Securities Attorney for Cannabis Companies
SEC Disclosure Requirements for Cannabis and Hemp Companies
Cannabis companies operate at the intersection of state legalization and federal prohibition, creating disclosure obligations unlike any other industry. Securities counsel with enforcement experience ensures that the federal-state conflict, banking limitations, and regulatory uncertainty are properly disclosed.
The Federal-State Conflict
Cannabis remains a Schedule I controlled substance under the federal Controlled Substances Act, even as more than forty states have legalized some form of marijuana use. This conflict creates a disclosure environment unlike any other industry. Public cannabis companies must prominently disclose that their core business operations violate federal law, that federal enforcement policy could change at any time, and that the legal landscape is subject to rapid and unpredictable shifts. Securities counsel ensures that these disclosures are not buried in boilerplate but are presented with the prominence the SEC expects.
Banking and Financial Services Restrictions
Cannabis companies face significant limitations in accessing banking and financial services. Many banks and payment processors refuse to service cannabis businesses due to federal anti-money laundering concerns. This forces companies into cash-intensive operations that create internal control challenges, audit complications, and heightened fraud risk. SEC filings must disclose these banking limitations, the costs they impose, and the risks they create for investors. The failure to disclose cash-handling risks and internal control weaknesses is a recurring enforcement theme.
Capital-Raising in a Restricted Industry
Cannabis companies raise capital through a combination of registered offerings, Regulation A, Regulation D private placements, and Canadian exchange listings. Each pathway requires careful disclosure about the federal regulatory risk, state licensing requirements, and the limitations on institutional investment that the industry faces. Securities counsel reviews offering documents to ensure that market opportunity projections are grounded in current law rather than speculative legalization timelines, and that the unique risks of cannabis investment are clearly presented.
Frequently Asked Questions
Can cannabis companies go public?
Yes. Cannabis companies can become public reporting companies through Form 10, S-1, or Regulation A filings. However, the federal-state regulatory conflict creates unique disclosure obligations. The SEC requires explicit risk factor disclosure about federal illegality, banking restrictions, and the potential for changes in enforcement policy.
What are the biggest SEC risks for cannabis issuers?
The biggest risks include inadequate disclosure of federal illegality and enforcement risk, failure to disclose banking and financial services limitations, overstatement of market opportunity based on speculative legalization timelines, related-party transactions common in cannabis structures, and going-concern issues tied to cash-intensive operations.
How does federal illegality affect SEC disclosure?
Federal classification of marijuana as a Schedule I controlled substance requires prominent risk factor disclosure in all SEC filings. Companies must disclose that their operations violate federal law, that federal enforcement policy could change, that banking relationships may be terminated, and that investors could face collateral consequences. Failure to provide this disclosure creates enforcement exposure.
Questions about your specific situation?
Frederick M. Lehrer is a former SEC Enforcement Attorney with over 30 years of issuer-side securities law experience. All consultations are confidential. Flat-fee engagements.