Raising capital in the cannabis industry comes with real legal risk, and two recent federal rulings drive home that point.

In Michigan, five investors known as the “5 Guys” sued after they wired $1.5 million for a stake in a Muskegon dispensary joint venture, only to realize they had diverted the money to cover the parent company’s payroll and operating costs instead of funding the business as promised. The defendants tried to defend themselves using the “unlawful contract” defense, arguing that because marijuana is federally illegal, courts should not enforce agreements related to it. Thus Chief Justice Y. Jarbou drew a distinction: claims that would seek to validate illegal enterprise, such as breach of fiduciary duty, were dismissed, but fraudulent claims survived, as ordering restitution for fraud is not the same as enforcing an illegal agreement. The Court has also declined to allow the reliance rebuttal standard to automatically eliminate allegations of fraud.

In California, the SEC’s case against American Patriot Brands — a former food truck company that got into cannabis and raised more than $50 million from investors — reached the penalty phase. Judge Anne Hwang ordered the company nearly $24 million, including more than $2.6 million for high salary and personal expenses to its CEO, plus permanent injunctions and two executive officers and directors.

Together, the rulings send a clear message: the legal gray area of ​​cannabis does not extend to fraud. Operators are advised to treat each raise as a securities offering, spend investors’ money as directed, fully disclose related party agreements and bring securities advice rather than surface issues.