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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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Germany Legalizes Recreational Cannabis – Canna Law Blog™

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Germany has legalized recreational cannabis

Germany’s new laws legalize possession by adults of up to 25 grams (around 1 ounce) of cannabis for recreational use. It also allows for adults to grow up to three plants. Use is prohibited within 100 meters of the entrance to a playground or school. This part of the legislation is already in force in Germany and come July 1, German adult residents can join nonprofit “cannabis clubs” with a maximum 500 members. Individuals 21 and older will be allowed to buy up to 25 grams per day, with a maximum of 50 grams per month; whereas those between the ages of 18 and 21 will be limited to 30 grams per month. Membership in multiple clubs will not be allowed.

Germany’s cannabis clubs

Germany’s cannabis clubs will be prohibited from locating within 100 meters of a school or playground, and each city or town can have no more than one club for every 6,000 residents. Each cannabis club will need a permit to operate, and this permit will be valid for up to seven years, with the possibility of an extension.

Germany’s impact on cannabis in Europe and the world

Germany is only the third EU country to legalize cannabis for recreational use — after Malta and Luxembourg. Since Germany has so many more people than Malta and Luxembourg, put together, how legal cannabis fares in Germany will likely have a significant impact on whether recreational cannabis legalization happens elsewhere in Europe — perhaps even further afield as well.

Recreational cannabis around the world

Contrary to what many believe, Uruguay, Canada, Thailand, and the United States (but not every state) are the only countries that have both legalized recreational cannabis and moved forward with licensing its actual sale. South Africa, Mexico, Malta, Luxembourg, and Australia (but not every state) have legalized recreational cannabis, but have yet to provide anyone with the necessary licenses needed to actually sell it. Portugal has legalized growing cannabis and it exports large quantities of it.

The economic implications of German cannabis legalization 

A study completed by the University of Dusseldorf in November of 2021 estimated that approximately $4.7 billion Euros in total would be generated from the taxes on cannabis products sold to German citizens, from the tourists coming to Germany for cannabis, and from the money German courts and law enforcement will save by not prosecuting recreational cannabis cases.

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For context on the run-up to German cannabis legalization, check out the following:



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Whoever Legalizes Weed Wins the Presidency?

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biden trump on marijuana votes democrats file legalizatio

Cannabis.net covered how voters are looking at marijuana legalization as a key element of who they vote for in a story titled, “I Vote with My Bong“. Data shows voters are more interested in marijuana politics than party lines when it comes the great green plant. Both policitcal parties are starting to take notice as poll numbers tighten up heaading into November.

Senate Democrats have reintroduced expansive legislation aimed at legalizing cannabis at the federal level. This marks a significant policy departure, backed by broad public support. However, this year’s passage seems improbable given the upcoming November elections and the current state of divided government.

 

The Democratic platform for federal cannabis laws is fully represented by the proposed bill. By removing marijuana from the list of banned substances, where it is now ranked as one of the most dangerous and addictive drugs, its main goal is to end the federal restriction on the drug.

 

The legislation’s main features include creating a new legal framework for cannabis, imposing taxes on the expanding cannabis business, expunging certain federal marijuana-related offenses from people’s criminal histories, increasing research on the health effects of marijuana, and allocating federal funds to support people and communities harmed by the war on drugs.

 

Senate Democrats Reintroduce Expansive Cannabis Legalization Bill

 

The initiative, initially introduced in 2022, was spearheaded by Senators Chuck Schumer of New York, serving as the majority leader; Ron Wyden of Oregon, chairing the Finance Committee; and Cory Booker of New Jersey. Additionally, fifteen other Senate Democrats have lent their support as co-sponsors.

 

“On Wednesday, while addressing the Senate floor, Mr Schumer, the first majority leader to advocate for federal legalization, emphasized the detrimental impact of the nation’s failed war on drugs, particularly on communities of color. He underscored the necessity of replacing this failed approach with a more equitable, sensible, and responsible cannabis regulation framework,” the text reads.

