The industry has just seen the first Reg A issuer get hit by the SEC.

Did the SEC cite fraud? No. Did it cite problems with the issuers’ lawyer, accountant, marketing partner, or other service providers? Not at all. Did it cite anything about the issuers’ particular industry (Cannabis-related)? Nope, they wouldn’t have qualified them in the first place if that were the case.

For what then? Failure to properly file an annual report as required by regulations.

Was it an oversight on the issuers part? Probably. Was it malicious intent? Of course not (well, I don’t know for a fact as I haven’t personally spoken with the issuer, but I can’t imagine it). Was it an infraction of the rules? Yep. Did the SEC terminate, revoke or otherwise cancel the offering? No, they just suspended it.

What happens now? Not exactly sure, this is unchartered waters in the post-JOBS Act world. First, of course, is that the offering has been paused, as the SEC has “Temporarily-Suspended” it. I’m sure that the issuer and their attorneys & accountants are scrambling to resolve this and get the proper forms filed. Will the SEC let the offering continue once the forms are filed? I don’t know, probably. Will the SEC fine or sanction the issuer? No-one knows, this is all so new. Will other bad things happen? Again, I have no idea, but I’ve got to speculate that this has happened countless times in the past with public companies and so there must be some precedent which we can use to guesstimate what might happen (as Reg A and Reg CF are private securities, not fully reporting companies, the fallout of missing a required filing is something we don’t really know yet).

Sadly this is the first of many. And I do mean “MANY” such instances to come. Not just with Reg A, where issuers may often be younger and less experienced, but usually have the cash to have professionals in their corner, but especially for Reg CF (aka “Title III”) issuers who are required, it seems, to file a Form C pretty much every time they sneeze. I don’t know how many required Form C filings will be missed, but I suspect it will be a lot. And it’ll be interesting to see how the regulators handle this going forward.

So nobody should get worked up. The world didn’t end. The JOBS Act is still the best legislation we’ve seen in 80 years. And the regulators are doing their job. Just all the more reason why issuers need to appreciate that they are selling “securities”, and as such they have ongoing responsibilities that they need to be aware of and abide by.

Best Regards,
Scott Purcell
FundAmerica, LLC