Massachusetts, where the governor closed adult-use cannabis businesses for two months but declared medical cannabis companies as “essential.” Despite the governor’s actions, Massachusetts sales still set records – hitting $700 million in sales, up approximately 56% from … Keep reading

Key Considerations for Issuers and Potential Finders Under the SEC’s Proposed “Finder” Exemption from Broker Registration

In our first installment of this two-part “mini-series” on finders, we outlined the Securities and Exchange Commission’s proposed conditional exemption (“Proposed Exemption”) to permit unregistered brokers – or “finders” – to engage in limited activities on behalf of private issuers without being subject to federal broker-dealer registration requirements.

We expect the Commission’s Proposed Exemption would help facilitate private companies’ capital raising efforts by permitting unregistered exempt finders to connect issuers with accredited investors in private markets in exchange for transaction-based compensation. Private investment funds, prospective finders, issuers, and investors should all take notice of this proposed “finders” exemption. Cannabis businesses, in particular, may find that the Proposed Exemption would open doors to previously untapped networks of potential investors through exempted intermediary “finders” that are not explicitly available under current regulations.

However, there are also certain traps for the unwary.

This installment highlights key considerations and concerns that issuers, private funds, potential investors, and prospective finders should be aware of – particularly any cannabis constituents seeking to navigate the proposed safe harbors in light of the federal illegality their industry operates under.

The Proposed Exemption Would Expand Available Capital Sources:  Exempt Finders Would be Free to Connect Private Companies with Keep reading

Big Benefits: HR Resources for Cannabis Companies

There are significant differences between professional employment organizations (PEOs), administrative services only (ASO) providers, and payroll providers. Why are these services critical for cannabis companies and their financial institutions? Which one do you need – and when? Katrina Skinner of Burns & Levinson joins Brian Wall of AdaptiveHR and Stacie McLauchlan of Paragon Payroll to discuss why cannabis companies should outsource HR and payroll, the implications of 280E, 401(k) options, how banking is affected, and of course – the cost of obtaining and providing these services.

Click here to watch the full webinar.… Keep reading