February 6, 2023

Volume XIII, Number 37

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February 03, 2023

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Investors: SEC Warns to Be Aware of Uptick of Fraud in the Cannabis Industry

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.

©2023 Norris McLaughlin P.A., All Rights ReservedNational Law Review, Volume X, Number 115

About this Author

At Norris McLaughlin, there are over twenty business law attorneys who spend all or most of their time in a variety of specialties within the field of business law.  The range of clients is broad, as are the legal services that we provide to them.  The following is a breakdown of many of the business services that we provide.  Often, these services overlap based on the needs of our client.

General Business

  • Day-to-day legal counseling
  • All aspects of product distribution, including compliance with franchising and other trade regulations, and the...
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