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Oregon Cannabis Securities: Raising Money Right

oregon cannabis securities

The deals in Oregon cannabis are getting very big and much of what we do these days involves mergers, acquisitions and cross border work. It’s amazing this happened so fast. Less than four years ago, as the OLCC began writing rules for the adult use marijuana industry, there was a distinct small business tenor to everything. At that time, our Portland office began forming the first of what eventually became a few hundred local cannabis companies. It was an exciting time, and a typical set-up looked something like this: two founders with limited capital, medical market bona fides and maybe credit card debt, would join forces with an investor and her few hundred grand. This crew would then form an LLC or corporation to grow weed on somebody’s property.

Today, many of those businesses have disappeared for one reason or another, others are humming along, and a few have really crushed it. Despite all of the consolidation in the OLCC world, though, the small deals and simple structures are making comeback. The only difference is that this time it’s on the hemp side. Oregon has seen a staggering increase in registered growers and acreage this planting season, owing to the new Farm Bill and the CBD craze. So here we’ve been forming small LLCs and corporations again, alongside the seven figure deals– and just in time for planting season. Who would have thought?

One commonality among most of these transactions, large and small, is something called “securities.” Simply defined, a security is a negotiable financial instrument (company stock, certain debt instruments, investment contracts, etc.) offered or sold to an investor who lacks real authority to manage the investment. Many of those early Oregon marijuana companies and the new hemp companies have been trading in securities from the outset, even if unaware of this fact. Noncompliant companies have sometimes skated by, but given the liability exposure here–including lawyer liability for bad deals–it’s crucial to get the securities issuance right.

Probably best to find an exemption.

Federal and state securities laws are very complex, but they apply even to small businesses (including cannabis businesses) offering or selling a security to even just one person. Federal law requires that the issuer either: 1) register the offering and sale with the SEC (“go public”), or 2) conduct that offering and sale within a registration exemption. Fortunately, there are quite a few exemptions available, but you’ve got to hit the target square. And even when you don’t have to register, it’s a really bad idea not to make extensive disclosures to offerees and investors in conjunction with any solicitation.

Finally, in addition to federal securities laws, an Oregon cannabis business issuing securities must comply with Oregon blue sky laws and also the blue sky law of each state in which a purchaser is located. For this reason, our cannabis company clients often end up paying registration fees in other states. Those can add up pretty fast and there may be circumstances where it’s just not worthwhile.

All of that said, below are the Oregon small offering exemptions typically used for a new cannabis business, which do not require registration when done correctly.

Sales to Accredited Investors

An “accredited investor” is an investor with special status under financial regulation laws, generally due to high net worth. ORS 59.035(5) exempts transactions between start-ups and accredited investors from registration, so long as there is no public advertising or general solicitation in connection with the transaction. This is a self-executing exemption, which means that no state filing is necessary to take advantage of the exemption.

The “10 in 12” Exemption

ORS 59.035(12) exempts from Oregon registration requirements transactions that result in not more than 10 purchasers within Oregon during any consecutive 12 months. Note that accredited investors do not count as “purchasers” here. Repeat transactions with the same purchaser during a 12-month period also do not increase the number of purchasers (in other words, each purchaser is counted as one purchaser for the 12-month period). To use this exemption, no commission or other remuneration can be paid, and no public advertising or general solicitation can be used.

Federal Rule 506 (Regulation D) Offerings

If you’ve made it this far, I’m not going to thrill you with an outline of SEC Rule 506; instead, there is a good overview of allowed offerings here. Suffice it to say that in Oregon, for any Rule 506 offering, ORS 59.049(3) provides that the local start-up must, within 15 days after the first sale in the state, file a completed Form D (including the state signature page) with the Oregon Securities Division. There is also a $250 filing fee requirement.

The bottom line is that very often, new Oregon cannabis businesses raising money are subject to securities laws. That is true even if the business intends to break federal laws by trading in marijuana, and even if the business is taking on investment (equity, loan, whatever) from just one person. With a new wave of cannabis businesses coming online, it’s important to get it right. The alternative may be getting sued for securities violations–or even cannabis investment fraud–and that’s no fun at all.

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BREAKING NEWS: California Opens Up for Commercial Hemp Cultivation

california hemp

We have been closely following California’s commercial hemp cultivation licensing law since it was proposed last year as Senate Bill 1409 (see here, here, and here). In March, I wrote about some of the roadblocks to implementing SB-1409’s commercial hemp cultivation programs, and the lengthy review process of the California Department of Food and Agriculture (“CDFA”) regulation which would allow hemp cultivators to register with their county agricultural commissioners.

The CDFA’s regulation was recently approved, and as of April 30, 2019, the CDFA posted applications for registration for commercial hemp cultivation and hemp seed breeders (see here and here respectively). It looks like these respective apps will not be submitted to the CDFA directly, but will instead be provided to county agricultural commissioners in the county in which a cultivator or seed breeder wishes to cultivate hemp. Applicants for commercial cultivation must provide basic information about themselves, as well information about the cultivation site, the purpose of the site (cultivation v. storage), GPS coordinates and other information regarding the site, a boundary map, and certain information about seed cultivars. The seed breeder application is relatively similar.

