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Are 504 Private Placement Security Offerings Allowed in Cannabis Businesses?

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We’ve written regularly about the plight of cannabis businesses not being able to secure traditional lending (and other financial services) from major, federally regulated institutions. In this post, we dive deeper into a promising federally regulated equity offering as an alternative funding means: Rule 504 under Securities and Exchange Commission (“SEC”) Regulation D.

Why aren’t banks more involved?

Despite adoption by a growing number of states, marijuana is (still) federally illegal. Federal laws preventing money laundering and other financial crimes create regulatory hurdles so significant for most major banks to service cannabis businesses that it just isn’t worth the compliance burden.

While state-regulated credit unions have stepped up to fill some of the void, institutional lending remains largely unattainable. The remainder of the void is filled by private lenders from the private equity and venture capital crowd and individual investors that require often significant collateral and interest rates that reflect the ongoing marijuana industry risk.

Raising money through private placements

When a cannabis company wants to raise capital through a private placement (sale) of securities, it subjects itself to federal and potentially state securities laws, regardless of whether they are raising through debt, equity, convertible debt, or something more creative like a SAFE (simple agreement for future equity).

What is a security or investment contract? Howey tells us

All private capital raises implicate securities laws. The definition of a security, while complex and fact-specific, in the private capital raise context is most clearly captured by the infamous U.S. Supreme Court case SEC v. Howey Co.

In Howey, the Court held that the catch-all term “investment contract” as used in the Securities Act’s definition of a security includes any contract or scheme where there is: 1) an investment of money; 2) in a common enterprise; 3) with the expectation of profit; 4) to be derived primarily from the efforts of others. Thus, the passive investment of capital into a cannabis business with the expectation of a return based on the success of the cannabis business is a security.

Under the federal securities laws, a company (the “issuer”) may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration is available. If they can, issuers typically prefer to avoid registration of securities offerings because it’s a lot of work and highly expensive. So, how can a cannabis company offer exempt securities to raise capital?

How does a Rule 504 exempt offering work?

Offerings may be exempt from the SEC’s registration requirements pursuant to Securities Act Section 4(a)(2) or its safe harbor under Regulation D of the Securities Act. Reg D includes Rule 504 that offerors commonly use to use securities without registration. This exemption sits nicely between the traditional Reg A+ public offering and Reg CF crowdfunding offering.

At the risk of oversimplifying, Rule 504 allows for the sale of up to $10MM in securities to non-accredited investors, but the issuer cannot advertise the offering publicly (this is called “general solicitation”). Accredited investors can still be involved and generally do not count against any investor limitations. Accredited investors, generally, have at least $1 million in net worth or income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years.

For most smaller cannabis companies trying to raise capital, their capital needs are often too small for accredited investors to be interested in or do not have access to accredited investors in the first place. Thus, Rule 504’s allowance for non-accredited investors and its relative simplicity becomes a possible solution. We note here that a Rule 504 offering does not preempt state securities registration requirements as other exemptions do, so state law compliance must be taken into account.

Avoiding bad actor disqualification

Like the other Reg D exemptions, Rule 504 contains a “bad actor” provision, which disallows certain people and issuers from being able to avail themselves of the exemption. So, what is a bad actor and do cannabis companies by virtue of trading in a federally illegal substance qualify as one? The short answer is no.

For the purposes of this post, the bad actor provision in Rule 504 disqualifies any issuer from taking advantage of the exception from having to register securities if its directors, general partners, managers, executive officers, or persons with more than 20% voting power of the offeror have certain criminal convictions.

Relevant criminal convictions

Fortunately, all of the convictions and other disqualifying events as stated by the SEC are focused almost exclusively on securities related offenses. While operating a cannabis business is technical unlawful under the Controlled Substances Act, none of the disqualifying events are characterized by violations of federal law not involving securities. So, while the term “bad actor” may seem like it could prohibit a marijuana company from offering unregistered securities under Rule 504, that is not the case.

Indeed, many cannabis companies raise capital by offering exempted securities under Rule 504 and applicable state exemptions. Its allowance for non-accredited investor participation also makes it uniquely suited to the situation many cannabis businesses find themselves in and their capital needs.

