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 recorded by Thompson and distributed via e-mail, press releases, and a public website. According to the complaint, Thompson also failed to require investors to be accredited investors.
On January 20, 2021, the United States District Court for the Northern District of Illinois (Case No. 1:20-cv-05205) ruled in favor of the SEC in connection with its complaint targeting Thompson. Without admitting or denying the allegations of the complaint, Thompson agreed to be permanently enjoined from directly or indirectly – including through any entity he owns or controls – participating in the issuance, purchase, offer, or sale of any security, except for his own personal account. Thompson also agreed to pay disgorgement, penalties, and prejudgment interest totaling over $500,000.
2. SEC v. Anthony Todd Johnson, et al., No. 20-cv-01493 (C.D. Cal. Jan. 28, 2021)
The SEC filed a complaint in July of 2020 against nine issuer entities, marketing companies, and their respective principals and control persons. According to the complaint, the defendants raised over $25 million from over 400 investors located in multiple states between September 2017 and February 2019 to supposedly finance two cannabis-related businesses in California – a licensed marijuana farm and a CBD extraction facility.
On January 28, 2021, a group consisting of cannabis-related issuers, affiliated marketing companies, and their respective principals accused of deceiving cannabis investors in an apparent $25 million scam involving two California cannabis enterprises reached a settlement with federal securities regulators in California federal court.
Brothers Anthony “Todd” Johnson and Jeremy Johnson and their marketing business Green Bud Initiatives LLC agreed to entry of a consent judgment to disgorge $3.38 million allegedly misappropriated from cannabis investors. In part, this disgorgement amount resulted from allegations by the SEC that the two brothers had misled and deceived investors regarding their compensation and misappropriated at least $2.7 million of investor funds – contrary to representations regarding the use of proceeds in the various issuers’ private placement memoranda. In addition, the settlement required each of the Johnson brothers to pay a civil penalty of almost $193,000. Further, the Johnsons, Green Bud Initiatives, and certain related issuer companies agreed to permanent injunctions barring further securities violations.
3. Highlights from the SEC’s recent enforcement actions include allegations involving:
- Making fraudulent and/or material misrepresentations or omissions to mislead and deceive investors and prospective investors, including and regarding returns on investment, the use of investor funds, compensation, education, and other disclosures.
- Acting as or engaging unregistered broker-dealers by failing to register with the SEC before soliciting investors and receiving transaction-based compensation.
- Conducting unregistered securities offerings.
- Accepting investment funds from unaccredited investors without taking reasonable steps, when necessary, to verify the investors’ accreditation status.
- • Using general solicitation to attract prospective investors, including via cold calls, Craigslist, Facebook, and public websites, press releases, social media, and other investor-facing solicitation efforts.
- Failing to disclose criminal history, personal bankruptcies, and other background issues of the principals and others.