By Jeff Bess, third-year student at the University of Washington School of Law.
State-legal cannabis is a booming business and further state-level moves toward legalization and regulation are likely on the way. Though legalization has most famously resulted in economic growth and increased state and local tax revenues, it has also come with its fair share of problems. As Seattle-based cannabis business attorney Hilary Bricken wrote earlier this month: “[L]ike any new and high growth industry with complicated and constantly changing rules and regulations, the marijuana industry is chalk full of scammers and con artists.” A recently reported, ongoing cannabis fraud investigation in Oregon – the first of its kind in the state – illustrates one way that less-than-scrupulous investment in the cannabis space can potentially present significant pitfalls for investors and entrepreneurs alike.
At the outset, this important disclaimer: The aforementioned investigation is ongoing; nothing has yet been proven, or even charged. We make no claim to special knowledge of the situation and nothing in the foregoing is a judgment as to the veracity of any related allegations. Nonetheless, the general contours of the scenario – as reported in the press – and claims by both sides serve as a useful illustration of how fraud could occur and may be avoided in a cannabis business.
In short, the current investigation in Oregon concerns an entrepreneur, a consultant, and several investors. The entrepreneur, Trish Siler, wanted to start a cannabis dispensary in Oregon, and enlisted the help of a cannabis business consultant named David Jacobs at a California firm called Green Rush. Siler and Jacobs worked together to find investors and raise money to get the business of the ground. In the course of doing so, they made numerous representations regarding Siler’s educational background and reputation in the Oregon cannabis community. Eventually, they secured the needed investment and received a letter that purported to be an official authorization from the state of Oregon permitting Siler’s operation of a dispensary, to be named Cannacea.
That is where the facts become murky. The investigation so far has uncovered that some of Siler’s claims about her education and connections to the industry are questionable, and proven others false. Jacobs was discovered to have been convicted of fraud and aggravated identity theft in 2005. Siler and Jacobs both agree that the letter supposedly from the state of Oregon authorizing their dispensary was a fraud, but they each deny writing it. Multiple investors who lost their money report receiving investment documents with representations and assurances that now appear to be false.
We will leave it to law enforcement to sort out what happened and assign blame, but clearly something went wrong. What should investors and entrepreneurs do to avoid the same fate?
• Do your homework
Due diligence is essential before consummating any transactions, but that is especially the case in the cannabis industry. It is a new industry subject to a lot of uncertainties and still working to professionalize. Investors should make every effort to learn all relevant information about a cannabis investment before they commit funds. This includes information about the fundamentals of the businesses, its other funding sources, and its key players’ backgrounds. Moreover, this information should be checked and double-checked; as with any other investment, anything that sounds too good to be true probably is. And, be sure you are mindful of all relevant laws while you do so.
The same holds for entrepreneurs. Be wary of who your investors are, where their money is coming from, and what they expect is terms of return and control in the business. Vet investors just as you would a business partner.
• Make clear, enforceable agreements – and stick to them
You must make the rules to enforce the rules. Handshake deals are always a risky proposition, but especially in an industry with so few standard operating procedures. Parties should be careful to craft agreements that reflect their true priorities and protect their interests. Furthermore, parties should enforce these agreements according to their terms to avoid risk of waiver.
• Engage trusted advisors
Do not take it upon yourself, as either an entrepreneur or investor, to verify everything about the other party. Retain well-qualified attorneys and accountants to review the terms of contracts before you enter into them. Not only will these professionals help catch your mistakes, they will bring the wisdom of their experience to the table and help ensure you do not overlook anything important. Your attorney can also draft agreements and review the other side’s proposals to ensure you are protected.