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California’s Cannabis Industry Conundrum and the Road Ahead

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Despite continuously surpassing every other state with recreational cannabis in terms of total retail sales, California’s cannabis industry has faced continuous and far-reaching issues on multiple levels that have only spread even further. From declining sales that result in hundreds of millions less in total retail sales to a massive illicit market that the state ignores, problems abound. California has even seen a pattern of dispensaries and cultivation facilities across California being burglarized and robbed. Suffice it to say, the state’s industry has colossal problems, the magnitudes of which haven’t been seen by any neighboring state.

The issues don’t even include the many internal issues that the California industry is facing, such as unpaid debts and taxes equaling millions and a lackluster effort at social equity inclusion. In fact, issues regarding the illicit market are moving into other states and impacting their total sales as well. In just the first year of operation, the Unified Cannabis Enforcement Taskforce seized over $312 million in illicit cannabis in 2023, which amounts to more than the total cannabis sales of entire states combined. But as an aside, you can read my colleague, Griffen Thorne’s take on why those numbers are insignificant. Either way, given how admittedly widespread the illicit market of cannabis in California is, those several hundred million dollars in illegally grown cannabis seized by the state is just a miniscule fraction of the colossal amount of the total scope of that illegal and unregulated market.

Internal Struggles and Regulatory Hurdles

The ramifications of these many shortcomings and industry-wide problems are being felt like ripple effects that never truly stop flowing. Like the heads of a hydra beast, hardships and disadvantages spring up from one another when dealing with an industry as large yet frequently impeded upon such as the California industry. Worse even, the billion-dollar industry continues to considerably drop in total annual sales. In 2022, sales dropped over eight percent, equaling over $400 million and the total sales figure from 2023 shows an unfortunately similar pattern. In 2023, California dispensaries sold a total of $5.1 billion in total sales, which itself is a 4.7 percent decline in sales from the already slumping 2022.  In total, sales are down a considerable 11 percent from the highest point of sales in 2021 and month over month show painfully little sign of improvement.

Even among fully legal and compliant operators in California, delayed and delinquent tax payments are a growing issue, with hundreds of different tax liabilities being owed by various cannabis businesses. With the exorbitant taxes that California cannabis operators must already regularly pay, the penalties caused by these delays and tax debts could very easily put a business under.

Bay Area Shutdowns and Rising Crime

Any industry professionals who felt falsely optimistic that the precarious conditions and problems that plague the California cannabis industry wouldn’t trail into 2024 were proven entirely wrong, as those widespread and multi-faceted issues have followed nearly every legal and compliant cannabis operator well into the new year. Already dealing with several other systemic and engrossing issues which are the aftermaths of ineffective policies, the Bay Area in particular has been once again hit with a new problem caused by the cascading effects of the many previously mentioned issues.

Cannabis businesses across the state have been either permanently or at least temporarily shutting down. This is bad news for everyone with a stake in the industry – from owners, to employees, to customers, to even neighbors who could benefit from the now-lost tax revenue.

Enforcement Failures and Policy Repercussions

Throughout the tumultuous year of 2023, Bay Area law enforcement continued to conduct several million-dollar operations, with these raids easily surpassing $10 million and thousands of illegally cultivated cannabis plants. Even more concerning, multiple firearms and thousands in cash were also found in these illegal grows. But again, this enforcement is declining and not nearly enough.

What has occurred, and continues to unfold, is an existential crisis for the entire cannabis community. The cannabis industry and legalization were founded on the premise of ending the failed War on Drugs and ceasing the incarceration of mostly black and brown individuals for victimless crimes. However, the current strain on cannabis communities, influenced by the illicit market, has reached a critical point, and business owners are experiencing the increasingly negative impacts of long-term enforcement gaps.

The Path Forward: Challenges and Solutions

What activists fail to acknowledge is that we are now facing the consequences of policies promoted for decades. The rallying cry, “Nobody should go to jail for a plant,” must now evolve. It’s time to end the War on Drugs and begin enforcing regulations to protect the industry. Creative enforcement strategies, beyond imprisonment, must be explored. Enforcement agencies and the cannabis industry, despite their historical distrust, will need to collaborate to achieve this. A short-term policy of stronger enforcement through collaboration can help reduce predominantly illicit sales. Eventually, this will lead to broader consumer acceptance of safe cannabis, purchased from reputable sources. This combined with tax relief can prevent this industry from falling into further despair.

