/>iRaising capital is always fraught with risk and uncertainty for any company. Those risks and uncertainties are magnified exponentially when it comes to raising capital for cannabis companies. Cannabis companies and potential investors must consider a hornet’s nest of complex, often contradictory rules and regulations arising from the existing inconsistencies between federal law and the laws of more than 40 states.
In order to discern the risks and uncertainties associated with a capital raise, it is important to understand the current state of the company and the types, what is being offered, and the types of investors being offered a stake in the company.
Startup Cannabis Companies
So, you want to start a cannabis company? Really? Do you just smoke a lot of pot with your friends and you think it would be cool to be in the cannabis industry? To be fair, that’s probably true. But I assure you that your chances of success in the cannabis industry – be it on the marijuana or hemp side – increase dramatically with the knowledge that you bring to the venture and the seriousness with which you approach it, just like any other startup.
First thing’s first, you need to form a corporate entity. This is not an overly laborious or complex task, but it is essential that it be done – and done properly. While there are websites that offer entity formation services, my experience is that it is worth spending a little money with a reputable attorney to make sure the entity you form is the right one to help you accomplish your goals. This is the classic “penny wise, pound foolish” situation, as I am regularly approached by business owners who are facing substantial legal challenges and costs that could have been averted at far less expense by getting it right on the front end.
Next, who are you going to ask for money? Is this a friends and family sort of thing or are you offering shares of your company to a broader universe of potential investors? This is a significant question because the answer will dictate the amount of paperwork and legal fees associated with making the necessary disclosures about your company to would-be investors. The securities laws in the United States require a company seeking capital investments to disclose all manner of information about the company, its practices, and perhaps most importantly the risks associated with any such investment (including the fact that the cultivation, processing, and sale of marijuana and certain hemp products are illegal under the laws of the United States and certain specific states). I tend to think of these risk disclosures as basically telling the investor all of the ways the investor could lose all of the investment. If done properly, investors will have a hard time claiming that you were not honest with them in the unfortunate event that the investment results in a loss for the investor.
If you’re dealing with friends and family and/or exclusively high-net-worth “accredited” investors, your disclosure obligations need to be less robust than if you are dealing with strangers who might be looking to take a flyer on a cannabis company because they think it would be interesting and particularly lucrative to invest in cannabis.
Again, our attorneys are prepared to assist with the required paperwork based on your specific situation.
Looking for Additional Capital for Your Existing Company?
Your company is up and running. Perhaps it is experiencing success and finding that it could grow even faster with more capital to expand capacity? Perhaps you’re looking to take on a strategic investor. Perhaps success hasn’t come as quickly as you’d planned, and you need capital to continue operations.
In some respects, the disclosure obligations are similar to the ones discussed above, although an operating entity will have more information to share about the company’s past performance. In addition to disclosing that information, pursuant to a well-drafted non-disclosure agreement, you’ll need to make sure that your disclosures are current to reflect any updates in the law (and the law is being updated almost constantly around the country) since any prior offering.
The Takeaway
Raising capital can be an essential, even exciting, part of operating your cannabis business. And although there are countless ways to go about raising capital, there are also a number of traps for the unwary operator. For cannabis operators – who, let’s face it, tend to have a more relaxed risk tolerance in general – this is an area of the business where it’s worth getting a lawyer and focusing on the details. An ounce of prevention is worth a pound of cure here, and you’ll be glad you did so in the event one of your investors becomes disappointed in the return on investment.
