As in many industries, early-stage companies in the cannabis space need capital. With traditional financing limited, outside investment becomes a possibility, but in seeking investors, the company needs to comply with federal and state securities laws. A September 2018 Investor Alert from the United States Securities and Exchange Commission provides warning signs for investors about the uptick in fraud in the cannabis space. Reading between the lines, companies should be wary of the points raised by the SEC and focus on the following points:

• Do not use unlicensed, unregistered brokers to promote or sell an investment
• Do not guarantee a high rate of returns or insulation from risk
• Be careful with how you describe the investment, its risks, and its benefits

Investment Fraud Allegations

As we pointed out in our Biz Law Blog post, “Do Your Due Diligence: U.S. Securities and Exchange Commission Warns Main Street Investors About COVID-19-Related Fraud,” the SEC recently brought charges against a promoter who raised $5.5 million that he claimed would be used to acquire a marijuana dispensary network. Much of the raise was used, instead, for personal expenses (including, as pointed out in the SEC Complaint, lavish cars, personal loans, and cryptocurrency investments), and the SEC is now seeking disgorgement as well as civil penalties.

Appropriate and Accurate Disclosure

A capital raise without appropriate and accurate disclosure to investors and the marketplace undercuts even the most legitimate investment opportunity. With more institutional investors targeting the cannabis space, business operators need to be ready for more robust due diligence and focus on the details of their capital raise, from complying with the law to investor transparency.