Despite the fact that these applications are now live, it’s not completely clear how they will be implemented. There are a number of counties in California that restrict or prohibit hemp cultivation. The memo attached to the application itself identifies a number of counties with restrictions: Amador, Calaveras, Glenn, Humboldt, Lassen, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Bernardino, San Joaquin, Santa Barbare, Shasta, Sierra, Siskiyou, Sonoma, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba. Since the application is so new, we haven’t evaluated which of these counties fully prohibit cultivation, but it’s a safe bet that if any of them do fully prohibit it, their agricultural commissioners are probably not going to accept these applications.

But what about counties that don’t say anything or only have some minor restrictions? It’s not clear yet whether counties will try to delay implementing hemp cultivation by claiming that they need to establish local protocol for registration. Ultimately, each county may do something different, and it will take time before we know what the full effect of the law is.

It’s also not clear how this will be impacted by the federal Agricultural Improvement Act of 2018 (or “2018 Farm Bill”). I summarized parts that law in my previous post linked above, but notably for this post, hemp produced per the former 2014 Farm Bill will be permissible. The 2014 Farm Bill doesn’t explicitly allow commercial cultivation, and so it’s not clear how this will play out. What is clear is that once the U.S. Department of Agriculture begins accepting state hemp-production plans for review per the 2018 Farm Bill, California will need to send its plan for review by the USDA. This could affect registered hemp cultivators, but as per usual, it’s not clear how that will happen just yet.

Stay tuned to the Canna Law Blog for more details on California hemp laws.

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USDA Now Offers Plant Variety Protection for Seed-Propagated Hemp

PVPA hemp seed
Lock ’em down with the PVPO.

On April 24, 2019, the United States Department of Agriculture (USDA) announced that the Plant Variety Protection Office (PVPO) would begin accepting applications of seed-propagated hemp for plant variety protection.

In the United States, there are three different ways to go about protecting intellectual property associated with plant varieties:

  1. Plant Variety Protection – available for seeds and tubers and issued by the PVPO;
  2. Plant Patents – available for asexually propagated plants except for edible tubers and issued by the United States Patent and Trademark Office (USPTO); and
  3. Utility Patents – available for genes, traits, methods, plant parts, or varieties and also issued by the USPTO.

The PVPO is responsible for implementing the Plant Variety Protection Act (PVPA) and will analyze an application to determine whether the variety specified is new, distinct, uniform and stable. Anyone who is the breeder of a unique variety of a sexually reproduced or tuber-propagated plant can apply for plant variety protection. The PVPO grants certificates to protect plant varieties for 20 years (25 years for vines and trees). According to the PVPO, “[c]ertificate owners have rights to exclude others from marketing and selling their varieties, manage the use of their varieties by other breeders, and enjoy legal protection of their work.”

The basic requirements for submitting an application under the PVPO program are as follows:

  1. Completion of all applicable forms;
  2. Payment of applicable fees ($4,382 to be paid with the application and $768 upon issuance of the certificate);
  3. A variety name that doesn’t conflict with an existing name for that crop; and
  4. Deposit of seeds or tissue cultures:
    1. 3,000 viable untreated seeds of the variety; additionally for hybrids, 3,000 seeds of each parent needed to reproduce the variety, or
    2. Live tissue culture samples (for potatoes) of the variety and payment of tissue culture fees. Ten (10) separate in-vitro plants (1 plant per tube) 4 to 6 weeks old, firmly rooted in one percent agar. It is recommended that plantlets be sent by an overnight delivery service to minimize the risk of damage.

Seed samples are important because they serve as a voucher specimen for PVPO’s use should a question arise about the validity of the subscription. According to PVPO, the samples are sent to the National Center for Genetic Resources Preservation (NCGRP) in Colorado. After analysis, seed samples are placed in long-term storage.

In addition to legalizing industrial hemp, the 2018 Farm Bill amended the U.S. Plant Variety Protection Act to add asexually propagated plants, previously not available under the Act. A revision of the U.S. PVPA will be needed and proposed rules are currently under development.

It is also important to note that there are penalties, including fines, for claiming that a variety is plant-variety protected when it is not.

While we are still waiting for the USDA to develop a regulatory framework for hemp under the 2018 Farm Bill, this update from the PVPO is an indication that we will be seeing regulatory changes of many kinds in the months to come.

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CBD & Cannabis for Pets in Pain

Dog at the vet for medical treatment for pain

The state of veterinary medicine has advanced significantly in recent years and thanks to the availability of more effective medicine, many pets are living longer than they would have years ago. With age however, comes the onset of problems such as arthritis and other forms of pain and inflammation. Conventional pharmaceuticals commonly used to treat pain sometimes have a negative impact on the immune system, GI tract, liver, and kidneys. Additionally, they don’t always work as well as we would like them to – for humans as well as other animals.1

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Hemp Testing

Altitude Consulting is not only a hemp testing laboratory, but an organization trusted to consult within the industry. Home growers and commercial farms around the world recognize that EPA based methodologies assure the most accurate and consistent data. Give us a call or bring us a hemp potency, residual solvent or terpene profile sample and see the difference.

Altitude Consulting
Denver’s most effective cannabis testing company.