As 2024 progresses, the multifaceted crisis confronting the California cannabis industry is expected to deteriorate further unless substantial changes are implemented by key organizations such as the Department of Cannabis Control, the Attorney General’s Office, and various law enforcement bodies. The shift from advocating the end of the Drug War to calling for enforcement marks a significant turning point. However, for meaningful change to occur, former advocates must collaborate with the government to creatively address these challenges and navigate the current storm.



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How to Unf**k American Drug Laws

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How to Unf**k America!

DISSOLVE THE DEA AND RE-NEGOTIATE DRUG AGREEMENTS WORLDWIDE!

The Drug Enforcement Administration (DEA) has long been a staunch opponent of cannabis legalization, so it comes as no surprise that they’ve rejected the Department of Health and Human Services’ (HHS) recommendation to reschedule cannabis to Schedule III under the Controlled Substances Act. The HHS review found cannabis to have medical value and a lower potential for abuse than currently scheduled.

 

However, the DEA believes the agency is wrong on this front.

 

This stance is unsurprising given the DEA’s role as the enforcer of drug laws that has largely criminalized cannabis for decades. Their opposition protects the interests of the powerful pharmaceutical industry which stands to lose billions if cannabis is rescheduled and medical programs expand.

 

It’s estimated that wherever medical cannabis is legalized, pharma loses roughly $10 billion in annual revenues as patients switch from prescription drugs to medical marijuana.

 

The DEA’s rejection of rescheduling leaves America at a crossroads. Do we continue allowing an agency with a vested interest in maintaining cannabis prohibition to override scientific evidence on the plant’s medical value? Or do we re-evaluate the necessity of the DEA’s existence altogether?

 

This antiquated drug war institution has not only perpetuated injustices against cannabis consumers but has also contributed to policies that make illicit substances even more unsafe and available on the black market. By clinging to an ideology focused on criminalization over harm reduction, the DEA’s presence is increasingly antithetical to the ideals of a free society.

 

As America reckons with the DEA’s hardline position, it’s worth examining whether disbanding the agency entirely and renegotiating international drug policies could be the first step in “unf**king” the nation’s catastrophic war on drugs. This article aims to showcase these reform ideas and a path forward.

 

 

While anonymous sources cited in the Wall Street Journal report claim there is tension between certain DEA officials and the White House over marijuana’s scheduling status, the agency itself has not taken an official public position on the matter.

 

The DEA has only stated that it is currently carrying out its scientific and medical evaluation of cannabis as required by law after receiving a scheduling recommendation from the U.S. Department of Health and Human Services (HHS).

 

HHS conducted its own assessment and advised moving marijuana from its current restrictive Schedule I status to the less prohibitive Schedule III under the Controlled Substances Act.

 

In testimony before Congress last year, DEA Administrator Anne Milgram said the agency would “keep an open mind” and “look at all the research” during its review process. This suggests the DEA has not pre-judged the outcome and is withholding any scheduling decision until it has thoroughly examined the evidence.

 

Importantly, the DEA has stressed that as the agency tasked with enforcing the Controlled Substances Act, it maintains final authority over determining cannabis’ proper scheduling – not HHS. While the Congressional Research Service stated it is “likely” DEA will accept HHS’ Schedule III recommendation based on past precedent, the DEA is not legally bound to that advisory opinion.

 

The purported resistance from some DEA officials cited anonymously aligns with the historical position of the agency and its past administrators who have vigorously defended marijuana’s Schedule I status quo. For example, the quote in the Journal from former DEA head Timothy Shea asserting “the science does not support rescheduling” reflects this entrenched anti-rescheduling mindset.

 

However, the DEA has made no definitive public statement adopting or rejecting HHS’ scheduling recommendation to date. All the agency has officially communicated is that it is presently conducting “an appropriate review of the science and available data” related to marijuana’s abuse potential, risk to public health, and medical value as required under the Controlled Substances Act.

