Marijuana Business Magazine July 2019

Marijuana Business Magazine | July 2019 64 U pstart and small marijuana businesses needing a financial shot in the arm may want to consider crowdfunding—raising capital through a significantly larger pool of investors who wager relatively small amounts of money. Investors might be family, friends, members of the local community or complete strangers. Multiple crowdfunding paths exist, differing in how much can be raised and who can invest, the amount, etc. They include: Regulation Crowdfunding: Also known as Regulation CF. This is the simplest and least expensive path for crowdfunding, but the company cannot raise more than $1,000,070 in 12 months. This type of fundraising must be done through a registered platform such as StartEngine or Kickstarter. Regulation D: More complex and strictly regulated than Regulation CF but less so than Regulation A (below). A company can solicit only deep-pocketed (or accredited) investors. That limits the investor pool to a smaller number of individuals making bigger investments. Issuers cannot advertise but must query individual investors. The raise is limited to $5 million. Regulation A: The most labor-intensive and strictly regulated crowdfunding option. There are two tiers: Tier 1 requires an audit; Tier 2 does not. A third “A” variant, the A+ offering—chosen by High Times for a $50 million crowdfunding raise that was scheduled to close June 30— is the most strictly regulated by the U.S. Securities and Exchange Commission (SEC). In all cases, issuers can tap accredited and unaccredited investors with no investment minimums. They also can advertise. Raise limits range from $20 million to $50 million, depending on the variant. Which crowdfunding option is best for your marijuana company? “It depends on your situation,” said Mark Scarola, chief operating officer of two Southern California businesses: GreenZone 360, an ancillary cannabis real estate company that did a Regulation D raise last year, and Alchemy Kings, a testing lab conducting a Regulation A+ raise with a roughly $7 million target that is expected to close in August. Regulation D is much quicker and less expensive, while Regulation A can take nine months or more, and issuers must deal with many more investors, Scarola said. “It’s a lot more paperwork on your end to have to deal with thousands of small investors as opposed to a handful of larger investors,” Scarola said. “If you have the means, and you can connect to a small number of individuals who can put in a larger dollar amount, that’s probably the easier route.” Jillian Sidoti, a Los Angeles crowdfunding attorney hired by Scarola, estimated that the various approaches have the following costs: Regulation CF: $10,000-$15,000 Regulation D: $20,000-$30,000 Regulation A: about $75,000 Here’s a look at each one: D TRAIN Because Regulation D is cheaper than Regulation A and less labor-intensive, most funds take this route—as Scarola did. He listened to what most experts advise and hired an attorney: Sidoti drafted a 40- to 50-page company operating agreement, a private placement memorandum and an offering circular (it’s like a prospectus) that was another 50- plus pages. She also completed the application forms. Scarola hoped to raise $7 million and had a database of about 4 million real estate investors to start with. But he finished with only about $1.1 million. A crowdfunding campaign allows upstart cannabis companies to connect with smaller investors, but be ready ‘for a lot of paperwork’ By Omar Sacirbey Jillian Sidoti is a crowdfunding attorney based in California. Courtesy Photo CROWDFUNDING 101 Hustle America