marijuana securities fundraising
Don’t let myths get in the way of solid financing.

With new startup companies that plan to raise funds, I’ll often have a sit-down meeting to discuss the fundraising process, the company’s growth path, and address any concerns of the startup founders regarding financing. At these meetings I’ve heard company founders say each of the following:

  • We’re all going to get diluted!
  • We’re going to lose control of the business!
  • We’re too busy to raise funds, so it makes sense to pay someone a “finder’s fee” to procure the investors.
  • Everyone loves our idea, so we’ll have the investors’ checks in hand next week.
  • Let’s just focus on the business, getting angel investment, and we’ll deal with all the corporate legal mumbo-jumbo later.

Trading stories with our corporate cannabis attorneys up and down the west coast, it seems like all of us have heard similar things. However, none of the above is based on reality or adviseable, and some of it is downright dangerous. So, let’s bust some myths around financing your cannabis startup.

  1. We’re all going to get diluted!

“Dilution” is super-scary word that rarely has the perceived affect, particularly in the context of equity financing. By-and-large equity financings are done in successive rounds, when the value of the company is increasing. Companies very rarely do a down-round (raising funds at a decreased valuation from the previous round) unless they are truly backed into a corner and in need of cash. Outside of these rare occurrences, a round of equity financing that significantly increases the valuation of the business may result in the “dilution” of owning a bit less of pie that has now become much bigger. Consider: would you rather own 10% of a $10 million dollar pie ($1 million), or 8% of a $25 Million pie ($2 million)? The answer is why a company would want to go from a $10 million Series A to a $25 million Series B. Ultimately, the focus should be on growth and total value of the expanding pie, not on the percentage assigned to one’s slice.

  1. We’re going to lose control of the business!

If the dilution concern bogeyman had a slightly more dramatic cousin, it would be the “investors are going to take over our company” concern. The popular conception of this phenomenon is likely owing to Aaron Sorkin’s creative genius in the film “The Social Network” – the glass conference room scene in which Eduardo Saverin, played by Andrew Garfield, was both diluted (your stocks are worth pennies now!) and unceremoniously kicked out of The Facebook through some sneaky lawyer tricks that not even his spidey-sense could detect. In reality, not only is Saverin a billionaire, but investors will only have the ability to “take over the company” if they are given that ability. That type of term is rarely hidden in a footnote or a tiny font. No company with sound counsel “suddenly” loses control of a business. If the company does five rounds of equity financing and investors come to cumulatively hold a majority of the equity, then yes, they could wrest control of the board and therefore the company. But this happens over the course of many years, and many decisions made by the company in many conference rooms. Not in a single, dramatic scene.

  1. We’re too busy to raise funds, so it makes sense to pay someone a “finder’s fee” to procure the investors.

Raising funds is not easy, and anyone claiming to be able to do it for you, particularly for a fee, should be viewed with extreme skepticism followed by an extreme review of their certifications to confirm that they are a “Registered Broker-Dealer” under the Exchange Act and with FINRA. See the SEC’s guidance here. The payment of a “finder’s fee” (even if you call it “consulting”) or any transaction-based fee to an unregistered broker-dealer may lead to severe penalties, and enough issues on the securities side that the company will be dead in the water.

  1. Everyone loves our idea, so we’ll have checks in hand next week.

Did we mention raising funds is not easy, particularly for companies in the cannabis space? Based on my anecdotal experience, the “conversion rate” from “we met an angel that’s interested, sounds like they want to write us a check right now” to the check’s actual arrival is well shy of 50%. Angel investors (good ones) don’t write checks on a whim, and responsible companies shouldn’t accept checks on a whim. Any investor who wants to write a check without seeing any documentation or doing other diligence on the company should be viewed with skepticism. Further, all investors need to be vetted and need to provide the company with information as to their accredited investor status. Angel rounds can be done fairly quickly and with minimal expense, but there is some process and the checks aren’t written after a single, informal chat.

