- Posted by Laura Croft, Esq
- On November 23, 2016
- California, economic, financial impact, investment, profits, Prop 64, SEC
California legalized adult recreational use of marijuana on November 8, 2016. The election brought a coast-to-coast landslide for cannabis, with California, Maine, Massachusetts and Nevada voting to legalize recreational marijuana, while Arkansas, Florida and North Dakota approved medical cannabis initiatives.
The question that is now at the forefront of many people’s minds – from consumers and sellers to cultivators and investors – is what will the financial landscape post Proposition 64 look like?
California is not just a national force, but a world economic power, coming in as the sixth largest in the world if it were a standalone country, with a GDP of $2.5 trillion in 2015. In light of California’s robust economy, the cannabis industry’s projected revenue went sky high when the golden state legalized the recreational use of cannabis. Analysts project that the already thriving medical cannabis market will see a multi-billion dollar increase. The 2016 California Legal Cannabis Market State Profile, from New Frontier Data and Arcview Market Research, projects the total state market to grow at a compounded annual rate of 18.5%, from $2.76 billion in 2015 to $6.5 billion by 2020. Nationwide, legal cannabis sales in the United States jumped 17%, to $5.4 billion in 2015, and are expected to grow by 25% this year, to $6.7 billion, according to Arcview Market Research. By 2020, legal cannabis sales in the United States are projected to hit $21.8 billion. Bloomberg markets project that the United States cannabis industry could grow to $50 billion in the next decade.
The evident “high net worth” of cannabis-related businesses is drawing in cutting-edge silicon valley companies, mainstream venture capital interest and prominent deep-pockets from a breadth of industries, ranging from technology to aerospace, and they are all looking to cash in on the promising new market of legal recreational marijuana.
Big banks have been reluctant to work with customers in the cannabis industry but if the analysts are even close to their projections and we see a multi-billion dollar industry continue to grow, big banks will likely step in, to finance cannabis ventures, where they have traditionally shied away from.
The widespread support and profound financial activity will undoubtedly motivate other states to follow suit, further pressuring the Drug Enforcement Administration to alter its classification of marijuana as a Schedule 1 drug. (The DEA presently asserts that there is no known medical benefit of cannabis and it is considered as dangerous as heroin and LSD, pursuant to scheduling, despite voluminous evidence of its profound medical benefits). De-scheduling cannabis will provide cannabis-related businesses with more access to banking services. Typically banks, particularly federal banks, do not provide loans to marijuana ventures, which conflict with federal law, because the Federal Deposit Insurance Corporation (FDIC) will not insure a bank that takes on “existential” risks, which would include loans to companies in violation of federal law. Banks also steer clear of any activity that could increase their criminal liability for aiding and abetting activities that are considered felonies under federal law.
Private investors and venture groups backing medical cannabis and looking to invest in cannabusinesses, provide alternative financing options, in lieu of traditional financing. Just this month, on Nov. 4, 2016, Privateer Holdings, a Seattle-based private equity firm that is focused on the legal cannabis industry, announced that it has closed $40 million in convertible bridge funding, the first part of a future $100 million Series C equity round. The $40 million raise brings Privateer’s fundraising total to $122 million, signifying the first time a legal cannabis company has raised more than $100 million.
You are overrun with excitement. You have a vision, you have backers, you see the demand and you have a business plan that will knock your competitors out of the water. Take a deep breath and remember that businesses and individuals involved in fundraising transactions need to pay heed to relevant securities law, set forth by the SEC. Federal and state securities laws are intended to protect investors, primarily ensuring that investors receive full and fair disclosures from businesses before they invest, so they are not left penniless. If the investment involves a security, such as corporate stock, llc units, or corporate bonds, then security law applies and some level of filing or disclosure, ranging from a massive filing and registration to informational disclosures will be required, pursuant to California securities and federal securities regulation.
Another recent development that the cannabis industry has been patiently waiting for is the “crowdfunding exemption,” made possible with JOBS Act, Jumpstart Our Business Startups, which established crowdfunding provisions that allow early-stage businesses to offer and sell securities. Under the crowdfunding rule, known as Regulation 4(a)(6), small, private companies are allowed to sell up to $1 million in shares within a 12-month period, and anybody can purchase those shares, not just accredited investors.
SEC regulations and compliance is complex and may be unchartered territory for many new to the cannabis industry or just new to raising capital. We invite you to contact CannaBusinessLaw for expert assistance in compliance with cannabis licensing, permitting, the application process and SEC compliance relating to commercial cannabis in California.