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Recent OCIE Risk Alert Demonstrates SEC’s Continued Focus on Private Fund Advisers

The staff (the “Staff”) of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert focused on certain key compliance issues for registered investment advisers that manage private equity funds or hedge funds (collectively, “private fund advisers”). OCIE’s Risk Alert highlights certain common deficiencies the Staff has observed, and its publication demonstrates the Staff’s continued focus on regulating private fund advisers. For purposes of this Cannabis Business Advisory blog, private fund advisers and investors alike in the cannabis space are advised to carefully take note of this Risk Alert, especially given the already enhanced scrutiny of the industry.

The Staff emphasizes three general areas of deficiencies OCIE has identified in examinations of private fund advisers: (1) inadequate disclosure of conflicts of interest, (2) inaccurate allocations and disclosures of fees and expenses, and (3) failure to properly maintain, establish and enforce policies and procedures relating to material non-public information (“MNPI”).

Conflicts of Interest Disclosures

The Staff underscores the antifraud provisions in Section 206 of the Investment Advisers Act of 1940 (the “Advisers Act”).  In particular, the Staff cautions advisers who are subject to these antifraud provisions to eliminate or otherwise make “full and … Keep reading

Lighting Up Lobbying for Cannabis Companies

With recent COVID 19-related mandates, such as the shelter-in-place orders or social distancing requirements, many businesses and cannabis companies have reached out to the governor’s office or other state and local officials with attempts to influence relief legislation or to request an industry-wide exception to a regulation. Did you know these types of activities may be considered lobbying and in some jurisdictions require registration as a lobbyist?

When analyzing whether you or your business may be lobbying, it’s helpful to keep in mind a broad and basic definition of lobbying. Lobbying in a nutshell could be considered any act that attempts to influence a government official or employee regarding a government action or issue. The challenge of lobby laws is that there may be up to three layers – federal, state, and local. Federal lobby laws are covered by The Lobbying Disclosure Act of 1995, however, there is not a universal definition of lobbying on the state and local level, and each state, city, municipality, or another local area may adopt its own definition and registration requirements. Therefore, as a matter of regulatory compliance, cannabis companies should have an awareness of the lobby laws where they operate and do … Keep reading

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

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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

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

Massachusetts’ Adult-Use Cannabis Returns Amid Uncertain Economic Forecast

On Monday, Massachusetts adult-use cannabis retailers resumed sales after two months of lockdown in response to the COVID-19 outbreak. Adult-use retailers are among the first “nonessential” businesses to return to operations under strict guidelines, pursuant to the Governor’s order.

Back in March, Governor Baker deemed adult-use cannabis retailers “nonessential,” which was a departure from the adult-use industry’s classification in other states where cannabis has been legalized. However, the Governor’s order permitted medical cannabis dispensaries to remain open, with the admonishment that sales be conducted in a manner that would to limit contact between employees and patients (curbside pickup, social-distancing, etc.) The disparate treatment between medical and adult-use retailers was subsequently challenged in court. On April 16, the Massachusetts Suffolk Superior Court, denied the plaintiffs’ plea for an emergency preliminary injunction in their suit against the Governor, the aim of which was to have recreational marijuana establishments added to the list of “essential” businesses.

Nonetheless, the commencement of phase one with respect to adult-use cannabis retailers could not have come sooner. Like other consumer-facing retailers, the adult-use cannabis industry has felt the economic strain of COVID-19. Obligations to pay rent, lost sales, and other business expenses dealt a blow … Keep reading

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The Weedmaps Subpoena: An Industry Wakeup Call

Weedmaps”, which has been called the cannabis industry’s largest technology company, was given a fright on Halloween of last year.  Weedmaps’ parent holding company, “Ghost Management Group, LLC”, received a subpoena to testify before a federal grand jury and provide certain documents and information to the U.S. Attorney for the Eastern District of California.  The wide range of records and other items contained in the request spooked the cannabis industry, as Weedmaps was asked to share materials regarding at least 30 marijuana plant-touching companies that it does business with.  Being the so-called “Yelp of cannabis”, Weedmaps is uniquely situated in having access to a significant amount of data for a large number of retail marijuana enterprises across the country, both medical and recreational.  While the public became aware of the subpoena in early March of this year, it wasn’t until just recently that a copy of the order was made generally available, revealing the broad scope of the information being requested and containing the names of several household-name cannabis companies.