  1. Let’s focus on the business, we’ll deal with the corporate legal mumbo-jumbo later.

Some elements of your corporate set-up can be delayed, and a competent business attorney should be able to identify those elements. But the critical “mumbo-jumbo” includes:

  1. Incorporating your company and adopting Bylaws
  2. Issuing your equity and making tax elections
  3. Protecting your intellectual property (IP)
  4. Securities compliance

Incorporating is quite obviously crucial (look out for my next post on entity selection for cannabis startups in California, in light of state-wide legalization and federal tax reform). But issuing the company’s initial equity is a single important task that accomplishes many smaller important tasks: not only does it force the founders to have necessary discussions regarding their roles, ownership stakes, equity vesting, and whether and how to reserve equity for employees. But it also achieves the necessary task of assigning all the IP of the founders to the company, and forces the company to act by board action (either at a meeting or by written consent). A discussion with your attorney regarding equity should also cover 83(b) tax elections, and address the company’s growth path and cover securities compliance for any future inbound investments, as well.

At that point, you’re done with the legal mumbo-jumbo (for now), and you can get back to making the company a smashing success— even if that means being “diluted” just a bit.

A growing number of startups in the cannabis space are engaging brokers and online platforms to assist in their fundraising. This makes sense: as we’ve written previously, most investors (particularly institutional capital) are staying on the sidelines and taking a wait-and-see approach to the cannabis industry. Thus, cannabis startups will always target a smaller, more dispersed, more specialized investor base, and going through experts is a logical way to reach them. Note that 506(c) is one of the relatively new options for company financing, implemented as part of the JOBS Act of 2012. It allows for companies to engage in a more public “general solicitation”—but with strings attached, as we’ll detail below.

From a securities law perspective, the engagement of a broker-dealer or online platform converts the offering exemption from the ever-popular 506(b) offering to a 506(c) offering – changing this one letter has a number of significant consequences:

1 – You must ensure that the broker-dealer is registered, or else.

Section 3(a)(4)(A) of the Securities Act generally defines a “broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.” This broad definition includes any “finder,” “fundraising consultant,” or anyone else receiving any transaction-based bonus or commission in return for introducing or engaging an investor. You should always consult your securities counsel when a third party is assisting the company on fundraising. Once it is established whether broker-dealer registration is required, FINRA provides an online Broker-Dealer Check. The penalties for using an unregistered broker-dealer are extremely harsh, so it’s always wise to err on the side of caution.

2 – You are limited to accredited investors, and you must take additional steps to confirm an investor’s accredited status.

In a 506(b) offering companies have the flexibility to raise from an unlimited number of accredited investors, as well as up to 35 unaccredited investors. Only around 2% of the US population would meet the accredited investor conditions (in short: at least $1 million of assets not including one’s home, or a recurring annual income of at least $200,000 (or $300,000 if married)). The loss of the unaccredited investor option may eliminate some of the classic “friends and family” seed investors, that write smaller—but often critical—checks to keep the company afloat in the early going.

Further, raising under 506(c) puts a higher burden on the company to complete its own diligence to confirm an investor’s accredited status. Under 506(b) you can essentially take the investor’s word for it. The SEC has laid out the types of records one would examine under a “principles-based verification method” and they include the investor’s bank statements, brokerage statements and records of securities holdings, tax returns and tax assessments or appraisal reports prepared by third-parties. Looking at these records may not seem like such a big deal, but the hurdle of developing this method and implementing for each investor can be a significant undertaking for startup company.

3 – You can engage in a general solicitation under 506(c), but with greater visibility comes…greater visibility.

The advantage of expanding your potential investor base beyond those with whom you have a “substantial pre-existing relationship” (which is required under 506(b)) may seem to open a world of possibilities. But putting your company out in the open may have drawbacks: any proprietary info in your investor materials will get passed around, you may pick up shareholders that cause you problems down the line, you may attract attention from the not-in-my-backyard types, and some investors prefer their cannabis investments to keep a lower profile.

Finally, it bears repeating: seek an experienced corporate and securities attorney. With these choices you need principled and consistent counsel, because there is a final consideration: once you’ve engaged a broker-dealer or otherwise engaged in a general solicitation, you are committed for the entirety of your financing round. Any unaccredited “friends and family” are out—they can’t write checks under any circumstances—and you cannot revert to the more relaxed requirements of 506(b).

marijuana investment venture capital
More room for cannabis-specific funds and investors.

Investor interest in the cannabis industry was at an all-time high in 2017 in anticipation of full legalization in California in 2018. The number and dollar figures of deals were up, and packed houses at our investment forums in San Francisco and Los Angeles served as anecdotal evidence of the same. The exponential expansion of available funds was set for 2018, when the institutional capital—venture capital (VC) and private equity funds—were preparing to allow future funds to invest in the cannabis industry. These funds would primarily invest in “ancillary businesses,” but the ripple effect of all that available capital in the industry would have meant more for direct operator cannabis businesses as well.

