July 10, 2018 3:25 pm

Investor Protections in Cannabis Companies, Part One

By Jay Purcell, Senior Associate, Clark Neubert LLP

As California’s legal cannabis market matures, we are seeing increasing investor interest in licensed companies positioned for growth and profit. Many potential investors are emerging from outside the industry, meaning their familiarity with cannabis law is often limited. And even investors with longtime cannabis experience, many of whom have acted as de facto banks for companies, are struggling to stay abreast with the state’s constantly evolving laws. Regardless of their background, investors financing cannabis companies naturally bring expectations for customary terms—but translating commonly-used deal provisions into cannabis investments can prove challenging. This is the first of a two-part series focused on investor protections in cannabis companies. In this article, we look at mandatory disclosures under California law and how these impact investors.

Privacy is a thing of the past.

In California, every cannabis company is required to publicly report all investors to the Bureau of Cannabis Control (BCC). Investors fall into two categories: large investors are known as “Owners” and small investors are known as individuals with a “Financial Interest.”

  • Owners must be disclosed if they meet a three-part criteria based on: (i) size(they hold an aggregate of 20 percent or more of a licensee); (ii) authority(they manage, direct or control a licensee); or, (iii) position(they are the CEO, LLC’s manager, partnership’s general partner or corporation’s director).[1]
  • Financial interest investors must also be disclosed if they have (i) contracts (an agreement to receive a licensee’s profits, or a loan from a non-bank); (ii) securities (any equity interest, or investment in, a licensee); or both.

Cannabis companies must report both Owners and Financial Interest investors on annual and renewal state applications. In addition, mandatory reporting on investors can also follow certain events (see below, Ongoing Obligations). In sum, while the kind of details required between Owners and Financial Interest investors vary, California law demands complete transparency by cannabis companies as to the identity of every investor.

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