June 2020

Increasing Lawsuits Against Cannabis-Related Businesses Places Spotlight on Adequacy of Disclosures

Kuang 6.24

Class action lawsuits against publicly traded cannabis-related companies more than doubled from 2018 to 2019, with 13 class action cases filed in 2019 compared to 6 class action cases filed in 2018 – a staggering 116% increase. Lawsuits against cannabis-related businesses continue to grow concurrently with the expanding industry growth and mostly focus on disclosure issues. Such lawsuits are ordinarily filed by shareholders in an attempt to recover investment losses, often after a company’s stock price decreases, and are asserted, in the event that the company allegedly made false and misleading statements or omissions in connection with a securities offering, under the Securities Act of 1933 or the Securities Exchange Act of 1934 for public company disclosures.

For example, on January 16, 2020, Aurora Cannabis Inc. (TSX: ACB), in Warren v. Aurora Cannabis Inc., et al., No. 20-cv-00555, received claims for allegedly making false and misleading statements and/or failing to disclose adverse information regarding Aurora’s business and prospects. Claims against Aurora were brought under the Securities Exchange Act of 1934 after the company announced disappointing results for Q1 2020 (reporting a 25% sales decline) and that the company was halting construction on its operating facilities in various regions – … Keep reading

FDIC Chairwoman McWilliams Remains Consistent Regarding Cannabis Banking

Financial institutions considering implementing cannabis banking programs should take comfort in recent comments made by FDIC Chairwoman Jelena McWilliams during virtual meetings held with bankers in Michigan and Arizona. While McWilliams said she could not “give blanket immunity” to banks or “bless them and say ‘go ahead and do it’” because marijuana remains illegal at the federal level, McWilliams stated that she thought bankers would be “OK” with regulators if they conduct due diligence that ensures licensed entities comply with state regulations and follow the 2014 FinCEN guidelines, including the filing of suspicious activity reports (SARs).

The direction provided by McWilliams and the FDIC remains consistent and echoes that of other regulatory agencies that continue to await comprehensive marijuana reform, or the passage of the SAFE Banking Act that stalled in the Senate after passing in the House last year. Despite not sharing any new insights, McWilliams’ unchanged position, coupled with FDIC efforts to support cannabis banking by educating its examiners, may mean that entering the cannabis banking space now is the least risky it has ever been, or will be, until the federal government changes its marijuana policy. Likewise, acting now may create business opportunities that will … Keep reading

A Message From Our Editors: Black Lives Matter

On May 25, 2020, George Floyd, a black American, lost his life to police brutality. The senseless killing of Mr. Floyd at the hands of police, while he was being arrested for a nonviolent crime, was a racist act. For nearly nine minutes, the arresting officer knelt on Mr. Floyd’s neck and ignored his victim’s impassioned pleas that he could not breathe. Three other officers either assisted in restraining Mr. Floyd or watched and did nothing as he took his last breath. All four officers were eventually fired, one has since been charged with second-degree murder, and the three others have been charged with aiding and abetting. Over the past several weeks, outcry over the systemic racism and institutionalized harassment of people of color has been heard at protests across our country and the world.

Institutional racism casts a shadow on all areas of our society and is glaringly evident in the newly legalized cannabis industry. The origin of the prohibition of marijuana lies in the racist history of this country. Some historians claim that the beginnings of this policy originated from the start of the Mexican Revolution in 1910 when Mexicans began to immigrate to the United States … Keep reading

Raising Money Under Rule 506

Private companies raising money in private offerings of securities often rely upon an exemption under Rule 506 of Regulation D.  In fact, Rule 506 is undoubtedly the most popular safe harbor from the registration requirements under Section 4(a)(2) of the Securities Act of 1933. This is due in no small part because an offering conducted under Rule 506 affords a company the ability to raise an unlimited amount of money.  Rule 506 provides two distinct exemptions: Rule 506(b) and (c).  Unlike Rule 506(b), an issuer relying on Rule 506(c) can engage in general solicitation when marketing its offering.  Certainly, there are traps for the unwary when proceeding under either exemption, as some cannabis companies have unfortunately discovered in recent years.

When is general solicitation available to issuers? Rule 506(c) allows a company to broadly solicit and generally advertise the offering. However, companies relying on Rule 506(b) are prohibited from engaging in general solicitation or advertising to market the offering.  Generally, as a practical matter, this means that companies raising capital under Rule 506(b) must have a pre-existing, substantive relationship with prospective investors.

Who can invest in a Rule 506 offering?  Under a 506(b) offering, a company may sell its … Keep reading

Now More Than Ever, Local Communities Need Cannabis Banking

Change and the discomfort that often accompanies it is inevitable, and it is difficult to remember a recent time that has brought as many changes as the world has experienced in 2020. As of this writing, our society is reeling from the effects of COVID-19 as well as nationwide protests spurred by the killing of George Floyd (and many others). Mr. Floyd’s death underscored the racial and economic disparity that continues to exist within our society as well as the cannabis industry, but more and more people are engaging in conversations that may offer new solutions to some of our most persistent problems. While these solutions may be homegrown, they need community backing to take hold and make a lasting difference, and local financial institutions are well-positioned to do their part in support of these grassroots efforts by providing financial services to local cannabis-related businesses (“CRBs”).

The cannabis industry has long been tied to social justice, and although efforts to repair the damage done to communities that have been disproportionately affected by failed drug policy through marijuana legalization have begun, they have a long way to go before they can be considered successful. The protests and renewed calls for … Keep reading