President Trump’s election did little to slow the enthusiasm throughout 2017, as investors took at face value the words of then-candidate Trump, who claimed to be “in favor of medical marijuana 100%” and to think adult-use “should be up to the states, absolutely.” Further, prior to Senate confirmation, his Attorney General, Jeff Sessions, apparently assured Senator Cory Gardner of Colorado, among others, that he would not interfere with the Cole Memorandum or states implementing their own regulatory systems for adult use cannabis.

The timing of the Sessions Memo—coming immediately after California’s legalization took effect—appears to be a demonstration of federal power to counteract California’s legalization efforts. Just as importantly, it’s an effort to prevent the vast expansion of capital that would flow into the industry. California is, after all, the venture capital capitol of the US, full of smart money willing to take reasonable, calculated risks.

However, so long as cannabis remains federally illegal under the Controlled Substances Act, and the Department of Justice (DOJ) remains ambiguous as to its prosecutorial priorities, institutional capital will stay out of the cannabis industry. Even with immense opportunities available, the possibility that marijuana holdings may threaten a fund’s overall portfolio and make their limited partners nervous means the potential rewards no longer justify the risks. Those analyzing investment trends have already noted that VC interest in cannabis isn’t living up to expectations in 2018. Given the lag in fund formation (because a fund’s limited partners would need to explicitly agree to allow investments in the cannabis industry), 2018 Q2 and Q3 would be the real indication of VC interest. But we in the industry already know the verdict: institutional funds of the Sand Hill Road variety, by and large, are staying out.

What this means for your business, if you’re raising funds in 2018:

  • Cannabis-specific funds (those able to raise funds) could be the big winners: they’ll have their pick of deals and can drive better terms.
  • Individual investors (high-net worth individuals) will continue to be the primary source of funds for direct operators in 2018.
  • A state-wide, comprehensive banking solution is not as close as we believed.
  • Multi-state expansion plans will be problematic—the Sessions Memo could have a detrimental effect on the legal defense in suits alleging Federal RICO violations.
  • Medical continues to be a safer option, for now. The Rohrabacher-Blumenauer Amendment provides a safe haven in California, where courts have ruled that it prohibits prosecution of medical cannabis businesses. Whether or not Rohrabacher-Blumenauer is extended (or expanded) will have a major impact on investment and business strategies in 2018.
  • Pressure for a legislative solutions towards legalization will continue, because: A) it’s popular among the electorate, B) local governments need the tax revenue, and C) these solutions normalize an industry that industry experts say will create more jobs in the US than the manufacturing industry by 2020. These political realities are turning cannabis agnostics into industry advocates – for example Senator Gardner, who has gone from an opponent of legalization five years ago to staking his political future on opposing Sessions’ attack on cannabis.

We are only one month into the new year, so expect plenty of twists and turns along the way. For now, though, it is undeniable that the recent DOJ reversal has impacted VC and private equity interest with respect to marijuana industry investment.

Best not to confuse your local regulators.

Across California local jurisdictions are opening licensing windows and evaluating commercial marijuana license applications. Often the scoring process is conducted by the staffs of city councils, zoning boards and planning commissions, working on a compressed timeframe, and giving scores for various categories using a scoring matrix: “Location,” “Safety & Security,” “Community Benefit,” are common categories, for example. There is typically a “Financial Stability & Capitalization” category, as well, where companies disclose their balance sheet, and their business plan going forward.

The scoring of these categories is unpredictable. Typical requests from the local regulators may be:

  • A budget for construction, operation, maintenance, compensation of employees, equipment costs, utility costs, and other operation costs. The budget must demonstrate sufficient capital in place to pay startup costs and at least three months of operating costs, as well as a description of the sources and uses of funds.
  • Proof of capitalization, in the form of documentation of cash or other liquid assets on hand, Letters of Credit or other equivalent assets.
  • A pro forma for at least three years of operation.

As we’ve previously written, early-stage companies are often raising early capital using convertible notes, as a means of kicking the valuation can down the road into 2018. Although notes are much more akin to equity investments, they show up on a balance sheet as debt. The impact of an applicant having outstanding debt is uncertain, but one can imagine that an applicant that has almost all of their cash on hand through issuing debt may be viewed unfavorably. And that can be a problem.