 

The reintroduction of the bill occurred just a day after the Justice Department proposed relaxing restrictions on cannabis and downgrading its classification on the controlled substances list. While this move did not meet the demands of some advocates and numerous Democrats, it indicated a significant shift in the Biden administration’s stance toward marijuana policy liberalization.

 

“Reclassification of cannabis is undoubtedly overdue, yet it represents only a partial solution,” remarked Mr Schumer. “Congress must acknowledge the evolving landscape and heed the call of the majority of Americans for cannabis reform. It’s time for legislative action to align with public sentiment and scientific evidence.”

 

Despite the backing from prominent Democrats, the likelihood of the legislation advancing in Congress during an election year remains slim. With Republicans, many of whom oppose federal cannabis legalization, controlling the House and none endorsing the bill, its prospects are further dimmed. Congressional functions have been hindered by deep internal divisions within the Republican majority in the House. With few imperative bills remaining, proponents find limited opportunities to incorporate them into broader legislative agendas.

 

Opposition Voices Concerns Over Potential Commercialization of Legalized Marijuana

 

Former Obama, Bush, and Clinton administration drug policy advisor Kevin Sabet issued a warning about the dangers of legalization. He contended that the legalization of marijuana will cause the sector to become more commercialized, drawing comparisons to the rise of “Big Tobacco 2.0.”

 

As the current president of Smart Approaches to Marijuana, an anti-legalization advocacy group, Sabet urged against the commercialization of marijuana in the name of social justice. While acknowledging certain positive aspects of the bill, such as the expungement of criminal records and the removal of penalties for marijuana use, he stressed that legalization would essentially amplify the presence of a commercial industry.

 

“We must carefully consider the ramifications, especially in light of our detrimental experience with Big Tobacco,” he remarked. “We need to question whether this would truly be beneficial for our society.”

 

However, despite opposition from figures like Sabet, the legislation mirrors a growing trend of support among Democrats and across the nation, transcending political divides in both Republican and Democratic-leaning states. This support for legalizing access to marijuana holds significant political value, particularly in anticipation of an expected election rematch between President Biden and former President Donald J. Trump.

 

There is broad support across the country for legalizing in one way or another; according to a January Pew Research Center study, 88% of Americans think marijuana should be allowed for either medicinal or recreational use. At the moment, adult recreational use of small amounts of marijuana is permitted in 24 states, while 38 states have approved its use for medical purposes. Furthermore, legalization of marijuana has often garnered broad support on state ballots whenever it has been advocated, frequently outperforming the popularity of politicians from either party.

 

Proponents of legalization have stressed the significance of the issue as a political one and asked policymakers to consider it.

 

“Political dynamics are such that politicians are finding it more and more difficult to obstruct cannabis policy reform,” stated Morgan Fox, political director of the National Organization for the Reform of Marijuana Laws. “This issue serves as a rallying point for those advocating cannabis policy reform.”

 

Political Dynamics Surrounding Cannabis Legalization in the Biden Administration

 

The Biden administration has been pushed to completely embrace legalization and include it more prominently into President Biden’s reelection campaign by Representative Earl Blumenauer of Oregon, a well-known proponent of cannabis legalization inside Congress. According to Blumenauer, the president should be able to better connect with young people on this topic. Although their support has been erratic, they could be crucial to the outcome in November.

 

The president’s shifting position on cannabis is reflected in the Biden administration’s decision to reduce it on the list of prohibited narcotics. Thousands of people convicted of minor drug charges have received pardons from President Biden as part of his attempts to remedy racial imbalances in the criminal justice system. President Biden’s position has been reiterated by White House Press Secretary Karine Jean-Pierre, who has stated that she is certain that no one should be imprisoned or prosecuted for the simple reason of consuming or having marijuana.

