Finding Investors: Raising Funds

John Abernathy Finance, Industry, Regulations Leave a Comment

Cannabis CEOs, Make Sure you are SEC Compliant! Part 1: Raising Funds


Image of money for investing in the cannabis industry

As the legal cannabis industry expands through the US, many investors are looking to invest in the industry. This is good news for small businesses looking to enter the cannabis industry or expand their current business. What cannabis CEOs may not know is that raising equity may be considered a securities offering and subject to Securities Exchange Commission rules and regulations. What do cannabis CEOs need to know about fundraising to ensure compliance?



The JOBS Act opened many opportunities for fundraising that were previously unavailable. How these funds are raised will determine whether the investment is considered a security. Let’s look at some of the common ways of raising funds and some of the advantages and disadvantages of each:

  1. If you plan on raising funds from ‘friends and family’ for your cannabis startup, you may not be subject to SEC oversight. However, to be exempt, it must be clear that each investor participates in the oversight of the business. This is a viable option for raising funds and reduces the cost of compliance and regulation. However, there is the cost of potential loss of control. For example, each partner should have voting rights and participate in the key-decision making functions of the business, including the ability to remove you from the position of CEO!

  2. Another option that has become common in the past years is federal equity-based crowdfunding. Crowdfunding at the federal level was created as a part of the JOBS Act of 2012, but only recently implemented. With equity-based crowdfunding, investors provide capital in exchange for equity in the business. The business can solicit investors federally (across state lines) and raise up to $1 million per year. There are limits on individual investments from $2,000 to $100,000 depending on the individual’s net worth or income level. Equity based crowdfunding is a great way to raise funds, but it is subject to greater regulation. For example, cannabis industry companies must have formation documents, sources and uses of funds schedules, list of owners and officers of the business, and financial statement of the company. Companies are required to have an annual independent review by a CPA and file annually with the SEC.

  3. The third, and likely most common, option is for companies to offer private securities offerings that are exempt from public registration under Regulation D (Reg D), Rule 506(b) or 506(c). Using a rule 506(b) exemption precludes firms from advertising to potential investors. The company can accept funds from accredited investors (investors with income of $200,000 or greater or net worth of over $1 million) and up to 35 non-accredited investors. These non-accredited investors need to be ‘sophisticated’ investors.
    An offering using 506(c) exemption can advertise freely to potential investors, but can only accept funds from accredited investors and must take reasonable steps to verify the investor’s accreditation status.

Regardless of which method you choose to raise funds, compliance is of utmost importance. The SEC enforces federal securities laws through criminal and civil proceedings. Noncompliance with exemptions above may result in having to refund investor funds, but it may result in steep fines and even criminal charges.

Compliance with state and local laws is critical for anyone in the cannabis industry because of heightened scrutiny from regulators. To acquire and keep investors happy it is extremely important to have internal control policies and procedures over the operating and financial reporting systems that will ensure transparency and compliance now and in the future.

I know it’s a lot to digest, but we are committed to providing you with the most relevant information we can. Feel free to contact me directly if you’re interested in compliance!



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