Raising Capital: Overview of Exemptions to Registration of Securities in Private Placements

These are uncertain times. Even before the world-wide COVID-19 pandemic, companies seeking to raise capital in the cannabis industry were facing challenges. However, some experts and insiders I’m hearing from are bullishly predicting that investors with dry powder will increasingly deploy capital for investment purposes. Other informed contacts are less optimistic, with forecasts painting a more negative outlook on the macro level.  As is often the case, both perspectives could turn out to be correct. Regardless, now, more than ever, with no accurate crystal ball in hand, it is critical for cannabis companies pursuing funding to be able to take comfort that they are properly navigating securities regulations.

This latest installment of my series on fundraising outlines at a very high level some of the most popular securities exemptions from registering securities.  Subsequent posts in this series will examine a number of these common exemptions in greater detail.

Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Securities Act”) or an exemption from registration is available.  A … Keep reading

Lessons of a Failed CBD Acquisition

Last Tuesday, February 18, 2020, Australis Capital Inc. announced the termination of its proposed acquisition (via merger) of Folium Equity Holding LLC, a fully integrated hemp/CBD operating company based in Colorado.  The transaction, announced in the middle of December 2019, was highly anticipated as a major step in the industry’s ongoing consolidation in the current down market.  Australis, a spin-off of well-known major cannabis player Aurora Cannabis Inc., was publicly listed on the Canadian Securities Exchange and over-the-counter in the U.S., as an investment company aimed at being the “beachhead” for Aurora’s U.S. cannabis investments.

Original discussions with Folium began about a year and a half ago when CBD was the “talk of the town” and hot industry.  Following a minority investment by Australis, it was contemplated that Aurora would ultimately acquire Folium.  However, as Aurora and Australis sought to demonstrate their independence (now being wholly-separate companies) and given the existing Australis minority investment, the strategy shifted to having Australis be the proposed acquirer, with a final merger agreement being reached in December of last year.  Yet, in the course of its diligence efforts over the intervening period following the signing of the merger agreement, Australis’ uncovered data and … Keep reading

A Search for Yield - Cannabis, Capital, and Credit

As highlighted in a previous blog post, a few months ago at Burns & Levinson’s Third Annual State of the Cannabis Industry Conference, several industry insiders and financial expert panelists forecasted a number of notable shifts in the cannabis capital markets to play out over the coming months.  We are now beginning to see some of those projections take form and come to fruition.  Of particular note, are the evolving patterns found in the fundraising efforts of cannabis operators and their pursuit for infusions of new capital, amidst a market segment reeling from a recent large scale financial downturn.  As sector participants descend on Boston for the 2020 Northeast Cannabis Business Conference, which kicks off today, players in the cannabis financial market would be well advised to take stock of these developments.  Of particular note is an increasing trend towards debt financing and a shift away from what has previously been an equity-investment heavy industry, exemplified by a number of high-profile transactions in the past few weeks involving several key players.

The recent dip in cannabis company valuations and related equity pricings has had a significant chilling effect on the industry’s equity markets, principally those concerning … Keep reading

Checking in on the SAFE Banking Act

While the legalization of medical and recreational marijuana continues to build momentum across the U.S., access to banking and other financial services has remained a consistent barrier to the legal marijuana industry. As we discussed back in October, there was major optimism when the Secure and Fair Enforcement Banking Act (the “SAFE Banking Act”) was finally passed by the U.S. House of Representatives in September 2019. However, this has remained idle in the hands of the Senate Banking Committee since September without any notable advancement.

The legislation, which does not address the decriminalization or legalization of marijuana, would provide a much needed safe harbor for banks and other financial institutions offering financial services to cannabis-related businesses. In addition to providing peace of mind to banks and credit unions that wish to service legal marijuana businesses, the legislation would also allow cannabis companies to move away from operating primarily on a cash basis, which has been a growing public safety concern for many of the affected businesses.

In December, the Chair of the Senate Banking Committee, Mike Crapo, proposed certain changes to the bill and requested public comment to assist with the Committee’s decision-making. Some of these proposals have … Keep reading

CBD as a Dietary Supplement – A Potential Regulatory Avenue for Retail Hemp Operators Selling THC Extracts

On January 13, 2020, Representative Collin Peterson, the Chairman of the House Agricultural Committee, introduced a new bipartisan bill, H.R.5587 (Bill 5587), in the U.S. House of Representatives that would potentially provide significant developments for the regulation of hemp-derived cannabidiol (CBD).  In short, Bill 5587 would (1) regulate CBD as a dietary supplement, provided all other applicable requirements for a dietary supplement are satisfied and (2) allow CBD to be included as an additive in foods that are introduced in interstate commerce and (3) mandate research by the UDSA on challenges faced in the industry.

First, a Recap of How CBD is Presently Treated.

The Agriculture Improvement Act of 2018 (2018 Farm Bill), removed industrial hemp containing not more than 0.3% of tetrahydrocannabinol (THC) and certain hemp by-products (such as CBD) from Schedule I of the U.S. Controlled Substances Act.  It further preserved the authority of the U.S. Food and Drug Administration (FDA) to regulate hemp/CBD and hemp/CBD-related products under the Federal Food, Drug, and Cosmetic Act and Section 351 of the Public Health Service Act. Accordingly, products containing hemp and hemp-derived CBD are subject to the same requirements as FDA-regulated products containing any other substance.

