United States: Crowdfunding In The Cannabis Industry – Update – SEC Temporarily Suspends Med-Ex Crowdfunding Offering

In April, we  wrote about Med-X, Inc. ("Med-X").  Med-X was the first cannabis company to launch an equity crowdfunding campaign, and as of September 16, 2016, the company has found itself in regulatory hot water for failing to adhere to securities law requirements.

The United States Securities and Exchange Commission ("SEC") issued an order temporarily suspending Exemption Pursuant to Section 3(b) of the Securities Act of 1933 and Regulation A (Equity Crowdfunding) thereunder to Med-X.  Under Rule 257 of Regulation A, an issuer whose offering statement has been qualified under Tier 2 must file an annual report on Form 1-K for the fiscal year in which the offering statement became qualified and for any fiscal year thereafter.¹  Annual reports on Form 1-K must be filed within 120 calendar days after the end of the fiscal year covered by the report.²   According to the SEC, Med-X was required to file its annual report on Form 1-K by April 30, 2016 and as of September 16, this year, Med-X had not made the filing.  As a result. Med-X's exemption was temporarily suspended.

Med-X has since made its required annual report filing and has also subsequently filed a semi-annual report and notice of an exempt offering of securities ("Reg D Filing").  The Reg D filing indicates that Med-X may not have been able to overcome issues related to its equity crowdfunding offering and the company could continue to experience legal troubles due to this lapse.

Equity crowdfunding holds great promise for cannabis companies that are prepared to avoid the attendant pitfalls that fundraising through this complex regulatory regime presents. In addition to perfecting business ideas and investor pitches, cannabis companies that wish to use equity crowdfunding should first seek out a qualified attorney to help them spot and avoid legal issues.

Footnotes

1 17 C.F.R. § 230.257(b)(1)

2 17 C.F.R. § 239.91; General Instruction A.(2) of Form 1-K

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