Recently the SEC updated its rules to simplify the patchwork of regulations to help companies in fundraising mode. This matters to cannabis companies of all types, especially those that want to utilize the available federal exemptions in their securities offerings.

In the SEC’s own words, “These amendments will promote capital formation and expand investment opportunities while preserving or improving important investor protections.” To hemp and marijuana companies, these changes mean they will have access to a wider pool of prospective investors. These amendments become effective 60 days after publication in the federal register.

The SEC is really taking big strides this fall. I previously wrote about the SEC’s recent expansion of who and what can qualify as an accredited investor. We can expect future refinements to the SEC’s rules to provide more opportunities for investors looking for opportunities and more guidance for companies looking for safe harbors from legal snags when dealing with investors.

The recently updated rules are designed to help startups and more experienced SMEs that have proof of concept in their business models and are in their first or fifth fundraising round. Below are some highlights.

Increased Offering Limits for Regulation A (Reg A), Regulation Crowdfunding (Reg CF), and Rule 504 (Reg D) Offerings.

Under Tier 2 of Regulation A, the maximum offering amount has been increased from $50MM to $75MM, and the maximum offering for secondary sales has been increased from $15MM to $22.5MM.

Under Regulation Crowdfunding, the offering limit has been increased from $1.07MM to $5MM, which will make this option more attractive to some companies where the crowdfunding model makes sense for their business plan. Accredited investors are no longer limited in the amount they can invest under a crowdfunding offering, and non-accredited investors can now use the higher of their annual income or net worth when calculating their investment limits. The financial statement review requirement has been temporarily extended for 18 months in offerings raising $250k or less within a 12-month period.

Offerings utilizing Rule 504 of Reg D can now raise up to $10MM from $5MM, which will increase the use of these already frequently utilized offerings.

Clarified Rules Governing Investment Offering Communications.

Everybody loves demo day, except for companies that have to either have their securities lawyer with them at the table or CEOs who have to continually wink and nod when they say they are not there to sell an investment opportunity in the business. The rule updates mean that issuers can generally talk openly about investment opportunities to “test-the-waters” without those communications being considered “general solicitation” or “general advertising” that make securities lawyers (and a few CEOs) sweat in their sleep.

Clarified Issuer’s Ability to Move from One Exemption to Another: Avoiding Offering Integration.

Boards and executive officers rarely think in terms of “what issuing exemption will we qualify for” when they are determining the criteria for their capital raise. Generally, they are looking at the company’s needs based on the CFO’s analysis, the availability of capital from interested investors and the CEO’s conversations with existing and prospective investors.

These rule amendments fit more with these reality scenarios – that sometimes a company’s offering may qualify for one or two different exemptions – and that the company may need to switch lanes during the offering process. This is often determined long after they have started communicating with prospective investors, soliciting offers, and probably after the company has made its first sale in the offering. Sometimes companies don’t even think about their offering parameters until well after they have received their first investor funds.

Based on a “facts and circumstances” review, the SEC will generally consider offerings as distinct from each other if they have a 30 calendar day window between them. This often matters when one offering utilizes “general solicitation” of prospective investors while the follow-on offering does not.

Offerings relating to employee benefit plans (Rule 701) or offerings by international companies (Reg S) or companies with a registered offering (as opposed to an exempt offering) will not be integrated with other offerings, subject to certain criteria.

Utilization of Special Purpose Vehicles (SPVs).

One reason why crowdfunding has not taken off in hemp and marijuana businesses is because no sane company executive team wants to deal with hundreds or thousands of investors in exchange for a $100 or even a $1,500 investment from each of the investors. They are just not worth the hassle. But the new rule amendments permit the use of certain SPVs for Reg CF and Reg A offerings. This is a boon to cannabis companies, and we may see more crowdfunding offerings by cannabis companies that are willing to deal with a single SPV investment entity as long as someone else deals with the SPV’s investors.

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The corporate identified for numerous merchandise with cannabinoid and different pure elements launched the non-public placement by way of the DealSquare platform, which is supported by NEO and DealMaker expertise.

DealSquare is an automatic platform that permits capital raisers to launch their non-public placement gives, and buyers to electronically enter a deal. NEO is a bunch of fintech firms that supply capital markets infrastructure, and DealMaker grants the back-office expertise and digital signature providers.

This capital increase is the primary one by way of mixed service choices of DealMaker and DealSquare. MedC Biopharma has created two medication going through medical trials concentrating on Pores and skin T-cell Lymphoma and Cutaneous Leishmaniasis, each of that are thought-about orphan circumstances.

“The launch of our private offering leveraging the joint service capabilities of those respected platforms marks a big step in direction of MedC taking its place amongst trade leaders which are decided to legitimize and ship the well being advantages of cannabinoids to the worldwide neighborhood,” said Dr. Owen Van Cauwenberghe, President of MedC.

