The U.S. Securities and Exchange Commission has allowed a share registration to proceed for a company whose business model includes cultivation and sale of marijuana, which are both illegal under federal law, though legal under some state laws.
This approval appears to be the first green light for a share registration by a company in this line of business and could set a precedent for marijuana dealers to access the equity markets, but the agency’s ambivalence about such a business model is clear from the way it handled the registration.
Irvine, Calif.-based Terra Tech Corp. recently received approval for its disclosures and the registration of its shares.
“The SEC allowed the registration statement to go effective without affirmative action by the commission,” said Randy Katz, an attorney who advised Terra Tech on the registration. Specifically, the SEC declined to “accelerate” this registration. Acceleration allows registration to be effective immediately upon the SEC’s approval of disclosures; without acceleration, the registration becomes effective 20 days after.
Acceleration of registration is the norm for underwritten offerings, a spokesman for the SEC said, because members of a syndicate can’t commit to the price they will pay for a stock 20 days in the future, when market conditions may have changed. But in order to grant acceleration, the commission has to find that acceleration is in the public interest. The SEC examiner overseeing the Terra Tech registration cited “policy” in declining to accelerate registration, Mr. Katz said. The SEC declined to comment when contacted by Risk & Compliance Journal.
Terra Tech’s two previous registrations were granted acceleration by the SEC, but at that time the company wasn’t directly engaging in marijuana cultivation and sales. Its prior business model was selling horticultural equipment. Its business model changed last year when the board voted to get into the marijuana business more directly.
Another company planning to cultivate and sell marijuana also has a pending application with the SEC, a source familiar with the company said.
If the SEC continues to deny acceleration to pot stock registrations, it will make underwritten offerings in this sector difficult. But even without acceleration, a registration becomes effective 20 days after the SEC gives a green light, and that opens new avenues for financing pot companies. Terra Tech’s registration application, as we described in a previous article, was for resale of stock from a convertible note, so failure to accelerate did not torpedo a deal, but merely required a slightly longer wait for the owner of the shares.
Terra Tech Chief Executive Derek Peterson isn’t complaining, because he said the fact that the SEC has allowed registration to proceed, even without acceleration, can mean substantially lower financing costs for his company. Financing under the convertible note structure used previously is costly, he explained, with capital providers demanding a 30%-40% discount on shares. This is in part to compensate them for the risk that they will only be able to sell the shares under Rule 144A, which requires a six-month “seasoning” period before restricted shares can be traded.
With its resale registration now effective, Terra Tech has filed another registration statement for an equity line, at a discount of only 5%. “Now that we see the SEC has tolerance for companies in this space and is willing to work with them, it opens an opportunity for better financing,” Mr. Peterson said.
That worries some opponents of marijuana legalization. “It’s hard to believe that the federal government is essentially giving the green light to a company to break federal law. It is one thing for the feds to say they won’t enforce federal law in some areas, it’s entirely another to say they will authorize a company to register shares. My worry is that the feds are now becoming complicit in allowing a new industry to boom–this isn’t Cheech and Chong, this is Big Tobacco 2.0,” said Kevin Sabet, former senior advisor at the White House Office of National Drug Control Policy and co-founder of Smart Approaches to Marijuana, an anti-legalization group.
Gregory J. Millman is a senior columnist with Risk & Compliance Journal. He is the author of The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks, and several other books