Risks in Investing in Cannabis Businesses

By Jason Liu, second-year stu­dent at the Uni­ver­sity of Wash­ing­ton School of Law. 

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As cannabis businesses become more prevalent, many folks are asking, “How can I invest in marijuana businesses?”

A look at the Securities and Exchange Commission’s (SEC) public company registrations show there are publicly traded cannabis businesses. However, these registered businesses are mostly ancillary cannabis business that provide services to cannabis production businesses. A search in the SEC’s databases show there are no companies that actually produce and handle cannabis. This may be due to the federal prohibition on cannabis.  Also, if a company lists on the SEC, it is opening ownership to individuals who do not meet residency requirements required by most states where marijuana is legal, thus potentially violating the licensing agreement. This would likely cause the cannabis licenses to be revoked.

For registrations of ancillary cannabis businesses, the SEC asked applicants to declare whether the company believed they violated federal law. For example, there was a successful IPO of cannabis centered communications company, MassRoots. After the SEC requested MassRoots declare whether the company believed they violated federal law, the company disclosed that “we may be deemed to be aiding and abetting illegal activities through the services that we provide to users and advertisers.” Following this request, the SEC moved on to different questions, thus implying acceptance. The SEC appears to be keen on the disclosure of illegal activity, and this disclosure may have further complications for shareholders of ancillary cannabis businesses.

In particular, the Cole Memo forbids cannabis activity as a cover or pretext for the trafficking of other illegal drugs or “other illegal activity.”  If there was disclosure of other illegal activity, this may elevate a company’s risk of being in the federal government’s crosshairs. If prosecuted, shareholders run the risk of their stock being seized.

Generally, there are limited cases of asset forfeiture of stocks related to illegal drug trafficking.  Regarding forfeiture, The Controlled Substances Act (CSA) includes “All moneys, negotiable instruments, [and] securities.”[1] This scope potentially extends to shareholders of public cannabis businesses as well. This risk poses at least two implications: 1) asset forfeiture of the cannabis stock and 2) asset forfeiture of other stocks shareholder owns. There are no cases so far of asset forfeiture of cannabis securities of strictly investor shareholders, but as the industry expands, these issues are on the near horizon.

Generally, the consensus from the SEC, as well as other investment resources is caution on investing in cannabis businesses. This may be due to the volatility of changing state laws as well as the conflicts with the CSA. However, if cannabis’ federal illegal status changes, there may be a new place for investment.

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