Bankless Times recently spoke with noted Regulation A attorney Kendall Almerico on the ins and outs of cannabis investing, including his foray into the Regulation A process with Goldenseed.
In the ’90s, everybody wanted a piece of the tech stock and dotcom market. Real estate was the hot ticket in the 2000s. Today, cannabis stocks are all the rage. With most of the U.S. and all of Canada legalizing some form of marijuana, many people see marijuana and hemp stocks as “the next big thing.”
But marijuana is illegal at the federal level in the U.S. and many U.S. cannabis businesses operate on a cash-only basis because banks will not provide them with services due to this, even in states where it is perfectly legal. It made us wonder: How are people legally investing in cannabis – one of the hottest market segments – with this federal ban in place?
To get someanswers, we turned to Kendall Almerico, a noted securities lawyer who believeshe is close to having the first private U.S. cannabis company that “touches theplant” qualified by the SEC to sell stock to the general public.
BT: We know your law practice is very involved in equity crowdfunding and securities tokens, but what took you down this path into cannabis securities?
KA: I was contacted by Goldenseed, a California marijuana and hemp grower and processor with retail consumer products who was interested in using Regulation A to raise capital while growing a base of brand ambassadors for their retail brand. I knew the management team from prior dealings with their real estate development business and realized they had the know-how and infrastructure to be successful in the highly regulated cannabis industry. I thought, “If they can get through the regulatory maze of both big real estate development and the cannabis business, then selling securities through Reg A should be a no-brainer for them.”
BT: How does the Regulation A process work for a company that wants to sell the stock?
KA: A company that wants to sell stock to the general public either needs to do an IPO which costs millions of dollars and can take years or they can use Reg A, which cuts that cost and timeframe down significantly. There is still a pretty significant SEC filing, audited financial records, a lot of disclosures and transparency, and then the SEC reviews it all. After some back and forth, once the SEC has finished its review, the company is “qualified” and is allowed to sell their stock to the general public. It’s usually sold online through an equity crowdfunding website.
BT: Why is this a big deal?
KA: For 80 years, only the rich and well-connected could invest in early-stage private companies like Goldenseed and reap the rewards of getting in on the ground floor if the company was successful. The Average Joe was not legally allowed to invest in Facebook when Marc Zuckerberg left his dorm at Harvard and got a few rich folks in Silicon Valley to finance Facebook. Those rich folks got richer, and everyone in the general public who wanted to invest had to wait until Facebook’s IPO many years later when the stock price was far higher than those early investors paid. In 2015, Regulation A changed all of that and allowed a private company, who goes through the SEC and jumps through a lot of hoops, to sell early-stage stock to anyone in the general public. It’s democratized the early-stage investment world. I think it’s great for young companies, and it’s great for the general public who are now given a chance to get in early on some deals.
BT: With marijuana still being illegal at the federal level, did you have any concerns of asking the SEC, a federal government agency, to review a company that arguably does something that another federal agency considers illegal?
KA: No major concerns, but I certainly knew we were heading into an unknown area. I have a great deal of respect for the SEC and thought they would see cannabis as I do, and like most of America does at this point. The more I work with them to get these Reg A offerings through their system, the more I see very smart people doing a very hard job that primarily involves protecting investors and often that involves new areas of business for the SEC to review. With Goldenseed, I knew that the company and its management were very solid and knew how to follow the rules, and if I was going to take a cannabis company to the SEC, I felt they were a good fit. I also know from prior dealings in other groundbreaking areas like blockchain and security token-related offerings, that the SEC not only wants to protect investors but also wants to be sure that these companies use the U.S. system and that the capital stays in the U.S. If the SEC makes it too hard for the companies who are doing things the right way in cutting-edge areas, all of that business will go to another country.
BT: I see stories in the news and get fed ads online all the time about cannabis stocks. How is this offering different?
KA: There are more than 200 publicly traded marijuana-related stocks in the U.S., but nearly all of them involve Canadian companies, where cannabis is legal at the federal level, or companies in the U.S. that do not “touch the plant.” In Goldenseed’s case, they are a private company, they operate legally in California, and they touch a lot of plants. From my research, they would be the first such company to be qualified by the SEC to sell stock to the general public.
BT: What is the significance of touching the plant?
KA: If a company touches the plant then they have trouble finding banking because marijuana is still illegal at the federal level. The New York Stock Exchange and NASDAQ will not list a U.S. cannabis company that touches the plant. Goldenseed touches a lot of plants. They have a few hundred thousand square feet of greenhouse space they plan to eventually have permitted and they’ve already harvested acres of hemp. They have taken a pre-roll to the market that won the High Times Cannabis Cup. That’s a lot of plant-touching. So, the significance is that this Regulation A offering will break a lot of ground, and hopefully open doors for others in the cannabis industry to use the process to help the already-huge industry to get even bigger. Bigger industry equals more jobs, more tax revenues and an even healthier economy.
BT: So, let’s get down to the nitty-gritty. If marijuana is illegal in the U.S. at the federal level, but people can already invest in public cannabis companies, and with your client may be able to invest in private cannabis companies, should investors be concerned that they may be doing something illegal by investing?
