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SEC Targets Reg A+ Marijuana Company, Med-X, in Administrative Proceeding.

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Reprinted from Crowdfund Beat, By Samuel S. Guzik, CrowdFundBeat special guest editor, Guzik & Associate

The Regulation A+ industry was buzzing this week – not with excitement, but with a healthy dose of trepidation. One of the first, high (no pun intended) profile Regulation A+ offerings, launched in November 2015, after a seemingly successful “Testing the Waters” campaign, was for a company called Med-X, a startup formed to participate in the newly burgeoning marijuana industry – the so called “Green Rush.”

But this month’s headline for Med-X was a bit more sanguine, enough to counteract even the most potent dosage of THC: “REGULATION A EXEMPTION OF MED-X, INC. TEMPORARILY SUSPENDED.” The story that followed was not the kind of publicity any company is looking for – especially when it is in the throes of raising money under Reg A+. Actually, it was not a story. Rather, it was an Administrative Order issued by the SEC on September 16, 2016, temporarily suspending the exemption of Med-X under Regulation A+.

Why? Well, it seems that this company failed to notice, or at least heed, the requirement that Reg A+ issuers file periodic informational reports as a condition of maintaining their status as Reg A+ issues. The basic requirement calls for a company, at the least, to file a semi-annual and annual report with the SEC following the “qualification” of the offering. Seems that Med-X failed to file its annual report, which would include audited financial statements, when due back in the Spring of 2016.

Some have speculated that the SEC was targeting a disfavored industry – Rule 506. I doubt it. The SEC has approved the registered sale of other companies in this industry long before Regulation A+ was adopted.

Others have speculated that this action reflects an uneven hand towards Regulation A+ issuers. After all, this type of swift action is rare for fully reporting companies which are delinquent in their filings. One more time: I think not.

The Staff at the SEC has been remarkably supportive of the rollout of Regulation A+, as measured anecdotally in terms of the efficiency in which it has been processing the review of Regulation A+ offerings.

Rather, I think back to one of the more notable sound bytes I coined in a Webinar back in April 2015: “Regulation A+ is not your daughter’s Kickstarter campaign.” Raising capital from outside investors is serious, heavily regulated business. And as indicated by some of the early Regulation A+ participants, the level of sophistication of the management of some of these issuers has hardly met the bar required to file and prosecute a Regulation A+ offering.

Yes, Regulation A+ is a little more complex than the pipedream: filling out a form, waiting for SEC approval, and then crowdfunding your way to $50 million. Apart from detailed disclosure rules, including audited financial statements, and the always difficult task of raising capital – especially for early stage companies – there is an ongoing SEC reporting requirement. Yes, the requirement is lighter than a fully reporting public company, to be sure, but enough to quickly overload an early stage company, with limited financial and human resources.

So if nothing else, this is one SEC enforcement action can be expected to inject a dose of reality into the Regulation A+ capital raising process. As our President might say, “A Teachable Moment.”

Samuel Guzik

Samuel S. Guzik has more than 35 years of experience as a corporate and securities attorney and business advisor in private practice in New York and Los Angeles, including as an associate at Willkie Farr and Gallagher, a major New York based international law firm, a partner at the law firm of Ervin, Cohen and Jessup, in Los Angeles, and in the firm he founded in 1993, Guzik & Associates.

Mr. Guzik has represented public and privately held companies and entrepreneurs on a broad range of business and financing transactions, both public and private. Mr. Guzik has also successfully represented clients in federal securities litigation and SEC enforcement proceedings. Guzik has represented businesses in a diverse range of industries, including digital media, apparel, health care and numerous high technology based businesses.

Guzik is a recognized authority and thought leader on matters relating to the JOBS Act of 2012 and the ongoing SEC rulemaking, including Regulation D Rule 506 private placements, Regulation A+, and investment crowdfunding. He has been consulted by Congressional members, state legislators and the U.S. Small Business Administration Office of Advocacy on matters relating to the JOBS Act and state securities matters.

Guzik & Associates
1875 Century Park East, Suite 700
Los Angeles, CA 90067
Telephone: 310-914-8600
www.guziklaw.com
www.corporatesecuritieslawyerblog.com
@SamuelGuzik1

Improving Legal Documents in Crowdfunding: Get Rid of the State Legends!

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By Mark Roderick, crowdfunding attorney with Flaster/Greenberg PC.

I see lots of offering documents like this, with pages of state “legends.” The good news is that in Crowdfunding offerings – Title II (Rule 506(c)), Title III (Regulation Crowdfunding), and Title IV (Regulation A) – you can and should get rid of them.

The legal case is pretty simple:

Before 1996, states were allowed to regulate private offerings. Every state allowed exemptions, but these exemptions often required legends, differing from state to state. The National Securities Market Improvement Act of 1996 added section 18 to the Securities Act of 1933. Section 18 provides that no state shall “impose any conditions upon the use of. . . .any offering document that is prepared by or on behalf of the issuer. . . .” in connection with the sale of “covered securities.” The securities sold under Title II, Title III, and Title IV are all “covered securities.” Hence, section 18 prohibits states from imposing any conditions regarding the issuer’s offering documents, including a condition that requires the use of a state legend.

If the capitalized legends just take up space, why not include them anyway just to be safe? Take Pennsylvania’s legend as an example:

These securities have not been registered under the Pennsylvania Securities Act of 1972 in reliance upon an exemption therefrom. any sale made pursuant to such exemption is voidable by a Pennsylvania purchaser within two business days from the date of receipt by the issuer of his or her written binding contract of purchase or, in the case of a transaction in which there is not a written binding contract of purchase, within two business days after he or she makes the initial payment for the shares being offered.

If you include the Pennsylvania legend “just to be safe,” you’ve given Pennsylvania investors a right of rescission they wouldn’t have had otherwise!

Two qualifications.

First, the North American Securities Administrators Association –the trade group of state securities regulators – suggests including uniform legend on offering documents. I include this or something similar as a matter of course:

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

Second, some states, including Florida, require a legend to appear on the face of the offering document to avoid broker-dealer registration. Because Section 18 of the Securities Act doesn’t prohibit states from regulating broker-dealers, some lawyers recommend including those legends, while others believe those requirements are an improper “back door” way for states to avoid the Federal rule. I come out in the latter camp, but opinions differ.

Markley S. Roderick concentrates his practice on the representation of entrepreneurs and their businesses. He represents companies across a wide range of industries, including technology, real estate, and healthcare.