As hashish enterprise attorneys, we are likely to see and listen to greater than our share of kooky and downright unhealthy enterprise pitches. Dangerous enterprise concepts are one factor, however complete scams and rip-offs are one other. Sadly, like all new and excessive progress trade with difficult and continuously altering guidelines and rules, the marijuana trade is chalk filled with scammers and ripoff artists.
1. Marijuana penny shares. We’ve blogged about these time and time once more. Stay away from most marijuana penny stocks. As each we and the SEC maintain mentioning, many (however not all) publicly traded hashish firms are autos for investor fraud. We’ve defined:
It virtually appears that publicly traded inventory firms are extra centered on promoting their shares than on competing available in the market. The herd mentality of traders appears to encourage this. Right here’s how that fundamental logic works: Marijuana is booming. Subsequently, marijuana companies should be booming. In flip, all marijuana companies should be booming. Subsequently, I have to spend money on a marijuana enterprise. The one method I can simply spend money on a marijuana enterprise is to purchase the inventory in a publicly traded marijuana enterprise. And so the shares simply maintain booming.
All of which ends up in pump and dump scams the place “the group behind the rip-off will increase the demand and buying and selling quantity within the inventory and this new influx of traders results in a pointy rise in its value. As soon as the value rise has formulated, the group will promote its place to make a big short-term achieve.” Pump and dump scams with publicly traded marijuana firms are nonetheless fairly in style, so watch out on the market.
2. Reverse merger marijuana shares. Similar to penny inventory fraud, reverse merger stock fraud is nothing new. Within the typical reverse merger transaction, a privately working firm seeks to accumulate controlling shares in an already publicly traded firm with the purpose of buying the general public firm’s itemizing.
Reverse mergers a comparatively quick, low cost and straightforward method for a non-public firm to “go public” with out having to undergo the entire SEC reporting, disclosure, and registration necessities required by a typical preliminary public providing. Within the reverse merger rip-off, the underlying publicly traded firm is normally only a shell firm with little or no belongings or constructive enterprise historical past. As a result of the underlying publicly traded shell has no belongings, no actual administration base, and oftentimes no enterprise in any respect, the entire level of those scams is to accumulate traders and lift capital based mostly on pumped-up inventory statistics, costs, and claims at first finally goes bust.
These scams are likely to contain the identical subset of marginal accounting and legislation corporations that help by securing IRS and SEC reporting delays. Like anything, in the event you’re buying inventory in a reverse merger firm, do your due diligence and know the pink flags.
3. Marijuana franchises. Most marijuana franchise “presents” are simply plain garbage as a result of they fail to account for the entire reporting, registration, and disclosure necessities required by federal and state franchise legal guidelines and rules. Franchising is ruled by FTC and various state agency rules. Due to the state and federal legislation battle with hashish, franchising a hashish enterprise is a very dangerous proposition and we’re discovering that the majority hashish “franchisors” will not be offering their potential “franchisees” with almost sufficient danger disclosures.
4. Some marijuana trademark licensing constructions. Far too many marijuana firms provide trademark and mental property licensing agreements to hashish cultivators, producers, and retailers as a solution to unfold their model (versus their merchandise) over state traces. Although positively a viable legal and business approach, most of the licensing agreements in these offers are being drafted by legal professionals who know nothing concerning the hashish trade or about mental property and IP licensing legal guidelines.
This unlucky dynamic results in licensing contracts rife with errors and omissions and that in the long run both fail to switch any protectable IP belongings and even result in their forfeiture. Now we have additionally seen licensing agreements drafted so poorly as to accidentally set off franchising necessities. For extra on what to search for to keep away from a extremely unhealthy IP licensing deal, take a look at Cannabis IP Licensing: It’s Complicated.
5. Marijuana “crowdfunding.” Some years again, the SEC launched new crowdfunding guidelines designed to let the small fry swim with the sharks. As of Might 16, 2016, firms can solicit $2,000 from anybody (and extra in lots of instances) in trade for an fairness stake of their enterprise. Corporations can elevate as much as $1 million yearly by way of these choices, which fall below Title III of the 2012 JOBS Act. As we now have written earlier than, the SEC does not care whether or not your online business is a pot enterprise, as long as you observe its choices guidelines. Although the SEC’s guidelines for crowdfunding advertising are extremely strict, we’re already getting wind of crowdfunding hashish firms in search of to skirt these new guidelines to the detriment of traders.
6. State-illegal marijuana firms. Not all marijuana firms are lawful below state or native marijuana legal guidelines, even in cannabis-legal states. The truth is, we regularly see blatantly unlawful hashish firms not solely on the market working, however in search of traders and elevating funds. Many states outlaw marijuana delivery services, on-line gross sales and distributor firms, marijuana telemedicine, marijuana bars and/or vape lounges (see Oregon and Washington), and marijuana events the place hashish is offered by the venue. Ensure you know what’s lawful below state and native legislation earlier than placing your hard-earned funds or time into an organization that’s solely going to get shut down or be prosecuted shortly thereafter.