KA: There’s some uncertainty about the legality of investing in a U.S. based marijuana-related company, even though lots of people do it every single day. Ask 10 lawyers that question and you’ll get 10 different explanations… and a huge legal bill. The reality is that an argument could be made you are committing a federal crime if you buy stock in a U.S. marijuana company that is fully licensed and operating within state law in a state where marijuana is legal. That company is possibly still violating federal law, even if what they are doing in their state is legal. And if you buy stock, you own part of that company. Hence, you are “doing something illegal.” Or, so the argument goes.
BT: What do you think?
KA: I’m not aware of any reported instance since the recent legalization movement where federal law enforcement authorities brought criminal charges against investors of a marijuana-related company in a state where they operate legally. I’m not aware of any reported instances of the federal government charging anyone related to such a company with a crime, much less their investors. This looks to be like one of those areas where authorities could technically charge someone with a crime, but chances are they won’t. It’s kind of like a policeman clocking you driving 5 MPH over the speed limit. You broke the law, you could get a ticket, but chances are you won’t. On the other hand, if law enforcement did decide to prosecute owners of marijuana companies, the penalty would probably be quite a bit stiffer than a few points on your driver’s license.
Is the federal government going to arrest all of those investors trading in these securities? Will the feds shut down Merrill Lynch and Goldman Sachs and TD Ameritrade and every other stock brokerage in the world for selling something “illegal?” Will the federal government shut down Google and Facebook for feeding us cannabis-related ads and clearly aiding and abetting in “illegal drug trafficking” across state lines? I personally don’t think so. If they were going to do so, they would have already done it. And, I seriously doubt the first arrests would be investors, who are so far removed from the actual growing and selling process.
BT: What’s the reasoning behind not enforcing these federal laws?
KA: Legal marijuana is one of the fastest-growing industries in the United States. I’ve read that it a $6.6 billion in 2016 projected to grow to $24.1 billion by 2025. Studies show the cannabis industry will account for 250,000 jobs by 2020. If the federal government wanted to start arresting people for investing in marijuana stocks, they would probably start first by arresting people working at marijuana farms and dispensaries. That would send the cannabis industry scrambling straight up to Canada, where this is all legal. Politicians and law enforcement would be waving goodbye to not only billions of dollars of economic value and growth and hundreds of thousands of jobs, but also to the hundreds of millions of dollars in state and federal tax revenue that the industry generates.
BT: Do you think that is possible? You never know with politicians….
KA: Something tells me that’s not going to happen, but you never know. Stranger things have happened. Like pot suddenly becoming legal and mainstream in most of the U.S., for example.
BT: Hemp is now in a different legal category than marijuana in the U.S. and CBD seems to be everywhere. Is it safer to buy hemp and CBD related stocks than those involving marijuana?
KA: Great question. First, a quick botany lesson and no, I didn’t learn this in law school. Hemp and marijuana are from the same family of flowering plants and they look nearly the same. Hemp refers to varieties of cannabis that contain no more than 0.3 percent THC — the psychoactive compound in cannabis that gets people high. The varieties of cannabis that have more than 0.3 percent TCH get classified as marijuana, the others are hemp. CBD can be derived from both hemp and marijuana, and it’s the same molecule regardless of which plant was the source.
Industrialhemp was made federally legal in the U.S. in 2018. So, you would think acompany that only deals with hemp is less risky from a legal standpoint thanone that deals with marijuana. But, it’s tricky. In some instances, CBD can still beconsidered a Schedule 1 controlled substance if it comes from marijuana, nothemp. How does a consumer know? And, there are still unresolved questions atthe federal level with the FDA about putting CBD into food and drinks.
So, there isstill some risk in investing in hemp or CBD stocks, but the same thoughtprocess as before applies: Will the federal government start shutting downeverything having to do with hemp and CBD? I really don’t think so.
BT: It seems you are saying that while there may be some technical illegalities involved with buying a cannabis stock, the risk of prosecution is not very large:
KA: I personally believe that but I don’t have a crystal ball and I can’t be sure. I also believe that anyone who wants to invest in a cannabis-related stock should talk to their own lawyer and investment advisor and get advice related to their situation. The risks may not just be an arrest, there could be other legal ramifications, particularly for U.S. government workers. You also may have to be registered with various state agencies if you invest in one of these stocks. Everybody should get their own legal and financial advice for their personal situation before they invest in any cannabis stock.
BT: One last question: while there seem to be some risks involved, a lot of people say that those who take high risks can get high rewards. Do you see this as one of those situations?
KA: Those who take high risks also lose all of their money sometimes. I’ve seen my share of those people go “all in” at a Vegas blackjack table and walk away with nothing except for a “free” watered-down cocktail.
But, I’m also well aware that investing in early-stage companies, while inherently risky, can give a greater chance at a bigger return. The stock markets and publicly traded stocks have traditionally been the place to increase the value of your overall investment portfolio over time. Early-stage investment in private companies is far riskier than investing in a public company on a stock exchange, but the long-term financial rewards of investing in the right private companies that make it big can dwarf the returns of most investments in public companies on the stock exchanges. While the downsides of private company investments exist: you have no liquidity, you have to hold the stocks for a long time, and there are far more losers than winners – those that do win tend to create more wealth for the early investors. But you have to pick the right company. Do your homework. Get advice from professionals. And never invest money you can’t afford to lose.
