As we wrote last week, new rules from the Securities and Exchange Commission (“SEC”) implementing the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”) have opened up new opportunities for cannabis businesses to raise up to $1,000,000 of capital by selling small pieces of their company to relatively small-dollar retail investors. This is a profound departure from previous SEC rules, which greatly limited a business’s ability to solicit funds from individuals other than “accredited investors” — people with at least $200,000 of annual income or a net worth of more than $1,000,000. Cannabis entrepreneurs, many of whom struggle to obtain traditional small business or start-up financing, generally laud this change as a needed means of freeing up new and more accessible sources of capital. At least one cannabis business is already pursuing this strategy with early success. However, recent SEC guidance on acceptable advertising of these securities could greatly hinder cannabis businesses.
In a series of Compliance and Disclosure Interpretations issued last month, the SEC addressed a number of questions regarding the new crowdfunding rules. Question 204.04 asked whether a media article could constitute notice subject to the rules on advertising equity crowdfunding offerings. These rules permit notices to include only “the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period.” The SEC answered as follows:
If the media article advertises the terms of the offering . . . the article would be a notice subject to Rule 204. Because Rule 204 limits the information that may be in such a notice, it would likely be difficult for the issuer to comply with the rule’s requirements.
As Robb Mandelbaum writes for Forbes, this interpretation is quite restrictive and could easily lead to inadvertent violations. For example, Mandelbaumm points to a recent interview with an entrepreneur seeking to issue equity crowdfunding securities. In the course of the “rather innocuous” interview, he was asked and then revealed the approximate amount of money his company was trying to raise. According to the Compliance and Disclosure Interpretation, that alone could constitute a violation of the SEC equity crowdfunding rules. Yikes.
The implications for cannabis entrepreneurs are clear. The possibility of raising upwards of a million dollars through equity crowdfunding is certainly big news for the cannabis industry, but excited cannabis entrepreneurs should be careful not to violate securities laws when they participate in the coverage. In particular, business owners should be careful about what they say in interviews and press releases, and how they use sponsored content in trade publications.
It should be noted that SEC Compliance and Disclosure Interpretations are not binding law. Nonetheless, cannabis entrepreneurs would be wise to avoid running afoul of the SEC. Finding yourself in the SEC’s crosshairs is scary and can have serious — even criminal — repercussions. Just having the SEC mention your company as being under investigation is also a great way to drive away investors. The bottom line is that if you are hoping to enjoy the potentially considerable benefits of equity crowdfunding, you must be cognizant of the rules and not let your enthusiasm for the business turn into a securities law violation.