However, after the … Keep reading

New York Legislature Optimistic to Legalize Recreational Cannabis in 2020


New York is gearing up to become the 12th US state to legalize recreational cannabis, and the 2nd US state to do so by way of legislative measure (as opposed to voter initiative), as Gov. Andrew Cuomo vowed to legalize recreational cannabis in his 2020 State of the State address in early January. Gov. Cuomo followed up his vow as he introduced language legalizing recreational cannabis in the state’s budget legislation last week.

State legislators are also optimistic that a law regulating recreational cannabis will be enacted in the coming months. That is… if the Governor and the state legislature are able to agree to the details following the failure of similar efforts just last year… Contention remains on many fronts as the Governor and state legislators have been unable to agree, among other things, on the proper method to distribute revenue from taxing recreational cannabis. The legislature’s bill proposal seeks to dictate how much funding is allocated for drug treatment and traffic-safety programs. It also specifies that half of the new resources be invested into communities that were disproportionately impacted by laws that criminalize the possession and sale of drugs.

Such “social equity” provisions remain a … Keep reading

Stuck in the Weeds with Massachusetts HCAs

A few years ago, the Commonwealth was considered an East Coast cannabis trailblazer for legalizing adult-use cannabis in 2016. However, there is mounting criticism faulting Host Community Agreements (HCAs) for dampening the industry’s growth potential in Massachusetts.  Let’s take a look at the basics and burden of Massachusetts’ HCAs:

Hosting Headaches

As a prerequisite for filing an application for a license in Massachusetts, a marijuana establishment must execute a Host Community Agreement with municipality where it intends to be located. (1) A HCA is a negotiated contract between the establishment and municipality, which includes terms and conditions relating to how the establishment will operate in the local community. There is not a standard form HCA because each municipality will need to consider the relevant circumstances and effects of an adult-use establishment entering the local community. This is not a quick administrative decision- the municipality must first vote to consider whether it even wants an adult-use establishment within its borders and any limitation on the number of establishments permitted. After deciding to open its doors to an adult-use establishment, in negotiating the Host Community Agreement the municipality also needs to consider the financial impact and related fees to charge to … Keep reading

Raising Capital in the Cannabis Industry: Fundraising Dos and Don’ts

Last year proved challenging for companies seeking to raise capital in the cannabis industry. The capital markets tightened and available funding dried up. Many of the industry’s publicly traded companies saw precipitous declines in valuations. Although fundraising efforts in the current environment still face genuine hurdles, there is cause for optimism that 2020 can be a banner year for companies seeking to raise capital in the industry.

It hasn’t been all doom and gloom for the industry’s capital raising efforts. In fact, venture capital firms invested almost $2 billion in U.S.-based cannabis startups alone through the first three quarters of last year – more than doubling the $835 million venture-backed investments in all of 2018. However, those taking a “glass half empty” view will focus on the decline in total funding from $967.1 million in the second quarter of 2019 to $452.8 million in the third quarter of the year.

With a hopeful eye toward further industry growth, this is the first installment of a series of posts that will discuss some of the important “fundraising dos and don’ts.”  While the volatility of many of the sector’s publicly traded companies has garnered the lion’s share of media attention, this … Keep reading

2020: New Year, New Opportunities

Now that the new year is here and in full swing, B&L’s cannabis advisory practice is taking some time to reflect on successes and shortfalls in the cannabis industry’s over the past 12 months. Following a momentous 2018 — which saw the passage of a federal Farm Bill legalizing hemp as well as marked increase in public support for legalization — this past year made clear that the industry has not yet reached its next phase of long-term growth.

In short, industry developments in 2019 have received mixed reviews — cannabis stocks fell sharply while federal legislation slowly progressed in Congress, bipartisan support for cannabis legalization continued to grow as several states were blindsided by the vaping crisis and so on. Thus, while the state of the industry remains strong (and we remain optimistic), its shortfalls reflect an industry still in its adolescence. Nonetheless, this was an exciting year as lawmakers on both the federal and state level

Federal Developments

In Congress, the dam appears to have broken on the introduction of cannabis legislation as there were several positive developments this year. For one, the long-awaited Secure and Fair Enforcement (SAFE) Banking Act was finally passed by the U.S. … Keep reading

See Capital Markets, M&A, and Beyond Panel here.

The Burns & Levinson 2019 State of the Cannabis Industry Conference concluded with a final panel, covering the current status of the industry’s capital markets and M&A transactions; finishing off with a look into the future.  The discussion centered on the effects of the industry’s recent nosedive earlier this year and how that has played out in the various related financial markets and asset classes.  Drawing across a broad spectrum of specialists, from investment bankers and accountants to operators and lawyers, the seasoned professionals on the panel echoed a few key points, which those in the industry should be aware of in the coming months, as they adjust to the fluid capital landscape on the horizon.

The cannabis industry is one that is continuously plagued by public sentiment, for better or worse, as seen over the past several days, with public cannabis company share prices rollercoasting up (when the U.S. House Judiciary Committee approved a bill legalizing marijuana) and down (with the FDA’s recent issuance of warning letters to companies selling CBD), often with intraday deltas in excess of 1,000 bps.  Over the past several months, the public sentiment and … Keep reading