As Colorado considers legislation to allow for publicly licensed marijuana companies, a flood of lawsuits, SEC actions and banking restrictions have plagued the industry.
Colorado lawmakers are considering House Bill 1090, a measure that has been delayed in the legislature over concerns raised by unions and smaller cannabis companies. Critics of the bill say they would be placed at a competitive disadvantage if the measure passes, and that workers would be without critical health, safety and wage protections.
The bill would allow larger cannabis companies trading on the Canadian Securities Exchange to funnel billions of dollars into operations in Colorado. That money could be used by Colorado-based cannabis companies to fuel national expansions outside of the state of Colorado. It also could enable larger companies to absorb smaller companies in a massive consolidation of the industry.
In one example, a California cannabis company recently announced that it is purchasing two smaller Colorado-based cannabis companies to own its “portfolio of strains” that are “well-suited for manufacturing in California and other adult-use and medically approved states.”
The first significant marijuana company to go public on a major U.S. exchange didn’t happen until July 2018, highlighting the uncertainties and unknowns around publicly traded cannabis companies.
In less than a year, public cannabis companies have faced several lawsuits over defrauding investors, actions and warnings by the U.S. Securities and Exchange Commission, and hurdles over banking issues. Despite the warning signs, some Colorado lawmakers are pushing forward with a plan to require the state to regulate foreign securities, something that rarely falls within the purview of state agencies.
A similar bill was vetoed by Democratic Gov. John Hickenlooper last year after Republican Attorney General Cynthia Coffman expressed concerns over enabling the black market. Foreign securities would not be subject to the same stringent background checks required for vetting money coming in to Colorado cannabis companies under the current regulatory structure. The former attorney general and governor worried that the measure would raise the ire of the federal government.
“(Publicly traded cannabis companies) could result in individuals who have no stake in Colorado’s well-being, seeking to maximize profits without regard to any negative consequences to the public’s health, safety or welfare…” Coffman wrote in a letter requesting a veto of last year’s bill. “It represents a departure from what has historically been a locally owned, fully transparent and tightly regulated marijuana market.”
SEC Takes Enforcement Actions, Lawsuits Fly
Even the SEC — a federal agency that has the experience to regulate foreign securities — has struggled to keep up with a surge in cannabis trading. The agency in September 2018 issued an “investor alert” warning investors against investing in cannabis companies. The SEC highlighted receiving “regular” complaints about marijuana-related investments. The SEC continues to bring enforcement actions against companies for investment fraud and market manipulation. About a half-dozen actions have already been taken by the agency.
Proponents of the bill attempted to fast-track HB 1090 through the legislature. But after concerns were raised, the measure was pushed to a Feb. 25 hearing. Since the delay, lawmakers began to host stakeholder meetings to address concerns. In just the last few weeks, additional lawsuits against public cannabis companies have been filed.
Most notably, California-based cannabis behemoth MedMen began advertising for a “crisis management planning manager”after the company faced multiple lawsuits seeking hundreds of millions of dollars in damages. Most of the complaints hinge on MedMen’s status as a publicly traded cannabis company.
One of the lawsuits against MedMen was filed recently by the company’s former chief financial officer, who claims that MedMen principals used “millions of company dollars” to pay for personal luxuries such as private jets, among other alleged misdeeds, according to Marijuana Business Daily.
The New York Medical Cannabis Industry Association last week asked MedMen to relinquish its membership after the string of lawsuits, which have included allegations of homophobic and racial slurs. MedMen has been viewed as a test case for publicly licensed cannabis companies. The company also faces allegations of violating securities regulations.
In Colorado, a Denver jury recently in federal court convicted an attorney of securities fraud, mail fraud, wire fraud, money laundering and conspiracy, in connection with a marijuana-related business. Guy M. Jean-Pierre and co-conspirators started a cannabis-related business, which repurposed steel shipping containers marketed to cannabis growers. The company prepared documents that allowed it to sell stock in violation of securities laws.
Meanwhile, banking remains a significant hurdle as cannabis companies go public. Those hurdles are in the form of lending restrictions, disagreeing local laws, and internal firewalls as banks discover they cannot accept cannabis money. Banks cite a flurry of federal regulations that currently deter banks from working with legal dispensaries in the U.S. and mandate that banks and other financial firms file “suspicious activity reports” to help monitor money laundering, according to a recent report by CNBC.
HB 1090 would come ahead of a cannabis banking fix on the federal level. Congress is currently considering bills in both the House and Senate, though that is likely to face a long battle.