President Obama signs the American Recovery and Reinvestment Act as Vice President Biden watches in Denver, Colo. on Feb. 17, 2009.
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JOBS Act’s historic legislative provision is not just for startup cannabis firms but for investors, too

April 20, 2016 / by / 0 Comment
  • SumoMe

Jumpstart Our Business Startups Act, or JOBS Act, has been around since 2012. However, the release of SEC’s final ruling on its Regulation A+ of Title IV makes this law more appealing to emerging markets such as the medical cannabis industry. Today, startups can now legally hold a crowdfunding campaign and encourage investors to become part of their initiatives.

Equity crowdfunding is different from regular crowdfunding on Indiegogo or Kickstarter since investors don’t need to have accreditation for them to become part of a company’s campaign. In this type of crowdfunding the investors are not just mere “donors,” as they are entitled to obtain a compensatory stake in the firm. Through this, smaller companies can now expand their market and brand reach by opening themselves to the public as they help smaller, regular investors to grow their money.

Med-X, a startup marijuana company that had successful equity offering for traditional investors in the past, saw it coming. In 2015, it became the first cannabis company to launch an equity crowdfunding in the US after the historic Title IV amendment on June 19th of the same year.

“We’ve prepared for this as we already knew in the past that, sooner or later, this new legislative provision will happen,” said COO Matthew Mills in an email interview. “But we are still surprised by the rapid response of SEC on our application.”

In a separate interview published by Leafly, Mills also recounted the elation he and his team felt upon learning that they were the first cannabis company to obtain the green light from the SEC. “The response was very favorable to us. We were surprised by that, and so was everybody else. As far as we know there were only two other companies that were qualified prior to us, neither of which was in the cannabis industry.”

However, Med-X is more than just a promising startup firm the aims to revolutionize the cannabis niche by producing only research-based products. It also wants to help the public understand the market more and educate them on its many sill-unknown benefits and market potential through The Marijuana Times, its media arm.

Prior to Title IV legislation, it was hard for startup firms to raise capital. According to the law’s Regulation D, private companies can only ask for funding to accredited investors who have a net worth of $1 million, or a stable income of more than $200,000. This strict rule made it hard for startup businesses in the cannabis market to look for eligible investors since the industry was, and still is, working on obtaining complete acceptance from the general public. A large fraction of the US population still needs to be educated on the benefits of medical marijuana, and other people’s reluctance to accept this fact remains one of the top reasons why weed is still prohibited in some states.

The cannabis industry, despite its multi-billion-dollar worth, is still an emerging industry. The companies in this niche are mostly small and startups, which explains the need for public aid to expand, gain more money on research, as well as leverage over the growing competition. The crowdfunding rule is undeniably a new avenue for these startups to obtain new financial opportunities to conduct more R&D for their existing and would-be products and services, as well as to put their brand in front of their target audience and prospective customers. For the likes of Med-X, now a leading cannabis brand in the startup niche because of its advocacy-driven brand, they now have more power in helping the entire industry by changing the public’s negative notion of the medical plant.

Still, crowdfund sourcing doesn’t mean that it’s for everyone. According to Bruce Barcott of Leafly, partnering with non-accredited investors has a catch. Every investor can spend a maximum amount of $100,000 on diversified shares in one year. Meaning to say, a company cannot consider an investor as a “true business partner” as they are licensed to invest the other portions of their investment money to other companies, which can be its direct competitor.

Also, this funding method could only be done with an aid of an intermediary licensed by the Financial Industry Regulatory Authority (FINRA,). “[And then they] must then file with the SEC every year, depending on how much capital they raise. A company raising $100,000 may have to file only its most recent tax returns. Up to $500,000, a company must provide financial statements reviewed by an independent CPA. Up to $1 million, a company must provide audited financials,” wrote Barcott.

Although equity crowdfunding sounds very enticing and promising, it might not fit a company’s strategies, goals, or financial capacity. The sanest advice would be is to study the market first, as well as the provisions of JOBS Act. This also the case with the investors, as they, too, have to scrutinize the companies asking for their support and hard-earned cash.

 

ABOUT THE AUTHOR

Leah Marie Angelou is an LGBTI activist, equality advocate, and has been a writer for several feminism-focused groups since 21. She is of African and Taiwanese decent. She now teaches microfinancing to various low-income communities across the East Coast.