Going Public Comes With Unexpected Potholes, Pitfalls for Cannabis Entrepreneurs

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 johns@mjbizmedia.com