Partnerships in Cannabis Businesses: Vital and Fraught

Leaders of successful cannabis businesses are significantly outnumbered by potential investors and partners who want in. It can be difficult to separate partners with integrity from those whose interests aren’t sufficiently aligned with your goals for your business.

With that in mind, I was interested to see this article from Aspen Daily News discussing the collapse of a relationship between a Colorado dispensary and its investors. I recommend reading the article in full, but the short of it is this:

  • In 2015, the dispensary signed a series of promissory notes valued at about $2 million with two investment firms.
  • In November 2016, the investment firms sued the dispensary alleging that the business defaulted on its loans.
  • In December, the dispensary counter-sued, alleging that the investors "did not actually give them the money." Instead, in their capacity as "expert business consultants," the investors allegedly used the funds to hire "unqualified" employees that the company's owners did not known and did not need. 
  • The investors' response to the dispensary's counter-claim is pending as of this post. 

We fully expect that the cannabis industry will see more conflicts like this one. Hilary Bricken from Harris Moure PLLC wrote in mid-2016 that her law firm was seeing a "massive spike in cannabis business owners suing their fellow owners."

Ownership disputes aren't unique to the cannabis industry, but these disputes are complicated in unusual ways in this industry. For example, regulatory restrictions on who can invest in a state-legal cannabis business make the pool of possible partners much smaller. In addition, issues in an individual's background that wouldn't affect their ability to do business in another industry -- like a 15-year old conviction for possession -- may disqualify them from participation in a cannabis business in certain states.

Before you partner with a co-founder, co-owner, or investor, do your due diligence:

  • Are there any issues in this person's background that may be a problem for your state regulators? What if you decide to do business together in another state?
  • What is your partner's business track record? How have other companies with which they've partnered fared?
  • How will the partnership be structured? What degree of control will they gain over your business?

Additional Resources

  • The case referenced above is Stillhouse Investments, LLC, et al v. Colorado Medical Marijuana Supply, Inc., et al in the Colorado District Court (Pitkin County). 
  • Read Hilary Bricken's excellent article
  • Learn more about our services for businesses

 

Investors Lose in Oregon's First Major Marijuana Fraud

Regulators in Oregon are investigating Portland dispensary Cannacea and its CEO, Tisha Siler, after it was revealed that materials used to attract investors to the company contained multiple false claims. Investors committed hundreds of thousands of dollars before the scheme was revealed.

With so much riding on personal connections and reputation, wise investors must take steps to ensure that they are putting their trust and money in safe hands. Don't just take it from us: Green Rush Consulting, which maintains that it is also a victim in this fraud, said the following in a press release:

"White-collar crime in this industry is a threat to all of us, and we need to perform due diligence in every aspect of our business operations in order to avoid it and help prevent it."

(Image credit Willamette Week)

Background

Cannacea was a tempting opportunity for investors hoping to profit from the "green rush": CEO Tisha Siler's letter confirming that she had licenses to operate up to seven dispensaries in Oregon suggested that the company had lots of room to grow into a profitable business.

But by mid-2016, Cannacea had shut down, and Siler was accused of forging the documents that claimed she could operate seven dispensaries. Instead, state authorities said, materials given to prospective investors contained many "inaccuracies and outright falsehoods" about Siler.

Siler maintains that she didn't create the materials given to investors, pointing instead to David Jacobs, a contractor for Green Rush Consulting, which Siler retained to help her find investors. (Read Green Rush's response to these accusations here.)

Due Diligence Protects Investments

Pre-investment due diligence would have revealed major red flags regarding Cannacea, Siler, and Jacobs. At a minimum, cover the following:

  • Licenses: Speak with the relevant regulators to confirm licenses. Leafly has a good guide describing how you can do this yourself.
  • Education: Degrees can often be confirmed directly with a university registrar.
  • Reputation: Research could have led investors to a website created in 2013 that alleges that Siler and Garrett Siler used a home in California as a marijuana growing and processing facility without the consent of their landlords. If the entrepreneur doesn't have much of a public profile, ask for references, then ask those references for more references.

Savvy investors should also confirm the integrity of any middlemen involved in an investment. In this case, searches of criminal records would have found that David Jacobs had a prior conviction for fraud and identity theft.

Whether Siler is an innocent victim herself, as she claims, or actively duped investors, the lesson is clear: The cannabis industry is vulnerable to fraud, and knowing as much as you can about those you're trusting with your money and reputation is wise. 

James Kochien contributed to this post. Read original reporting on Cannacea from The Oregonian here. Learn more about Galen Diligence or contact us here