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Marijuana Sector: Raising Capital as a Cannabis Company

Marijuana Sector: Raising Capital as a Cannabis Company

The Controlled Substances Act lists Cannabis as a Schedule I drug (though this no longer includes Hemp).  Despite this, the cannabis sector is one of the fastest growing in the US. Forbes predicts the American cannabis industry (both medical and recreational) will grow to $160 billion by 2025. To accommodate, if not encourage this enormous growth, the laws regulating cannabis and marijuana-related businesses are rapidly adapting.

Furthermore, given how heavily regulated banks and other financial institutions are, it can be nearly impossible for a cannabis or marijuana related business to obtain a traditional loan.  As a result, cannabis and marijuana related businesses must rely on alternative avenues for raising capital and growing the business, including bootstrapping, crowdfunding and private equity raises.  

A successful cannabis or marijuana related business must not also have access to capital but also markets.  Such access may require compliance with various specific State laws and approval by local communities.  As a result, it is essential that cannabis and marijuana related businesses show good corporate character to potential investors, regulators and communities to ensure flexibility, growth potential and ability to expand into other markets.  

Below are the 4 major considerations specific to raising money for a cannabis company or marijuana related business.

Tip 1: Strong Corporate Governance 

Cannabis and marijuana related businesses must maintain strong corporate governance in order to mitigate legal risk to the company and its investors.  This should include observing all corporate formalities, including having a board of directors that meets regularly, maintains minutes and exercises oversight authority over the company.  

It is simple: lower risk is attractive to investors.  Ensuring that the board of directors discharges its duty of care over the company in form and substance is essential to shield investors from potential personal and criminal liability.

Tip 2: Effective Corporate Compliance Program 

There is significant federal interest in cannabis and marijuana related businesses and ensuring that they are not engaged in other criminal activity. This includes money laundering, sale of other drugs, gang violence and diversion from legal to illegal states.  Consequently, maintaining an effective corporate compliance program is essential to allay concerns by regulators that a cannabis or marijuana related business may be engaged in illegal activity.

 When determining whether a cannabis or marijuana related business is a good corporate citizen or in need of investigation or prosecution, the United States Sentencing Commission considers: (a) whether an organization has developed and maintained an effective compliance program, and (b) whether that program will detect and prevent violations of law.  Effective compliance programs must include: policies and procedures, monitoring and auditing, investigating and reporting, training and communications (with employees), and discipline and incentives.

Tip 3: Environmental, Sustainable, Governance

Investors across all industries are increasing their focus on Environmental, Sustainable and Governance (ESG) pledges and reporting.  Cannabis investors are particularly interested in cannabis companies impacting diversity, equity and inclusion and other social justice issues.  In addition, local regulators care significantly about how cannabis companies will impact their local community. 

This shift towards a value driven economy has resulted in increased competition by cannabis and marijuana related businesses to attract capital by making and following through on ESG goals.  Successful cannabis and marijuana related businesses should document ESG initiatives and incorporate them into the core of their business.

Tip 4: Robust Disclosures

Providing robust financial disclosures provides critical information to potential investors and significantly reduces potential liability for cannabis and marijuana related businesses, should a dispute arise between the company and an investor.  

Effective disclosures will inform investors of all of the general financial risks associated with any investment, along with the specific risks associated with investing in the cannabis industry.  These risks include criminal exposure and risk to other areas of an investor’s life, including banking, investments and government clearances.  Robust disclosures will also include reporting on any ESG initiatives.

Biztech Lawyers Can Enable Your Cannabis Business

Biztech Lawyers can enable your cannabis or marijuana related business to attract investors and avoid regulators by strengthening your corporate governance and compliance procedures and your financial disclosures.  This will ensure that your cannabis or marijuana related business is viewed as a good corporate citizen to investors, regulators and communities.

In need of legal support from a tech startup lawyer? Biztech Lawyers is a multi-award-winning law firm, known for fuelling and protecting tech innovation worldwide. Get in touch now to see how we can help.

Casper Xiao

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