 

In fact, Administrator Milgram pointedly declined to even acknowledge if there is any internal dissent when asked about the Journal’s reporting, telling Marijuana Moment: “I’m not going to comment on any internal DEA deliberations.”

 

Some cannabis reform advocates have expressed skepticism about the motivations behind the anonymously-sourced leaks claiming DEA opposition, especially given the consistent anti-rescheduling history and drug war ethos of the agency. As NORML’s deputy director stated, there’s a presumed faction within DEA that wishes to “cling to their ‘flat Earth’ cannabis policies at all costs” regardless of the evidence.

 

While this apparent internal wariness about rescheduling aligns with the DEA’s historic stance, the agency’s official public position for now is that it is dutifully carrying out the scheduling review process as required with an open mind. Definitive proof of whether the DEA will accept or reject HHS’ recommendation to reschedule cannabis to Schedule III is still pending completion of its evaluation in the coming months.

 

 

The Drug Enforcement Administration’s own mission statement makes clear that the agency’s purpose is to enforce the controlled substances laws and regulations of the United States. However, the DEA has catastrophically failed to achieve those objectives over the past several decades of waging its self-described “war on drugs.”

 

According to the DEA’s mission statement, the agency is tasked with “bringing to the criminal and civil justice system…organizations involved in the growing, manufacture, or distribution of controlled substances.” Yet despite an increasingly militarized effort and violating civil liberties in the name of this “war,” illicit drugs are more widely available and used today than when the modern Controlled Substances Act was established in 1970.

 

One key reason the DEA has been losing this war is because the Controlled Substances Act essentially grants a monopoly over the “manufacturing of Schedule I drugs” solely to well-funded pharmaceutical corporations and research institutions. By wrongfully placing cannabis in the most restrictive Schedule I category, the DEA has made it nearly impossible for anyone outside of big pharma to legally research and develop drugs derived from the plant.

 

This monopolistic blockade goes against stated American principles of facilitating open research, scientific inquiry, and a free market of innovative new medications. Instead, it protects the profit motives of large pharmaceutical companies by eliminating potential competition from cannabis-derived drugs and therapies.

 

Despite an overwhelming body of scientific evidence showing cannabis’ relative safety and potential medical benefits, the DEA stubbornly clings to antiquated dogmas labeling it a dangerous substance “with no currently accepted medical use.” This ideological inflexibility seems motivated more by a desire for the DEA’s own bureaucratic relevance than upholding facts, ethics or American principles.

 

After over 50 years and over $1 trillion spent enforcing draconian drug laws, it’s clear that the DEA’s militarized “war” has been an extraordinarily costly and tragic failure in terms of public health, civil liberties and human rights. Not only has prohibition caused a crisis of overincarceration, but it has also empowered violent criminal cartels while failing to reduce drug availability or use.

 

In the 1970s when the modern war on drugs was launched, around 25 million Americans had used illicit drugs. Today, after a trillion dollars spent on DEA enforcement efforts, over 119 million Americans have used prohibited substances according to federal data. Rather than reducing availability and use, drugs are unquestionably more prevalent across all demographics than before the DEA’s creation.

 

Not only has the DEA’s drug war failed to reduce drug use, but it has enriched and further empowered the highly organized, well-resourced, and increasingly ruthless criminal cartels that control the lucrative illegal drug trade. Before the harsh prohibitions, drug operations were unrefined and largely limited to small crime rings. But cartels grew into the multinational billion-dollar enterprises they are today precisely because of the high-risk, high-reward economics created by blanket criminalization.

 

Essentially, the DEA’s drug enforcement policies turbocharged the profitable international drug trade into a full-blown cartel-controlled battlefield with thousands of lives lost in drug-related violence every year. In many regions, murderous cartels exert more control than governments due to the lawlessness and fortunes enabled by harsh prohibition.

 

Simply put, the DEA has undeniably lost its militarized crusade to extinguish drug use and suppress drug supply through harsh criminalization. It is clear that continued prohibition and DEA enforcement actually makes drugs more available, more potent, more adulterated with dangerous additives, and more consolidated under the control of bloodthirsty criminal enterprises.