 

Former President Trump’s position on legalization is more nuanced. In 2018, his administration authorized prosecutors to rigorously enforce federal marijuana restrictions in states that had relaxed their prohibitions. However, Trump later hinted at support for legislative proposals delegating legalization decisions to individual states, and he granted pardons to several nonviolent drug offenders.

 

Morgan Fox noted, “The topic of cannabis hasn’t been a prominent feature in conversations, rallies, or media appearances. It remains uncertain how a potential future Trump administration would approach cannabis policy.”

 

Congress is currently deliberating on more incremental measures aimed at loosening restrictions on marijuana, such as granting legal cannabis businesses access to financial services. While some of these bills enjoy bipartisan support, the majority are unlikely to progress in the current Congress due to opposition from Republicans.

 

Bottom Line

 

While Senate Democrats push forward with a comprehensive federal cannabis legalization bill, political hurdles loom large, particularly in a divided Congress and with opposition from Republicans. Despite growing public support and shifting stances within the Biden administration, the path to nationwide cannabis reform remains uncertain amidst ongoing debates and the upcoming November elections.

 

IS WEED A VOTING ISSUE, READ ON…

VOTE ON MARIJUANA ISSUES

VOTING ON MARIJUANA POLICY AND NOT PARTY LINES SAY VOTERS!

 



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Does the Easing of Cannabis Laws Mean Marijuana is Now Safer?

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safer drug mariuana now

The debate surrounding the legal status of cannabis has been ongoing for decades, with proponents advocating for its rescheduling or complete legalization. Currently, cannabis is classified as a Schedule I drug, implying that it has a high potential for abuse and no accepted medical use. However, this classification is set to change, with discussions about moving cannabis to Schedule III or even fully legalizing it. This shift in policy is driven by the growing body of evidence that highlights the numerous medical benefits of cannabis, which directly contradicts its current Schedule I status.

Despite the impending changes in cannabis regulation, some articles, such as the one published by WebMD, claim that “Easing Marijuana Laws doesn’t mean that the drug is safer.” This statement seems to suggest that the reduction in scheduling or legalization of cannabis does not inherently make the drug safer for consumption. However, I disagree with this notion and argue that relaxing marijuana laws does, in fact, contribute to making cannabis safer. Throughout the rest of this article, I will explain the reasons behind my perspective, addressing the various factors that come into play when considering the safety of cannabis in the context of its legal status.

 

Here’s the following summary of the most salient points of the WebMD article. Note, this is their opinion on the subject matter and I am only stating what they said. Afterwords, I’ll explain why they are wrong!

 

  • Experts caution that the recent announcement about reclassifying marijuana from Schedule I to Schedule III should not lead to major conclusions about its safety.

  • The reclassification is expected to make it easier for scientists to study questions about marijuana’s safety and efficacy as a medical treatment.

  • If marijuana is rescheduled, patients in states with medical marijuana laws who possess marijuana prescribed by their physician will no longer be guilty of a federal crime.

  • The intention behind reclassifying marijuana is not to send a message that it is safe to use, and people should not misinterpret or over-interpret the implications of the change in schedule.

  • Marijuana today is up to 20 times more potent than marijuana commonly used from the 1960s through the 1980s, and addiction rates have increased from around 10% to up to 30% of users.

  • Known risks of marijuana use include addiction, serious mental illnesses, accidents while driving under the influence, heart and lung problems, and impacts on brain development.

  • The commercialization of marijuana, similar to alcohol and tobacco, raises concerns about its impact on human health.

 

As you can see, these talking points are the same ones we’ve heard since the inception of prohibition. Therefore, not too difficult to debunk. Let’s begin:

  1. The so-called “experts” cautioning against interpreting the rescheduling of cannabis as a sign of its safety are essentially clinging to the outdated and erroneous belief that cannabis is as dangerous as heroin. By suggesting that people should still view cannabis as a Schedule I drug despite its reclassification, these experts are displaying a flawed logic. The very act of rescheduling cannabis to Schedule III is an acknowledgment that the drug is, in fact, safer than previously claimed. It’s time for these experts to update their understanding and stop perpetuating the false equivalence between cannabis and highly addictive and dangerous substances like heroin.