To a city staffer unfamiliar with a convertible promissory notes, the debt may appear to be nothing more than a short-term loan, and with a balloon payment set at a 12 to 24 month maturity date, the company may look like it needs a moonshot to survive. In reality, though, the company will have no payment obligations, so long as it achieves a priced round equity financing within that timeframe. In that case, investors will convert to equity, the debt is extinguished, and no debt service payments are made. However, in a competitive licensing application environment, explaining the intricacies of a convertible note to a city staffer means you’ve likely already lost the battle.

Rather than carry debt on the balance sheet through the application process, an alternative instrument for early-stage financing can be borrowed from the tech world: the SAFE (Simple Agreement for Future Equity). This instrument was developed for early company financing by startup accelerator Y Combinator. It serves the same function of a convertible note, and will often convert to equity on nearly identical terms. But is explicitly NOT a debt instrument. It’s a more company-favorable means of raising capital, as compared to the convertible note: the investor loses the security of holding a debt instrument, and the leverage of having a maturity date.

To the local regulator – likely unfamiliar with either instrument – the SAFE would appear to be much more like a letter of intent to issue equity in the future. And the SAFE investment received by the company appears on the balance sheet as cash on hand and unencumbered, making the company appear much better capitalized than a company whose capital all comes with a corresponding debt obligation.

SAFEs are not for everyone, and an investor familiar only with convertible notes but not SAFEs will almost always prefer to hold the convertible debt. However, for companies that can raise funds with a SAFE, there are a few potential advantages: 1) these companies may find their applications get a critical boost in their “Capitalization” score; and 2) they are easy to put together, as a SAFE is just a standard agreement with few negotiable terms – the Cap, the Discount, the Most Favored Nation Clause. If the terms are right, companies planning to navigating multiple local cannabis application processes would be wise to consider taking the SAFE route.

Cannabis business transactionOur cannabis attorneys see many cannabis deals and on a daily basis we see term sheets, pitch decks, prospectuses, fund summaries, etc. Though we’re always on the legal side, we are also often asked for advice we’d label “business advice” — ranging from the specific (here’s our deck, what valuation can we demand?) to the very general (as investors where should we put our money ahead of what’s going to happen with California cannabis in 2018?). In this post I offer our thoughts on some common issues.


Company Founders Ask: What are Investors Looking for?

If you spend too much time and thought reworking the numbers on a term sheet, or even believing those numbers play a big role in driving investor interest, you’ve got it wrong. I for one have never heard an investor say “the product misses the mark and the team is mediocre, but with these investment terms I’d be crazy not to jump in!” Though Shark Tank isn’t what life is really like out in the trenches, it does get the investment decision process in the right order: first the sharks meet the team and get their pitch, then they discuss and negotiate numbers.” If you’re too focused on the numerical terms, you’re better off not having a term sheet — a pitch deck (or even a one-pager) that focuses on the following is much more likely to drive an investor discussion forward:

  • the size of the opportunity
  • capturing the imagination of the investor
  • selling the investor on the team – the people – as the right ones to execute and seize the opportunity


Investors Ask: Where are the Big Returns?

Many investors assume higher risk companies will mean higher returns. And with this assumption often comes another one: companies that “touch the [cannabis] plant” (and are therefore unsuitable for nearly all institutional capital) will generate the highest returns. For investors using debt instruments and looking purely at interest rates as their ROI, this may be true. But for equity investors, it’s all about scale, and companies whose primary business is one that “touches the plant” rarely have the highest scalability. Though there aren’t nearly enough company exits to say for sure, the big returns are far more likely to be found in business-to-business ancillary cannabis companies – software, data metrics, equipment leasing, and other business services.


Everybody Asks: How can we insulate ourselves from federal criminal liability?

You cannot, not with 100% certainty. You cannot be involved in the cannabis industry and be completely insulated from federal criminal liability. That said, there are tiers of risk, and they generally break down as follows:

Tier 1 (highest risk):

  • Business operators that cultivate and sell cannabis
  • Business operators that process, test, extract or otherwise “touch the plant”

Tier 2:

  • Investors in Tier 1, above

Tier 3 (lowest risk):

  • Advisors and service providers to Tier 1 businesses and Tier 2 investors
  • Vendors and others that enter into “arms-length” transactions with cannabis companies


Company Founders Ask: Where do we meet investors?