 

Since the DEA has manifestly failed in its purported core mission after a half-century of trying the same unsuccessful strong-arm tactics, it’s time for America to radically renegotiate its relationship with drugs and drug policy. Clinging to this quixotic, destructive “war on drugs” only perpetuates injustice, enriches murderous criminals, erodes civil liberties, inhibits research into potential cures, and debases America’s founding ideals.

 

The first step in renegotiating this relationship is ending the DEA’s fundamentally flawed, uniquely American strain of blanket drug criminalization that gifted cartels their very power and riches. Only then can the nation reclaim its principles and pragmatically regulate drugs in a manner that improves public health and safety.

 

 

The inescapable reality is that the DEA’s prohibitionist policies have utterly failed to curb drug use, availability or the power of violent criminal cartels. In fact, the evidence shows their harsh crackdown tactics have made the drug supply more dangerous and emboldened criminality. This raises the uncomfortable but imperative question – is the DEA itself more detrimental to America’s overall health and wellness than the drugs it futilely aims to eliminate?

 

By decentralizing drug policy away from the DEA’s one-size-fits-all criminalization model, America can open the door to responsibly exploring therapeutic psychotropics like psilocybin and LSD. These could provide psychiatric breakthroughs, yet their potential remains bottlenecked by the DEA’s restrictive drug scheduling system which fuels a cruel cycle of patient suffering.

 

Disbanding the DEA does not mean descending into some Mad Max drug apocalypse fantasy peddled by drug warriors. Rather, it simply unlocks the gates restraining scientific inquiry into these substances’ medicinal wisdom for the betterment of society.

 

Moreover, America cannot continue moralizing about illicit drugs being universally “bad” while simultaneously celebrating mind-altering drugs like alcohol that are scientifically more toxic and lethal than cannabis. This blatant hypocrisy and muddled messaging undermines credibility. Alcohol objectively fits the profile of a Schedule I narcotic far more than marijuana, yet it’s aggressively marketed during events like the Super Bowl while the DEA places its watchful eye on those seeking alternative paths outside the mainstream river of pharmaceutical junk.

 

For those adamant about “unfucking America,” one of the most imperative first steps is dismantling the DEA power structure and reclaiming individual bodily autonomy from the state’s draconian prohibition regime. America’s founders envisioned a society of personal freedoms, not one where federal foot soldiers infringe on liberties under the prejudiced guise of keeping “dangerous” plants from citizens who wish to consciously explore their own consciousness.

 

THE DEA ON CANNABIS, READ ON…

THE DEA VS CANNABIS

THE DEA VS SCIENCE ON CANNABIS BENEFITS!



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3 New Studies Show How Cannabis is Helping Doctors in the Fight Against Cancer

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What The New Studies On Cannabis and Cancer Say


According to the World Cancer Research Fund, there were around 18 million cases of cancer globally in 2020.


That’s a staggering number, considering we are living in the best times for modern medicine. Yet, cancer remains so elusive and difficult to treat. So why haven’t we cured cancer yet?

 

Well, cancer isn’t just one kind of disease: it’s a term that encompasses over 200 different types of cancer diseases that afflict various parts of the human body. Further, each cancer type has several different subtypes, all of which behave differently on a molecular as well as genetic level. Genetic mutations are behind these different types of cancers, and the more the cancer or tumor grows, the more mutations it will undergo.

 

Since cancer cells mutate more over time, this affects the way they behave. And this is the nature of cancer, but this very nature of it is what makes treatment so difficult. Mutations can eventually become treatment-resistant, so patients will need new treatments over time. And the cycle goes on.

 

But alongside pharmaceutical medications, chemotherapy, radiation, and other modern forms of medical treatments to fight cancer, we have cannabis to thanks. A growing number of cancer patients are seeing the benefits of integrating cannabis into their healing journey. And unlike conventional medications, there are rarely any side effects to using marijuana for cancer.


Here’s what the latest studies say when it comes to cannabis and cancer.

Cannabis Is Promising for Reducing Melanoma Cell Growth

 

Last October 2023, MGC Pharmaceuticals in Australia conducted early trials together with researchers at Charles Darwin University as well as RMIT on a potentially revolutionary cannabis extract called PHEC-66.

