Bulletins

Risk Factor Disclosures: Raising Money for Cannabis-Related Businesses

April 17, 2020

   

Given the current disruptions caused by the COVID-19 global pandemic, an immediate challenge confronted by companies actively engaged in fundraising efforts is the adequacy of risk factor disclosures to prospective investors, especially in light of the impact of the current pandemic.

Cannabis-related businesses that are actively raising capital are strongly encouraged to carefully consider the following key issues:

Risk Factors in a Private Placement Memorandum. When raising private capital, our cannabis clients typically include a private placement memorandum (“PPM”) in their package of offering documents to investors. A PPM is a securities disclosure document that provides certain necessary information about the company, its business, and the offered securities. From the company’s perspective, PPMs serve a dual purpose: PPMs are intended to act as a protective securities compliance instrument as well as an investor marketing tool. Notably, every PPM should include a risk factors section.

What are Risk Factors? From a company’s risk management perspective, risk factors are probably the most important section of the PPM. Risk factors are intended to disclose to prospective investors the risks that could lead investors to lose all or a portion of their investment. Generally, key categories include disclosures about the company’s specific industry, company, business plan, and securities offering.

The SEC has indicated the need for specific, relevant risk factors. Risk factors should be specific, tailored and relevant to the company, its industry, the offering, and any other salient types of risks. Properly drafted risk factors serve to help protect the company and its principals from potential legal exposure and civil liability under federal and state securities laws. The Regulation D “safe harbor” protections do not extend to violations of the antifraud prohibitions of federal securities laws. Essentially, this means that any information a company provides to investors must be free from materially false or misleading statements or omissions of material facts.

For marijuana-related businesses, focusing on risk factors is critically important. A marijuana-related business’s PPM should include specific, marijuana-related risk factors. A common mistake that companies make is failing to provide relevant, detailed risk factors. Instead, companies frequently rely upon boilerplate risk factors derived from a generic template. While this is never a good idea in any industry, full and comprehensive disclosure of all risk factors associated with cannabis is even more imperative due to the overlay of federal illegality of marijuana under the Controlled Substances Act.

COVID-19 Disclosures. Companies engaged in raising capital should consider the adequacy of their risk factor disclosures with respect to the consequences of the COVID-19 pandemic, including the effect of the pandemic on the company’s operations and performance.

View the full article on COVID Considerations here.

receive news & alerts

Yes! I’d like to receive updates with firm news and insights that are relevant to me!