Going Public Comes With Unexpected Potholes, Pitfalls for Cannabis Entrepreneurs

marijuana stocks

By John Schroyer

Taking a marijuana company public is often viewed as a great exit strategy, usually by entrepreneurs who are dreaming of a big payout.

It can also be a quick route to disaster, however, especially in situations involving a reverse merger – the most common method of going public in the marijuana space.

Aside from increased scrutiny, regulations, reporting requirements and costs, entrepreneurs who spent blood, sweat and tears building up their companies can lose control of the business literally overnight. In a worse-case scenario, founders can even be forced out of the company completely.

This appears to be the case with Genifer Murray, a visible and prominent industry executive who founded Colorado-based CannLabs and served as its director and president.

Murray took her cannabis testing company public last year via a reverse merger that left her beholden to a board of directors. Just 15 months later, the board terminated her employment, allegedly for disclosing confidential information to third parties and for other instances of misconduct. 

“She’s the classic example,” said Robert Frichtel, president and CEO of General Cannabis Corp., another public cannabis company. “Her circumstance sounds like they just stripped away what they wanted from her and threw her to the curb.”

Murray disputes the board’s claims but declined to comment for this story, saying she’s still consulting with her attorneys on how to handle the situation.

Bill Livermore, director of external relations for CannLabs, said to the best of his knowledge, Murray resigned voluntarily. But the company’s filing with the U.S. Securities and Exchange Commission (SEC) says her employment agreement was terminated “for cause” and that the board asked her to resign her position as a director.

CannLabs’ stock, which trades under the symbol CANL on the over-the-counter market, fell roughly 45% the next trading day after the company reported the news to the SEC.

Other entrepreneurs and executives have also learned about the dangers of going public the hard way.

Frichtel’s company – which was founded in June 2013 as Advanced Cannabis Solutions – is one of them. A year after completing a reverse merger, the SEC suspended public trading of the company’s stock due to suspicious activity by a prominent shareholder.

After nearly a year of wrangling that included a lawsuit filed against the shareholder, the company was allowed to resume trading on public markets.

Frichtel said the biggest lesson he learned is to do your homework.

“The problem was there was a scoundrel involved in this process that we hadn’t completely vetted,” Frichtel said. “If I was to do it again, I’d probably have everybody go through a very strict, rigid background check with a private investigator, making sure that everybody that would touch this organization wouldn’t have something in their past that would resurface.”

This isn’t an uncommon problem, especially in the cannabis world, said Alan Brochstein, founder of 420 Investor.

“There’s a whole bunch of these stories,” Brochstein said. “You often get involved with financiers who don’t have your interests in mind. They’re just looking to cash out. So it can create a situation often where they aren’t interested in the long-term success of the company.”

A better option, albeit much more expensive and time-consuming, is to file an S-1 with the SEC and stand as a public company on one’s own, instead of undergoing a reverse merger, which can be more expedient.

“It takes longer, but it’s so much cleaner, and in the end, it’ll be better for everybody,” Brochstein said.

But, if a company is convinced that a reverse merger is the way to go, then be careful.

“Approach it cautiously. Assume that they’re trying to take advantage of you. That’s not a hypothetical,” Brochstein said.

Costs are another issue.

Surna – an ancillary firm that specializes in cultivation technology – has found it incredibly expensive to run a public company as opposed to a private one, said Tae Darnell, the company’s general counsel.

“If you intend to cut corners in this realm, it doesn’t work,” Darnell said. “When you take a company public, what you’re committing to is running two companies. You’re going to run the fundamental business itself and then you’re going to run the public side, which is in and of itself its own operational entity.”

Frichtel agreed, saying General Cannabis typically spends hundreds of thousands a year on auditors and attorneys to make sure they remain compliant with SEC regulations.

Still, the benefits of going public can be realized, if managed properly.

Frichtel said General Cannabis is now able to attract top-level capital for acquisitions, and is also able to fund small companies that it is interested in taking over. It wouldn’t be able to do so as a private company, or at least, not as easily. But, Frichtel insisted, it was risky.

“It is a very positive thing that we have done, but through the dark days of our (SEC) suspension, it felt like the biggest mistake that could have been made,” Frichtel said.

John Schroyer can be reached at [email protected]

3 comments on “Going Public Comes With Unexpected Potholes, Pitfalls for Cannabis Entrepreneurs
  1. scott giannotti on

    Excellent article, very relevant, and of
    vital importance as many cannabis entrepreneurs are agressively seeking financing with the main goal to go public and raise more money in capital markets. This article should be a warning flare to cannabis entrepreneurs not to be seduced by get rich quick schemes and focus on the quality and long term success of their venture. Great piece Schroyer!

    Reply
  2. Cockroach Eliminator on

    See how this single, separate, one line question/paragraph is missing is in the last 10Q filed for the prior shell, Speedsport, that Cann Labs was folded into?

    It was manually rewritten to OMIT this required paragraph:

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

    https://www.sec.gov/Archives/edgar/data/1449934/000101968714001550/sdsp_10q-033114.htm

    Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

    Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

    Large accelerated filer o Accelerated filer o
    Non-accelerated filer o Smaller Reporting Company x

    THE mandatory, REQUIRED question ABOUT FORMER SHELL STATUS BELONGS RIGHT HERE, BUT HAS BEEN OMITTED IN THIS 10Q THAT WAS THE CONTROLLING DOCUMENT for the prior shell Cann Labs was merged into

    Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

    There were 16,827,505 shares of the registrant’s common stock, $0.001 par value per share, outstanding on April 25, 2014.

    BY THE WAY, ONLY ABOUT 4.2 MILLION OF THESE PRIOR SHELL SHARES WERE CANCELED–GUESS WHO HAS BEEN ILLEGALLY TRADING MILLIONS OF THEM?

    Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Act of 1934, as amended, and otherwise are not subject to liability under those sections.

    So, to make this easier for you, the SEC requires standard language in all 10Qs–and the closing document for a reverse merger is always heavily scrutinized, especially in the cannabis industry.

    This simple line/paragraph

    “…Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No …”

    IS MISSING from the last 10Q filed for the prior shell, Speedsport, that Cann Labs was folded into. This is how the fraud occurred to fold Cann Labs into a “fully reporting company.” Speedsport was a shell. The 10Q for Speedsport is missing this basic question, there is a box the issuer checks to the right of yes and no, my text does not allow me to copy the box:

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

    I am pasting an example, this is standard in every 10Q that is legitimate, and it always exists, for example if you pulled Microsoft 10Q or Facebook 10Q or even a microchip food company 10Q, doesn’t matter, it is required by the SEC and it always follows this question, highlighted in green. I will highlight in green the same question on the Speedsport shell so you can see there is no yellow highlighted “indicate by check mark wether the registrant is a shell company…” that follows, instead it is a second question that always follows in these and the shell question is simply omitted because the 10Q was manually typed, and this is what allowed the fraud to occur.

    Reply
  3. Tim Paynter on

    In the early days of Colorado, gold was mined from the granite mountain peaks. Of the thousands of people who flooded the state looking for their fortune, most ended up flat broke or working for an industry controlled by a tiny fraction of those original dreamers. Today, they don’t mine gold from granite anymore. The rest of the legacy remains true.

    Reply

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