There have been a slew of enforcement actions against regulated cannabis companies engaging in alleged securities fraud. However, the harm caused to investors could have easily been prevented. Know how to recognize the top investor scams as you assess investment opportunities.
A brief history of securities violations in cannabis
Securities violations are nothing new in cannabis and have been in the crosshairs of state authorities for nearly a decade. Three notable cases in Q3 2016 called to light that state and federal agencies are indeed paying attention to the cannabis sector and issuing enforcements when appropriate.
Cannacea
In July 2016, the cannabis industry saw its first formal state securities fraud investigation into a regulated business.
Tisha Siler, CEO of Cannacea, a Portland, Oregon dispensary, was fined $40,000 by Oregon state regulators for multiple alleged violations of state securities laws. Among other things, Siler was found to have participated in fabricating a forged letter from the Oregon Health Authority, which “thanked” her for treating Oregonians and awarded her up to six dispensaries without any bureaucratic red tape. While the extent to which investors relied on this letter varied, four investors were duped into handing over a total of $225,000 toward her build.
Siler blamed the matter on Green Rush Consulting, the advisers she engaged to help her raise funding, and claimed that she never reviewed the offering documents that they prepared. (Notably, the Green Rush consultant she worked with had been previously incarcerated for fraud.) Electronic evidence showed that Siler reviewed and revised the paperwork herself. Siler denied having prepared the fraudulent letter or having it prepared on her behalf; yet forensic analysis on the letter pointed toward Siler and Cannacea. To date, an appeal is pending.
THCP
Later that same year, Oregon regulators also fined Todd Grange $60,000 for violating state securities laws. Regulators alleged that Grange promoted a website that offered investors a $150,000 return on a $10,000 investment in THC Pharmaceuticals (THCP). Grange allegedly told prospective investors THCP had been active for five years, had raised $9 million from 27 investors, and was slated to merge with a publicly traded company.
The investigation revealed that THCP didn’t even exist. Its capital raise was false, it had no plans to merge and it apparently never obtained certification of organization from the state.
Fusion Pharm
On Sept. 16th, 2016, the U.S. Securities and Exchange Commission (SEC) announced fraud charges against Fusion Pharm, its CEO and an attorney in an alleged scheme involving stock sales and financial filings of a company that manufactures PharmPods grow containers. These charges run parallel to criminal action brought by the U.S. Attorney’s Office for the District of Colorado.
Investors were allegedly misled into believing that stated revenues resulted from PharmPod sales when, in fact, revenues had been recorded and trumpeted from the illegal sale of restricted stock by hidden affiliates. Typically, attorneys are responsible for those fraudulent statements that may be directly attributable to them. Here, the attorney is alleged to have issued opinion letters falsely stating that the restricted stock may be properly sold on the open market.
The SEC’s Division of Enforcement filed a motion to terminate additional proceedings in May 2020, noting that “all ill-gotten gains received by [R]espondent have been attributed to” two individuals in the related criminal case and that Fusion Pharm was defunct.
5 things we can learn from these investor scams
The press coverage on these three securities violations in 2016 was focused on scheming entrepreneurs and their lies and subsequent punishment. Nonetheless, there was poor decision-making on both sides of the money. Everyone involved in a potential deal should have their eye out for red flags.
Here is a rundown of five simple steps that would have keyed prospective investors into the frauds perpetrated by Cannacea, THCP, and Fusion Pharm.
If it’s too good to be true, it probably is
The most common and easily spotted fraud is the promise of high returns with little to no risk. Unlike public offerings, private placements frequently do not require extensive disclosure requirements, but investment opportunity documents that do not identify a single risk are an instant red flag. Aggressive sales tactics could also signal a potential scam. Proper financial diligence takes time, and reputable brokers will respect the process.
Take a look at the company’s public-facing entities such as its website or social media. If they are making guarantees or claims that don’t add up, it’s a sign to stay away.
Verify if an organization is in good standing
When reviewing proposed transaction documents, the easiest “fact” to verify is whether the company soliciting investment is in good standing with its state of organization. To operate, corporations and LLCs must register with and report to the state of organization. This information may be found by conducting a company search on the applicable Secretary of State website.
Ask for and look up the investor’s credentials
The credentials of investment professionals (brokers and investment advisers) are also publicly available on FINRA’s Broker Check and the Adviser Public Disclosure website. Even a simple Internet search may reveal prior infractions. Be wary of unverifiable or missing biographies of managers or anyone who does not volunteer their credentials upfront.
Be wary of who else is investing
Ask questions about where the investor funds are coming from. A company should care who its investors are. Private placements are typically available for accredited investors only. If the target company has not presented investors with an accredited investor questionnaire or asked them about their financial qualifications, something is likely amiss.
Pay close attention to the transacting documents
Transaction documents should look and feel professional, and proper issuers rarely attempt an offering alone. A properly prepared investment package typically requires labor intensive documents and other submissions by lawyers, accountants and possibly brokerage firms, all of whom should be disclosed to, and available to speak with, prospective investors. Documents that appear to have been hastily prepared, or have spelling, grammatical or formatting errors, should signal that the issuer may be unreliable.
Pay close attention to protect yourself from investor scams
Like all financial products, investment opportunities must be regarded with a careful eye and with expert guidance. In many respects, the existence of regulatory enforcement signals the maturity and legitimacy of the regulated cannabis market and is a cause for celebration. However, investors must remain vigilant and rise to the occasion. A trustworthy team of advisors like the attorneys at Rudick Law Group can help you assess opportunities and make smart decisions.
A version of this article originally appeared in Marijuana Venture: https://www.marijuanaventure.com/common-cannabis-investment-scams/
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