  2. While the reclassification of cannabis to Schedule III will make it easier for researchers to study the plant, it also opens the door for pharmaceutical companies to exert their influence over the cannabis market. With the FDA’s regulatory framework, which is heavily influenced by the pharmaceutical industry, the commercialization of cannabis could become subject to the whims and demands of big pharma. This raises concerns about the accessibility and affordability of cannabis for those who rely on it for medicinal purposes.

  3. The rescheduling of cannabis is not intended to send a message about its safety, but rather to give pharmaceutical companies more control over the market. However, the fact that cannabis is being reclassified is a clear indication that the government’s long-standing claims about its dangers were exaggerated and based on flawed science. This revelation undermines the credibility of the so-called experts and institutions that perpetuated these false narratives for decades, eroding public trust in their judgment and motivations.

  4. While it is true that marijuana today is more potent than it was in the past, this fact alone does not justify the alarmist rhetoric surrounding its use. Cannabis consumers, like myself, have adapted their consumption habits to accommodate the increased potency. With experience and self-awareness, people learn to modulate their behavior and avoid the unpleasant side effects of overconsumption. The focus should be on promoting responsible use and education rather than fearmongering based on potency alone.

  5. The risks associated with cannabis use are not unique and are comparable to the risks associated with many other legal substances and activities. Just as alcohol and driving carry inherent risks, so does cannabis use. However, the existence of these risks does not justify prohibition. Instead, we should focus on harm reduction strategies, education, and responsible regulation to mitigate these risks while respecting individual autonomy and freedom of choice.

  6. The commercialization of cannabis has not led to the public health concerns that WebMD and other critics suggest. In fact, legalization and regulation have been associated with decreased opioid deaths, increased tax revenue, and job creation. Youth consumption has not increased as a result of legalization, contrary to the fearmongering narratives. WebMD’s stance on this issue appears to be more aligned with the interests of the pharmaceutical industry than with the well-being of the public. It’s time for a more balanced and evidence-based approach to discussing the impacts of cannabis legalization.

WebMD’s position on the rescheduling of cannabis is misguided and fails to acknowledge the overwhelming evidence supporting the relative safety of the drug. By claiming that easing marijuana laws doesn’t mean the drug is safer, WebMD is perpetuating outdated and inaccurate stereotypes about cannabis. The “experts” cited in the article seem to be echoing the sentiments of the pharmaceutical industry, which has a vested interest in maintaining control over the medical cannabis market. It’s important to recognize that many of these experts have been trained using materials and resources funded by the pharmaceutical industry, which may bias their perspectives.

The fact remains that cannabis is significantly safer than heroin, and this is not a matter of opinion but a well-established scientific fact. Moreover, cannabis is arguably safer than any of the drugs currently listed under Schedule III, based on every relevant metric, including addiction potential, overdose risk, and overall impact on public health. The reluctance to acknowledge this reality stems from decades of misinformation and propaganda, which have been used to justify the criminalization and stigmatization of cannabis users.

It’s becoming increasingly apparent that the current discussions surrounding the rescheduling of cannabis are more about political maneuvering than genuine concern for public health. The timing of these conversations, coinciding with the lead-up to the presidential election, suggests that the Biden administration may be using the issue to garner support and boost their chances of reelection. However, it is crucial that the American people see beyond these political games and demand evidence-based policies that prioritize public health and individual liberty over the interests of the pharmaceutical industry and political opportunism.

 

SAFER OPTIONS, READ ON…

SAFER FOR DEPRESSION WEED OR AYAHUSCA

WHICH IS SAFER FOR DEPRESSION, WEED OR AYAHUASCA?

 



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