The SEC adopted a new version of Regulation A (now known as “Reg A+”) that helps smaller companies, like AgTech startups, to make an initial public offering. The marijuana industry is one such AgTech industry that is benefitting from the new rules.
Now that cannabis is approved for medical and recreational purposes in several states, the cannabis industry is fast-growing and proving that it can be lucrative. Despite recent pushback from some members of Congress and from the US Attorney’s Office, an increasing majority of Americans favor legalization, which increases the business opportunities.
What is Reg A+?
“Reg A+” refers to a securities regulation interpreting a section of the JOBS Act that granted the SEC authority to amend to previous Reg A rules, allowing companies to raise up to $50 million in capital from accredited and non-accredited investors in a 12-month period without having to become a fully reporting company.
However, raising capital under the new rules is subject to eligibility, disclosure, and reporting requirements under a two-tier system. Although Reg A+ also puts some limits on the number of funds from non-accredited investors, the revamped regulation (along with another JOBS Act title, Regulation Crowdfunding) gives the public the opportunity to invest in many small companies for the first time.
So, while Reg A+ rules are not specifically directed toward the cannabis industry, the industry benefits by being able to access new pools of financing.
Who Is Investing?
Reg A+ removed the requirement that only “sophisticated” investors (read: wealthy people) can afford to risk investing in early-stage, startup-type companies eligible to seek out investors under the JOBS Act. The intent of the JOBS Act was to increase the investment opportunities available to all Americans, not just those making over $200K per year. When the rules and regulations became effective in 2015, cannabis-related companies started to attract a wide range of investors worldwide who can now invest under Regulation A+.
Still, not everyone is investing. There is a cannabis Exchange Traded Fund (ETF) in the U.S. But, individual stocks that have direct connection to the plant itself usually list on the Canadian exchange. Why? Because the Securities and Exchange Commission regulates the U.S. stock exchanges. The SEC is skeptical of the industry overall and has suspended trading of several cannabis industry companies’ stocks. Many investors don’t want this risk — just yet.
Five Factors Advisors Should Understand About Reg A+-Related Investment in the Marijuana Industry:
- The marijuana industry has made significant investments in real estate. In fact, Green Leaf Investment Fund is a crowd-funded real estate investment fund approved under Reg A+. The minimum investment for this fund is less than $500 and commercial real estate experts with over 30 years of commercial real estate experience comprise the management team.
- The most significant factor is that loyal “crowds” already exist in this industry. Medical and recreational cannabis users are an already existing, enthusiastic, highly social media-savvy bunch. An individual company need only engage part of this group of supporters on social media to help spread its message.
- Investors can invest directly because of their passion for the product. Those type of investors are typically not looking to flip or day-trade these stocks.
- Investors can hold Reg A+ stocks in a brokerage account, retirement account, custodial or trust account, which may help to accommodate a wide swath of investors.
- A company offering Reg A+ investment opportunities may use it as a stepping stone towards becoming a publicly-traded company.
Another huge Reg A+ benefit to companies in the cannabis and other industries is the way startups can go about measuring potential investors’ interest in their companies. During the test-the-waters stage of an issuer’s marketing campaign, potential investors can express interest in a startup concept without having to commit to purchasing securities at that stage.
In exchange, the company can collect a mailing list and, through a broker, eventually offer securities to those who expressed interest previously. It is a marketing option nicknamed “Kickstarter-Lite.” It is a cost-effective way to size up investor appetite in the early stages of a company’s or a product’s development before significant funds are expended.
The cannabis industry is young and changing quickly, but Reg A+ has provided it with early financial support and has provided investors with new opportunities.