 

They tested the impact of PHEC-66 on melanoma skin cells, which is the most fatal type of skin cancer. In RMIT, Dr. Ava Bachari led the project as part of PhD studies. In the trials, they found that the cannabis extract successfully binds to receptor sites found on certain melanoma cancer cells, after which it reduces the cancer cell growth in 2 important phases.

“The damage to the melanoma cell prevents it from dividing into new cells, and instead begins a programmed cell death, also known as apoptosis,” explains Dr. Nazim Nassar, a Charles Darwin University pharmaceutical lecturer, and also a co-author of the study. “This is a growing area of important research because we need to understand cannabis extracts as much as possible, especially their potential to function as anticancer agents,” he added.

 

“If we know how they react to cancer cells, particularly in the cause of cell death, we can refine treatment techniques to be more specific, responsive and effective,” Dr. Nassar adds.

 

“Advanced cancer delivery systems still need to be fully developed, underscoring the importance of ongoing efforts to ensure the proper and effective use of these agents at target sites,” said Dr. Nassar.


New Study Reveals That Majority Of Cancer Patients Who Use Marijuana Report Significant Symptomatic Improvement

 

A recent study covering the results of 1,886 survivors of cancer revealed that almost half of them either used cannabis previously, or still use it to help with their diagnosis. The findings, which were published in December 2023 in the Journal of Cancer Survivorship said that consumption of marijuana among cancer survivors is more prevalent because of its efficacy for managing symptoms.

 

Patients primarily found marijuana effective for treating pain as well as sleep disturbances. Other symptoms they were using marijuana for include nausea, appetite, depression, and to help them cope with the illness. Additionally, there was a fraction of them that were using cannabis to treat cancer. There were varying responses in terms of how effective marijuana was at treating various cancer symptoms, though most cannabis survivors see benefits in its usage.

 

“With most survivors reporting benefits from cannabis use in cancer management, there is a need for more studies to strengthen current evidence on cannabis therapeutics,” says the study. “Also, there is a need for policies, clear guidelines, and cannabis-based educational programs for healthcare providers and survivors on the use, benefits, and risks of cannabis in cancer management,” it adds.

 

A New Discovery In Cancer-Cannabis Research: Marijuana Helps Cancer Patients Think More Clearly

 

In 2023, Angela Bryan, PhD, a researcher from the University of Colorado Cancer Center, discovered breakthrough findings in the cancer-cannabis field. While involved in a study, she found that cancer patients reported better cognition, among other benefits of cannabis on the daily life of cancer patients.

 

It’s interesting to note that Bryan was herself diagnosed with breast cancer back in 2017. She also relied on cannabis to help keep pain levels down during her treatment. That said, Bryan has invested much of her time and effort in research to analyzing the impact of legalized marijuana in Colorado.


For this study, Bryan and her team studied 25 cancer patients over the course of 2 weeks. They measured everything including sleep health, cognition, and pain levels. Afterwards, they were asked to visit a dispensary to purchase any cannabis products they wanted, which they believed would treat their symptoms. When the study participants already had these products, which ranged from pills to oils and gummies, Bryan and her team of researchers did another measurement of cognitive and physical levels. These tests were done right after they consumed the cannabis products as well as after 2 weeks of continued use.

 

What they found was surprising: cannabis is indeed helpful in improving cognition and thinking skills among cancer patients. “There’s a lot of concern about compromised cognition in patients undergoing treatment for cancer,” explained Bryan. “Even after treatment is over, patients describe things like brain fog and slowing of their cognition. There was a concern that if they use cannabis to treat these other concerns, it could compromise their cognition. But the opposite turned out to be the case.”

 

Conclusion


It has become clear with these studies that the list of cannabis’ benefits for cancer patients only continues to grow. While finding a cure may feel far off, the good news is that more patients than ever have access to marijuana to help them recover.

 

WHAT IS RSO OIL AND DOES IT FIGHT CANCER? READ ON…

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WHAT IS RSO OIL AND DOES IT FIGHT CANCER, LISTEN HERE!

 



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