The U.S Justice Department has, since the time of the Cole Memorandum, taken a limited approach in pursing legal action against state-law compliant marijuana enterprises, instead concentrating … Keep reading

COVID-19 Stalls Pending Recreational Efforts but Spurs Long-Term Industry Optimism

Cannabis legalization and program launches have been stalled as states have turned their focus to addressing the ongoing COVID-19 crisis. As was recently discussed on the CannaBusiness Advisory, the State of New York was gearing up to become the 12th state to legalize recreational cannabis in 2020 and had hoped to accomplish this by April 1st by including it in the state’s new budget bill that had to be adopted on such date. However, given the COVID-19 outbreak in New York, lawmakers fell under pressure to adopt a new budget while also dealing with the ongoing crisis. In that climate, with lawmakers unlikely to have come to a resolution on the topic, Governor Andrew Cuomo acknowledged that the state would not include recreational cannabis in its budget bill in an announcement on March 31st. Despite the delay, experts believe recreational cannabis in New York has a good chance of passage as a stand-alone bill prior to the end of 2020.

In Maine, the state’s Office of Marijuana Policy announced on April 10 that it would be postponing its long-anticipated spring 2020 launch of recreational cannabis sales in the state due to the ongoing COVID-19 … Keep reading

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Recreational Marijuana: Preliminary Injunction Denied in Suit Against MA Governor

The Massachusetts Suffolk Superior Court, in a ruling by Justice Ken Salinger on April 16, 2020, denied the plaintiffs’ plea for an emergency preliminary injunction in their suit against Massachusetts Governor Charles Baker, which sought to have recreational marijuana establishments added to the list of “essential” businesses. In making its ruling, the Court came to the conclusion that the plaintiffs were not likely to succeed on the merits of their claims. Among other factors, this resulted in the Court’s decision to deny the plaintiffs’ motion that, if granted, would have permitted recreational marijuana establishments in the Commonwealth to re-open, after their effective closure by executive order of the Governor. The following summarizes a few of the ruling’s key elements.

  1. Court’s Jurisdiction. While the Court determined that the plaintiffs’ claims for declaratory judgment were invalid, as such relief is not available against the office of the Governor, their actions for temporary or permanent injunction are in fact colorable claims under which the case can proceed. In reaching this conclusion, the ruling indicates that although declaratory judgment cannot be provided as a remedy for the alleged violation of equal protection, “the Governor may [not] violate the constitution with impunity.” Following
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COVID-19: Risk Factor Disclosures When Raising Money in a Global Pandemic

Given the current disruptions caused by the COVID-19 global pandemic, let’s focus on an immediate challenge confronted by companies actively engaged in fundraising efforts:  The adequacy of risk factor disclosures to prospective investors, especially in light of the impact of the current pandemic.

Cannabis-related businesses that are actively raising capital are strongly encouraged to carefully consider the following key issues:

Risk Factors in a Private Placement Memorandum:  When raising private capital, our cannabis clients typically include a private placement memorandum (“PPM”) in their package of offering documents to investors. A PPM is a securities disclosure document that provides certain necessary information about the company, its business, and the offered securities. From the company’s perspective, PPMs serve a dual purpose: PPMs are intended to act as a protective securities compliance instrument as well as an investor marketing tool. Notably, every PPM should include a risk factors section.

What are Risk Factors? From a company’s risk management perspective, risk factors are probably the most important section of the PPM. Risk factors are intended to disclose to prospective investors the risks that could lead investors to lose all or a portion of their investment. Generally, key categories include disclosures about the … Keep reading

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