Regulation A+: Opening the Doors For Cannabis Businesses Seeking Capital

Being a business owner or an executive in the cannabis industry is no easy feat. We not only face the daily challenges that every other industry confronts, but we also yield to regulations, limited avenues for advertising, investing into education, and we lack access to basic services like banking and financing. Companies like MBank (OTC:MBNC) have tried to brave the terrain (See: MBank’s Lasting Mark on the History of the Cannabis Industry), but have had to close the accounts they worked so hard to open for these cannabis-related businesses, leaving that many more, strapped for capital. But fear not, because when one door closes, another opens and Regulation A+ may be the answer to expanding our access to the funds we all need to grow.

According to the US Small Business Administration, over 50% of small businesses fail within the first five years.  One of the primary reasons for this high rate of failure is insufficient capital.  Many entrants into the growing cannabis and hemp industry have experienced the pitfalls of insufficient capital.  Some have turned to banks, whose risk management policies typically do not allow for lending to companies operating in the cannabis and hemp industry.  While there are some encouraging signs, such as the Kansas City Federal Reserve President Esther George meeting with marijuana business owners and bankers in Denver, Colorado on April 9, 2015, regular access to banking services is still a long ways off.

Many entrants into the growing cannabis and hemp industry have experienced the pitfalls of insufficient capital.  Some have turned to banks, whose risk management policies typically do not allow for lending to companies operating in the cannabis and hemp industry.

However, under new rules from the Securities and Exchange Commission (SEC), access to investor capital may supplant the need to rely on banks.  On March 25, 2015, the SEC approved new rules that expand the usefulness of the Regulation A+ exemption from full registration of securities offerings.  Full registration is typically referred to as an initial public offering (IPO), which is an expensive proposition and includes an extensive ongoing reporting regime.  Regulation A+, on the other hand, is a simpler disclosure process that can be done at a lower cost and with a less burdensome ongoing reporting requirement.

The general rules are as follows: Any company organized in the United States or Canada may raise up to $20 million over 12-months in a Tier 1 Regulation A+ offering, or may raise up to $50 million over 12-months in a Tier 2 Regulation A+ offering.  The crucial difference between Tier 1 and Tier 2 offerings is that Tier 2 preempts state review of the securities offerings materials.  This is especially important in those states that require merit review of the securities offering — not just reviewing for complete disclosure, but also reviewing for whether the offering is good for investors.  This type of review may hold up the process of getting a marijuana company past the regulators and being able to offer its securities to investors.

Tier 2 offerings preempt state regulation of the securities offering in exchange for other investor protections, including audited financial statements and limited ongoing reporting.  While the SEC will review the offering materials, it does not review based on merit.  Instead, it reviews for completeness of disclosure.

Any investor may invest in a Regulation A+ offering. So cannabis companies can raise funds, debt or equity (shares) from its customers, suppliers, friends family and fans.

Any investor may invest in a Regulation A+ offering. So cannabis companies can raise funds, debt or equity (shares) from its customers, suppliers, friends family and fans.

For those companies that are forced to operate in cash because they have not been able to obtain a bank account for deposits, you may ask what is that company supposed to do with millions of dollars in cash?  Use of a registered broker-dealer may resolve that concern.  The broker, while not a depository institution, can hold on to the proceeds of the securities offering for the company.

Photo Credit: DanielSTL

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