  • Introductions
  • Industry associations
  • Conferences and networking events
  • Not cold-calling

Speaking of great places to meet investors, keep your eyes and ear peeled for our California Cannabis Investment Forum, coming soon in San Francisco!

California cannabis financing

For cannabis companies in California, 2017 is a period when neither companies nor investors are living in the moment. In addition to all of the risk factors cannabis investors need to heed, everyone is planning for future uncertainty because of  the recent passage of MAUCRSA. The state is currently working on MAUCRSA regulations, and local governments are changing policies with what seems like every public hearing – not to mention comments from our federal leadership that seem tailor-made for cooling investment into cannabis companies (the job creators!).

At the same time, California cannabis companies need funding now to scale up their operations in anticipation of future licensure under MAUCRSA and to appease local regulators through local licensing and permitting processes. The result of all this is that our California cannabis lawyers are seeing and working on many deals involving hybrid financing structures – an element of cash investment now, and warrants, options, and convertible debt later. Each has different triggers and rights for the cannabis company and investors, but all are in essence a different form of “kicking the can down the road” to 2018.

Three big factors are driving hybridized financing in The Golden State:

1. Regulatory Uncertainty and Red Tape.

Investors inherently accept risk in any investment, but they do not enjoy reading the tea leaves on major issues that are out of the control of company and investor – any of which could pose an existential threat to their entire investment. This means investors are searching for creative ways to mitigate these risks, and risks abound in cannabis regulations that change pretty much all the time. Many cannabis investors are uncertain whether they want to cross the 20% ownership threshold to be considered an “owner” under MAUCRSA, which ultimately requires they be disclosed to and heavily vetted by California state regulators.

2. License Transfer and Corporate Structuring Issues.

California’s draft cannabis business regulations make clear that future licenses are not transferable. And many local governments are also making sure cannabis operators cannot transfer their permits or local licenses after-the-fact. Further, most existing medical cannabis operators are organized as non-profit entities pursuant to Proposition 215, and there’s an outstanding question as to whether these entities will be able to merge into for-profits once they have their state licenses under MAUCRSA, though such a move could potentially jeopardize state and local licensure altogether. Though all parties should undertake their cannabis financings with this knowledge, investors understandably still want to reduce risk by withholding some of their investment until 2018 when more of these questions will likely have been resolved by state and local governments.

3. The Size of the Opportunity.

In the last two weeks, we’ve seen the situation in Nevada where despite a 33-37% tax on all retail sales, dispensaries simply cannot keep up with demand and are selling out of supply. In the event California has a similar supply crunch, we are seeing investors in California cannabis cultivators seeking warrants or options as a “kicker” for additional upside – more equity in the event the opportunities prove even greater than anticipated.

This is not to say that investors are dictating all terms in the world of cannabis finance. Cannabis companies, too, can and do negotiate for control of the trigger points or adjustments to the future exercise price (or regulatory triggers). Some cannabis companies are choosing hybrid investment structures because they, too, want to feel out the size of the opportunities and many believe they will be able to demand much greater valuations and investment terms in 2018, once the initial dust settles on the regulatory sphere.

What are you seeing out there by way of California cannabis funding?


We’ve written previously on options cannabis companies have when seeking financing. Since passage of Proposition 64, investor activity has noticeably picked up in California. It’s not surprising, as California is both the largest projected cannabis marketplace as well as home to roughly half of the country’s venture capital investors.

Cannabis Financing 101
Cannabis Financing 101

How are these investments structured? Below is a list of the more common types of cannabis investments we’re seeing, mostly in California, but in Washington State and in Oregon as well, in rough order of popularity:

Equity Financings. Our firm is doing “priced rounds” in the form of Series A equity financings with multiple investors, as well as individual investors purchasing minority ownership interests in LLCs. Cannabis companies are generally (but not always) preferring to have all investors within California so that they can do an intrastate offering for securities purposes.

Debt Financings. Companies with a track record of success are often preferring debt, as are investors that prefer not to have the exposure that comes with equity ownership. However, uncertainty on licensure processes and the timing when companies can fully operate has made payment schedules particularly risky for companies counting on revenues to pay back loans.

