13 Jul Corona-Cannabis Update #16: Virus Yields Class Action Suit, IPO Suspended

As the seasons zip by during this surreal time, we hope all are staying safe and sane, especially in states most effected currently such as California, Texas and Florida. Here in New York the hard work seems to have paid off for now, with very low rates continuing as the populace slowly and carefully emerges back to life. Offices are beginning to reopen with mandatory masks, temperature checks, closed kitchens and new plexiglass dividers between work stations. New York City has postponed indoor dining as other retail outlets are allowing limited guests. The current debate about reopening schools has become politicized as it has a big impact on parents’ ability to return to their workplaces. Bottom line: to paraphrase/butcher the great Robert Frost, it appears we have miles to go before COVID-19 is a memory. Here’s the latest on the impact of the pandemic on the cannabis and hemp industries:

• Coronavirus class action: A lead law firm was recently appointed in a case against a major multistate operator. The case, one of three class actions pending against the MSO, alleges that the company misled investors by claiming they could not make an interest payment due to the coronavirus. Plaintiffs claim the company previously announced it had escrowed funds to make the interest payments.
• IPO suspended due to late filing: A well-known cannabis media company announced a few weeks ago that it would not be able to make even the SEC-permitted extended deadline to file its annual financial information for 2019 by June 12 due to the pandemic, and the filing is still pending. Media reports now indicate that this means their two-year old Regulation A+ IPO has to be put on hold at least until the company’s filings are current.
• COVID kills Arkansas but not Nebraska legalization. Organizers of the effort to legalize adult use of cannabis in Arkansas have said that COVID-19 effectively ended their chance to collect enough signatures to put the issue on the ballot for a constitutional amendment this November. Arkansas has had legal medical marijuana since 2016, but stakeholders such as the Republican Governor Asa Hutchinson oppose adult use. Proponents tried to change the state signature-gathering rules in court but were facing stalling tactics, eventually just running out of time. Nebraska legalization advocates, however, believe they have more than enough signatures to put adult use on the ballot there. To qualify they needed 121,000 signatures but have submitted more than 182,000, hoping that successful challenges will not exceed the excess.
• State treasurers push SAFE banking. Sixteen state treasurers have sent a letter to the Congressional leadership imploring them to include SAFE Banking Act provisions in the next coronavirus stimulus bill. They point to the pandemic creating additional safety concerns for cannabis workers, noting, “To keep workers, patients and consumers safe, it is essential that we reduce the use of cash by creating access to financial services for these state-licensed businesses.” The provisions are in the House-approved bill, as we have noted.
• Deals and deals. One major operator just terminated two acquisitions of Colorado businesses, one a cultivator and the other in the concentrates business, due to “business and valuation issues.” It was just disclosed that another MSO raised $19.6 million from four investors in May, and recently some new debt of between $30 million to $50 million. An Internet celebrity (whose father served time for securities violations) and his CBD company are being sued for diverting corporate funds for personal use. A public dispensary company raised about $8 million.

The class actions keep coming, keep an eye on these, they could be ultimately company-killing for some. The two-year old Reg A+ offering by the media company has been the subject of quite a bit of both positive and negative press coverage, hopefully they can get caught up on the late filings and finally close out the IPO offering. Frustrating that something simple like gathering signatures electronically is standing in the way of allowing voters to weigh in on legalization. I think, despite the efforts of the State Treasurers, the SAFE Banking Act is not likely to get through the Senate. And it is nice to see some deals closing although there are very few and they remain limited to public companies. An ongoing challenge for the industry for sure.

Post-pandemic tip of the week: Experts are expecting more saving and less spending during and after the COVID-19 craziness. We saw some of this after 2008 as well. This is more likely to hit big ticket items like cars and appliances, and we may see continued or even increased spending on “small luxuries” like premium ice cream and yes, cannabis. Historically the US savings rate has been about 5%, up from closer to 3% about 7-8 years ago. But many countries’ rates, such as in Australia, Germany, France and Spain are much higher (some, like Japan, are lower). Less savings means more spending and more contribution to the economy, but savings increases personal protection and less burden on welfare and heath clinics and the like. So let’s watch this one!