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SEC Sues Cannabis Players for $25 Million Offering Fraud

sec fraud

In the most basic terms, offering fraud occurs when a person (or entity) makes material misrepresentations or omissions to potential investors in a new company (most commonly, promising those investors large “guaranteed” returns on their investments). Offering fraud cases have become more prominent in recent years, and it looks like the U.S. Securities and Exchange Commission is ready to start looking at the cannabis industry.

Last week, the Commission filed suit in the Central District of California against a group of individuals and companies for securities offering fraud and other violations of the Exchange Act. The Complaint outlines how nine issuer entities and their principals/control persons raised over $25 million from more than 400 investors in the 2017-2019 timeframe to supposedly finance the establishment of a licensed marijuana farm and CBD extraction facility in Salinas, California. In soliciting investments, the defendants misled and deceived actual and potential investors about their potential return on investment – which they claimed to be annual returns of 100% or more.

It gets worse. The Complaint outlines a litany of additional offenses:

  • The defendants deceived investors about how their investment funds would actually be used, misrepresented the compensation they intended to receive, and misappropriated at least $2.7 million of investment funds;
  • The defendants used a business loan to pay off investors in an entirely unrelated entity;
  • The defendants also made material misrepresentations about their financial and business backgrounds;
  • The defendants claimed they had also made large capital contributions when they had not;
  • The defendants falsely claimed that their company had a business and research relationship with a prominent California university; and
  • The defendants essentially acted as unregistered broker-dealers in connection with the offerings.

None of the securities offerings were registered with the Commission. Accordingly, the investors weren’t provided with the requisite registration statement for their benefit. The Commission makes special note of the fact that most of the investors were unaccredited and unsophisticated.

We’ll continue to follow this case and report on how it develops, especially how the various defendants answer the claims lobbed against them. We can only expect to see more and more of these lawsuits as the cannabis industry continues to mature.


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