Convertible Notes. Convertible debt is traditionally used pre-Series A when a company is developing a product and still determining the size of the opportunity. A Convertible Note corrects for the difficulty in determining valuation at such an early stage by kicking the valuation can down the road to the Series A, but ensuring the investor gets at least as much value (and almost always more value) for their invested dollar, compared to the Series A investor. Typically notes have low interest rates, as investors are seeking equity upon conversion rather than by repayment.

For cannabis companies in California, convertible notes are taking on a new purpose: extending the question of valuation until 2018, when more will be known about the state’s cannabis regulatory regime. Conversion that is not automatic, but rather the option of the investor, also gives the investor an “out” should the investor not like the political climate around cannabis in 2018.

A slight variation on a convertible note is a “debtquity” arrangement where an investor provides a line of credit with a sliding scale of equity issuance based on the amount of capital accessed.

Alternative Financing Arrangements. Cannabis companies are proposing some non-traditional financing structures, such as investment via equipment leases, consulting arrangements, turn-key real estate, or investor-funded capital improvements. These are often a product of investor preferences or investor residency restrictions. Though these alternative financing arrangments are sometimes trickier for the lawyers to structure than a traditional investment, they often make for a good vehicle to provide cannabis companies with key resources needed at an early stage.



Cannabis securitiesLike tech startups, or any new business, cannabis startups need investment. Though most tech startups are organized as corporations, with the ultimate goal of acquisition or IPO, cannabis businesses are more often (but not always) organized as LLCs. But cannabis startups too often fail to realize that if they are seeking investors, they are probably selling securities.

Tech startups begrudgingly accept that compliance with securities laws are a fact of business life. With each financing, their attorney tells them: utilize a securities exemption or register the securities.

LLC membership interests, however, don’t fit into the common perception of the term “security.” Even many attorneys wrongly believe that securities are limited to stocks, bonds, and the like, and that a minority stake in an LLC is not an investment in securities.

In 2008, the case of US v. Leonard defined when a membership interest constitutes an “investment contract” — “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” The court wrestled with extending the definition to LLC membership interests but concluded that LLC interests require a “case-by-case analysis” into the “economic realities” of the underlying transaction.

In short, the investor must “exercise meaningful control over his investment.” The touchstone of what constitutes a security is not the form of investment, but rather whether or not it is a “passive investment.” If the investment requires active management engagement by the investor, it is not a security. But if it is a passive investment where the investor relies on others to run the business, it is a security.

Investors often have the right to give input into management decisions but do not ever actually exercise this right. The trend in securities regulation is to look beyond the terms of the agreement to analyze the practical realities. Cannabis businesses should be aware that in US v. Leonard, the individuals were convicted of securities fraud and went to prison.

The big takeaway is that businesses can choose to have all investors as active member-managers, and thus can plan around (and draft their operating agreement around) the need for securities compliance. The following are some practical points to ensure that your investors are “active member-managers” rather than “passive investors”:

  • Investors have voting rights in the LLC operating agreement, and exercise those rights in practice.
  • Investors have a management role and are “actively engaged” – they can have titles or membership on committees tasked with certain aspects of business operations.
  • Investors have input into and negotiate the terms of the LLC agreement.
  • Investors have full information rights, and actually receive and approve reports regularly.
  • Investors have input on key company strategic decisions – major decisions are made after consultation with investors.

Ensuring that your investors have an active, participatory role in management allows you to avoid entirely having to deal with securities law. When choosing your investors, you can help yourself in this context by seeking out investors that, in addition to money, have experience in the cannabis industry or in management so they can provide a value-add to your business.

Of course, this type of active management role won’t be acceptable to investors in every circumstance. As the number of cannabis investors grows and becomes more geographically diverse, however, the more likely they are to be considered “passive.” Marijuana businesses must understand that taking on passive investors means it’s time for securities compliance. At that point your attorney should be telling you to utilize a securities exemption and make the appropriate filing, or register the securities.

California cannabis businesses may recognize “management control” from California’s recently-released proposed regulations. We’ve written about these here and here. The regulations define as an “owner” any person who participates in the “direction, control, or management” of the cannabis business. Individuals having management rights will need to be disclosed to and vetted by state regulators in license application processes. Therefore, securities compliance and cannabis regulatory compliance are now two sides of a coin. Investors either lack management rights, meaning they are passive investors and securities compliance is required. Or investors have management rights, meaning they are “owners” and disclosure to cannabis regulators is required.