We were quoted in a December 2016 article in BostInno following passage of Massachusetts' adult-use initiative.
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."
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.
We were in Oakland for the NCIA's Cannabis Business Summit from June 20th-22nd, 2016.
...Christopher R. Esposito, 49, of Topsfield, raised more than $550,000 from investors in 2011 and 2012 in his Lionshare Ventures. He allegedly used the majority of the funds for unauthorized personal expenses, such as groceries and pet care, and then spent $75,000 to secretly take control of Cannabiz Mobile Inc. without disclosing that to investors.
(The Boston Globe, May 2016)
When it comes to investment decisions, investigative due diligence beats a background check every time.
It wouldn't show up in an average background check, but a search of Financial Industry Regulatory Authority records would have found the following information about Esposito:
That was just one of the three disclosure events on his record, but none of these red flags would have appeared in a typical background check.
Some frauds are harder to identify than others. Investors should always conduct due diligence before pursuing an investment, especially in an emerging industry like cannabis.
When you invest in a company, you're investing in its management.
Savvy investors want to know that a company's senior executives are trust-worthy and will conduct their business with integrity.
Here are just two of the many reasons why investigative due diligence is preferable to a standard background check when it comes to investment decisions.
Reason 1: BACKGROUND CHECKS MISS RISKS THAT MATTER TO INVESTORS.
Did you know that the typical background check only searches criminal records in the state where a person currently lives? Or that they don't identify issues like conflicts of interest and reputation-damaging news articles?
Investigative due diligence identifies risk factors that affect the success of your investment.
REASON 2: BACKGROUND CHECKS AREn't for investment decisions.
Background checks are designed to help make employment decisions, not investment decisions.
Pre-employment background checks are governed by the Fair Credit Reporting Act, which limits the type of information that can be collected and how that information can be used. As a result, most background checks only go back seven years, leaving you blind to any red flags that happened before then.
We know that an investment decision is very different from a hiring decision. Real due diligence isn't limited to the last seven years.