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ACKRELL
CAPITAL
CHAPTER IV U.S. Legal Landscape

as publicly traded companies, but ordinarily will market its securities using a private placement memorandum (PPM) that includes information similar to some of the information required to be disclosed by publicly traded companies. An issuer in a private placement is subject to liability under federal securities laws for misrepresentation or fraudulent statements made in a PPM or otherwise in connection with the private offering.

By all indications, federal securities laws do not prohibit companies engaged in federally illegal cannabis activities from raising capital through the issuance of securities, nor do they prohibit industry participants like stock exchanges and investment banks from performing their ordinary market functions in connection with such companies. The SEC has allowed the registration and sale of securities offered by companies engaged in federally illegal cannabis activities and the trading of those securities on multiple U.S. stock markets. Although the SEC has on occasion suspended trading in some of these securities, those suspensions generally have been due to alleged violations of securities regulations rather than unlawful cannabis activities.

A cannabis company offering or selling securities must comply with federal securities laws—like any other issuer—by making required notice or registration filings and by providing truthful material information to investors. Any discussion of risks delivered to investors, whether required by securities laws or volunteered by the issuer as part of a private offering, should include a thorough discussion of the unique risks posed by operating a cannabis business engaged in federally illegal conduct. For an example of some of these risks, refer to Chapter IX, Cannabis Industry Risk Factors.

Federal Bankruptcy Law

Bankruptcy is a legal proceeding by which a debtor resolves its debt obligations and creditors are afforded certain rights in the debtor’s assets in full or partial satisfaction of the debts owed to them. In the United States, bankruptcy is governed primarily by the Bankruptcy Reform Act of 1978 (Bankruptcy Code). Bankruptcy proceedings are conducted primarily by federal bankruptcy courts and generally involve administration of a debtor’s assets either by a court-appointed trustee or by the debtor with approval and oversight of the court. Bankruptcy can be voluntary (initiated by the debtor) or involuntary (initiated by creditors). Bankruptcy provides certain rights and protections to the debtor and the creditors and is intended to fairly and finally resolve debts so the parties can pursue other affairs.

Debtors whose assets relate to federally illegal cannabis activity, as well as their creditors, generally are not eligible for bankruptcy protection for two reasons: First, federal courts refuse to appoint trustees to administer or take control of unlawful assets or business operations. Second, pursuant to an equitable doctrine known as “unclean hands,” federal courts typically decline to honor creditor claims that arise from knowingly transacting with a debtor in furtherance of unlawful activity. A federal bankruptcy court in Arizona invoked both these reasons in its 2015 decision in In Re Medpoint Management, LLC; details of this case follow.

Medpoint Management, LLC (Medpoint) managed the cultivation and business operations of a state-legal Arizona medical cannabis dispensary. Medpoint defaulted under various loan and consulting agreements directly related to its dispensary activities, and the four creditors under those agreements

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