“Our tireless efforts and dedication to substantiated medical and well being claims for these merchandise will be certain that their advantages shall be out there to all these in want. We’re lucky to have the ability to make the most of the mixed DealSquare, NEO, and DealMaker providing.”

The corporate famous it plans to make use of the raised capital to help its worldwide growth, first throughout Australia and Canada, and later to achieve Europe, UK, Latin America, and Asia.

Moreover, MedC Biopharma may also broaden its portfolio of merchandise.

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Jefferies downgrades Aurora stock to hold from buy and says path to profitability is further away than expected.

Aurora Cannabis Inc.’s U.S.-listed shares slid 8% Monday, after the company announced the exit of a key executive, amid insiders selling stakes, dilutive financing moves and questions about the company’s path to profitability.

The Canadian company, which is the most widely held stock ACB, -4.50%ACB, -4.58%  on trading platform Robinhood, said late Saturday that Cam Battley, its chief commercial officer and the man widely viewed as the face of the company, was leaving. Battley had been with Aurora since 2016 and will remain on the board of MedReleaf Australia, a private cannabis company in which Aurora owns a stake.

Jefferies downgraded the stock to hold from buy following the news.

“It is clear to us that the market is lacking conviction in Aurora, and this update will do little to help that,” Jefferies analyst Owen Bennett wrote in a note to clients as he lowered his stock price target to C$3.00 ($2.28) from C$7.00.

Aurora shares have lost 24% of their value in the past month, battered by negative sell-side reports, a controversial convertible bond exchange that was highly dilutive for shareholders and news that Director Jason Dyck had sold more than 1 million of his shares, equal to 57% of his holdings.

But for Bennett, the key issue is one of trust. Aurora has repeatedly failed to meet its own targets and has promised one course of action, before immediately choosing another, he said.

“Key examples are missing revenue guidance despite issuing it after quarter-end at Q4, still little visibility on near-term profitability despite promises since January and throughout 2019 this would happen by Q4, continued dilution (debenture conversion, ATM used) despite reassurances this would not be the case, announcement of ceasing facility constructions just weeks after a press release praising their progression, and most recently the embarrassment of having to freeze sales in Germany over an investigation into the company’s processing methods,” the analyst wrote.

“Against this backdrop, we believe it is easy to make the case that Battley is ‘jumping ship’ with potential further bad news on the way and it is also now one thing too many for our previous conviction.”

MKM analyst Bill Kirk noted it’s the third major management shake-up in the new cannabis sector in a year, coming after Canopy Growth Corp.’s CGC, -0.05%WEED, -4.42%  Bruce Linton was ousted and Aphria Inc.’s APHA, +1.66%APHA, -2.60%  former CEO Vic Neufeld was forced to step down. Battley was one of the strongest voices for the industry, said Kirk.

“The sudden departure, during a period of insider selling, dwindling cash to cover payables, and sector turmoil does not send a strong message to investors,” he wrote, as he cut his stock price target to C$2.00 from C$3.00 and reiterated a sell rating.

Kirk is expecting profitability for cannabis growers to get worse before it gets better, with pricing falling and supply gradually improving. The Canadian sector has had a rocky rollout with red tape hampering the creation of a network of retail stores that has allowed the black market to thrive.

“With legal price gaps widening versus the illicit channel, we believe growth and addressable market opportunities are smaller than others believe,” the analyst wrote. “Further, an outsized (relative to peers) exposure to medical marijuana limits the growth opportunity as most medical markets (Canada, various U.S. states) show flat to declining medical consumption.”

Aurora shares have fallen 59% in 2019, while the ETFMG Alternative Harvest ETF MJ, -0.18%  has declined 30% and the Horizons Marijuana Life Sciences ETF HMMJ, -3.16%  has shed 39% of its value.

The S&P 500 index SPX, +0.00%  has gained 29% and the Dow Jones Industrial Average DJIA, +0.08% has gained 22% in the year to date.

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The tsunami has all but ended in a defeat for many investors and companies. There is finally good news. The JOBS Act 3.0

The jobs act 1.0 and 2.0 delivered a disruption to investing and helped propel small businesses into multimillion dollar companies.  The great rush of Reg. A and Reg. D and  Equity Crowdfunding seems to have all but halted in the last 2 years for many reasons.

Companies were required to only allow investment form verified  Accredited Investors.  The SEC States An accredited investor is a person that the SEC deems is sophisticated enough to protect themselves in making investment decisions and therefore does not require certain additional protections under certain securities laws.  Currently, to be an accredited investor as an individual, you must (1) earn $200,000 (or $300,000 jointly with your spouse) in income over the last 2 years or (2) $1 million in net worth (excluding home value. There was a major downfall in this strategy, many eligible  Accredited Investors, especially in the US had not verified their status nor had they been given the right material to understand the investments criteria.

