General

Colorado Executive Order Pardons Thousands Convicted of Marijuana Possession

As marijuana reform happens across the country, Colorado continues to lead the way. On October 1st, Governor Jared Polis signed an executive order that pardoned almost 3,000 Coloradans who were convicted by the State of possession of one ounce or less of marijuana, thereby restoring all rights of citizenship without condition. In doing so, Gov. Polis stated that Colorado was “…finally cleaning up some of the inequalities of the past…” that were created by former anti-marijuana policies. The power to issue the pardons was included in a bipartisan bill signed into law in June that included provisions promoting social equity in Colorado’s legal marijuana market.

HB20-1424, titled Social Equity Licensees in Regulated Marijuana, changed the term “accelerator licensee” to “social equity licensee” in the Colorado Marijuana Code, as well as, amended those who qualified for such licensees. The accelerator licensing program pairs established marijuana business owners with disadvantaged applicants who may not have the necessary skills or access to traditional funding sources to enter the space. Under the new bill, social equity applicants can now apply for these licenses if the applicant is a Colorado resident and has not been the owner of a revoked cannabis license, … Keep reading

Changes to the Accredited Investor Definition

Marijuana-related businesses (“MRBs”) planning to raise money in private offerings should be aware of recent changes to the “accredited investor” definition under the Securities Act of 1933, as amended (“Securities Act”). The U.S. Securities and Exchange Commission (“SEC”) recently adopted a final rule (the “Final Rule”) amending Rule 501(a) of Regulation D promulgated under the Securities Act, which expands the definition of “accredited investor.”

Topline conclusion: These changes establish additional investor eligibility qualifications, thereby increasing the available pool of potential investors who may participate in private securities offerings. This is good news for MRBs hoping to raise money, particularly under Rule 506(b) or Rule 506(c).

When will these changes become effective?  The Final Rule will become effective sixty (60) days following its publication in the Federal Register. It is anticipated that the effective date will be sometime in early November 2020.

Will the Final Rule change the income and net worth standards required for individuals?  No. The income and net worth thresholds for individuals remain the same.  That is, individuals must still have an annual income of at least $200,000 (or $300,000, together with his/her spouse) or a net worth of more than $1 million (excluding the … Keep reading

Four Years Later and Maine is Poised to Finally Launch the Sale of Adult-Use Cannabis in October

After having been indefinitely postponed in April 2020 due to the COVID-19 pandemic and nearly four years after Maine residents voted to legalize adult-use recreational cannabis, Maine is set to launch the long-awaited retail sale of adult-use recreational cannabis this coming October. While voters passed a ballot measure in 2016 to legalize adult-use recreational cannabis, state legislators and regulators have spent the time in between battling how to regulate the industry. And, as the state only started accepting applications to its adult-use recreational cannabis program back in December 2019, some had hoped that recreational sales would begin in April prior to the state announcing the indefinite postponement, which was then suggested would last beyond June.

Four months later, on August 14th, 2020, Maine’s Office of Marijuana Policy finally announced its plans for the issuance of the state’s first adult-use marijuana establishment licenses beginning on September 8th, which is anticipated to give stores enough time to harvest, test and package products for sales to begin a month later on October 9th. In light of the ongoing pandemic, the Office of Marijuana Policy is also working with the state’s Department of Economic and Community Development … Keep reading

Leveling the Playing Field: Various Approaches to Social Equity

Since the era of cannabis legalization commenced, stakeholders, regulators, and ordinary citizens alike have been concerned about the lack of social equity and diversity in the cannabis industry.  Even prior to the modern era of legalization, the inextricable relationship between race, enforcement, and the origins of prohibition has served as a troubling reminder of our country’s systemic inequity, as we have previously noted. Therefore, in recent years regulators have attempted to address past social and racial disparities by ensuring that those from disproportionately impacted communities would not be blockaded from the legal market.  This week we will take a look at various approaches that state regulators have implemented to combat inequity in the industry.

While several states have made social equity provisions a part of their marijuana programs, jurisdictions have taken slightly different approaches and experienced myriad results.  Since 2016, at least six (6) states have enacted considerable measures to increase diversity in their respective marijuana programs by either eliminating or mitigating barriers to entry into the market (including, Massachusetts, California, Michigan, Ohio, Illinois, Washington). Moreover, with respect to adult-use marijuana, Massachusetts, California, and Illinois have each made social equity a key aspect of their legalization plans.

Massachusetts  Keep reading

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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