Massachusetts Secretary of State Bill Galvin and his Securities Division are increasingly turning their attention toward securities offerings in the cannabis industry, as demonstrated by the June 19, 2019 filing of the second enforcement action against a cannabis business in the last two months. The filing was accompanied by a statement from Galvin warning of future sweeps in the industry.
The latest enforcement action, brought against Positronic Farms, based in Holyoke, MA, and its founder David Caputo, comes with a warning to anyone conducting a securities offering in the cannabis industry. Positronic and Caputo were charged by the Securities Division for three reasons: (1) they allegedly failed to register the offering or qualify for a registration exemption; (2) their offering materials allegedly contained misrepresentations; and (3) they allegedly employed unregistered agents to market and sell the securities and paid them commissions. Positronic raised $1.3 million from approximately 40 investors throughout the United States, allegedly without verifying whether the investors were accredited. It solicited the general public through a variety of media, including newspaper ads, press releases, emails and online videos. Caputo also sent offering materials to more than 200 individuals who he met at conferences. In addition to the widespread solicitation of unregistered securities, Positronic and Caputo allegedly made several misrepresentations in their offering documents. For example, they advertised that they would not use investors’ funds until they raised at least $250,000, but then used the funds prior to doing so. They also allegedly represented that the funds would be maintained in an escrow account, but comingled them with the company’s general account.
Positronic claimed to be relying on the exemption from registration found in Rule 506 of Regulation D, but that exemption requires either that company not use a general solicitation or that if a company does use a general solicitation, that it only sell securities to accredited investors. Positronic allegedly failed to file an application for registration or notice of exemption for the offering of securities in Massachusetts.
This action comes on the heels of an April 17, 2019 action filed against a Massachusetts investment adviser for, among other things, allegedly directing a client to invest in marijuana projects without adequately disclosing his controlling interest in the investment vehicle or the fees he would receive in connection with the projects . In conjunction with this increased activity, Secretary Galvin warned that the securities division will launch a sweep of businesses raising money from cannabis-related investments. At this stage, it is unclear what any such sweep would entail or look like, but we will continue to cover it here.