Start Up Companies were busy building and marketing their pitch decks and dealing with all the relevant road shows and right things to say. The companies themselves failed to deliver on then best strategy of all to entice investors, and exit strategy.

Indiegogo, Crowdfunder and Start Engine were co-conspirators in a race to entice companies to list on their platforms they did not divulge to the companies that the main strategy investors seek is exits to IPO, Mergers and  Buy Outs.

As with the ICO craze of 2016, many companies made money in marketing and investor relations and many investors did eventually invest only to be dismayed at the lack of forethought in these projects. Over 90% of the ICOs from 2016 are now gone with millions being lost across the board.

While, the JOBS Act gave investors a new avenue and helped companies to deliver an alternative investing vehicle, the accredited investors, were this time left holding the bag.  As more companies were being listed the pool of investors got smaller and less tolerant of mistakes.

In 2014 – 2016 every start up company was the “Uber of ” or was “disrupting some form of economy”, the vast majority of those companies too have run out of funds, or never reached market with their product, even after there was a sizable investment from the members of the equity crowdfunding platforms.

WHAT DOES JOBS ACT 3.0 MEAN FOR COMPANIES?

The JOBS Act 3.0 should be the game changer. This should finally open the doors to investment like never before allowing investors to be accredited by their experience rather than their wealth.

It is now on the companies themselves to deliver solid growth plans and solid ideas. They should have a good team on board who are more than just friends from school and college.  The companies need guidance by seasoned personnel, rather than giving titles out to anyone in the room based on their needs.

The lack of quality education on Equity Crowdfunding and investing is still astonishing in today’s digital age where many  16 year olds had Youtube channels devoted to Crypto.

WHAT IS IN THE FUTURE FOR JOBS ACT 3.0 AND INVESTORS

The JOBS Act 3.0 gives many updates and addendums to the previous 2 JOBS Acts.

The Launch of Venture Exchange is one of the more ambitious and lofty elements, this will no doubt lead to a rush venture exchanges  being brought to market.  It stands to reason, that companies with 10,000 shares should not be regulated equally to those with 10 million shares. The Act 3.0 would allow for the registration of “venture exchanges” with the SEC to provide a venue for small and emerging companies and offer a platform to trade their securities. It would also permit the trading of venture securities, which would apply to early stage companies whose shares are Regulation A+ securities, as well as listed companies whose shares are below the average daily trade volume. The creation of venture exchanges would help even the playing field such that small and startup companies could attract investors.

HOW WILL THIS JOBS ACT 3.0 IMPACT MARIJUANA COMPANIES?

Marijauana and Cannabis companies should be able to utilize some of the many relaxed rules including  the rules for filing confidential IPOs. The current rules permit “an emerging growth company” or any person authorized to act on its behalf file confidentially. The Act 3.0 proposes to change the wording to “an issuer” or any person authorized to act on its behalf. This would widen the pool of companies able to explore confidential filings.

JOBS ACT 3.0 EASING OF REGULATORY BURDENS

The fourth objective of JOBS Act 3.0 is to reduce the economic costs of going public by relaxing the requirements for companies to produce quarterly financial reports. On average, initial regulatory compliance costs more than $1 million in one-time costs associated with an IPO. The Act 3.0 directs the SEC to analyze the costs and benefits of quarterly reports and provide recommendations to Congress for decreasing costs, increasing transparency, and increasing efficiency of quarterly financial reporting. The aim is to allow smaller companies to delay various financial reporting requirements. These tactics would enable more companies to secure an IPO by allowing them to spread the cost over a longer period of time, thus reducing the financial burden of going public.

The Marijuana Industry should be rejoicing and hoping to capitalize on these relaxed regulations along with the recent victory and landmark legalization of marijuana in Illinois just last week. Marijuana, Cannabis and CBD companies now have better access to a larger pool of investors , with less regulation at a critical time for the Cannabis markets.

Accredited Investors can now come for a new class in the investor pool and be self directed. This will help deliver a huge influx of investors into the market and so long as companies have a clear path to exit and solid team this is a win for all.

MARIJUANA INVESTORS SHOULD NOW START LINING UP THEIR PORTFOLIOS FOR 2019-2021

The new acceptance of investment in Cannabis and Marijuana markets as legitimate, of not federally legal yet, is a huge boost for famers, growers and research scientists interested in releasing new medical treatments for Cancer, Addiction, Mood disorders and pain relief.

As more states legalize both in medical marijuana and recreational marijuana use, the older propaganda is not able to out do the merits and positive reports especially from the medical marijuana and CBD research camps.

The older “Reefer Madness” days are slowly fading away as more scientific research points to the legitimate use of these plants and their extracts beyond rolling joints.

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