SEC Allows Cannabis Company to Register Shares

SEC Allows Cannabis Company to Register Shares

The U.S. Securities and Exchange Commission has allowed a marijuana company to register its shares. Terra Tech Corp of Irvine, California is a Nevada corporation that primarily manufactures and sells hydroponic agriculture equipment and supplies. According to The Cannabist, hydroponics is booming: “Supplying the lighting, nutrient and water needs of … plants has resulted in huge growth in hydroponics stores and grow operation supply retailers. According to a market research report published by IBISWorld, the hydroponic equipment retail industry has grown by 7.2 percent per year nationwide since 2009, with California and Colorado growing at a whopping 32 percent.”

Terra Tech stock trades on the OTCBB under the symbol TRTC.

According to Terra Tech’s Prospectus and recently allowed Form S-1 Registration Statement,

“[Terra Tech] recently formed three majority-owned subsidiaries for the purposes of cultivation or production of medical marijuana and/or operation of dispensary facilities in various locations in Nevada upon obtaining the necessary government approvals and permits, as to which there can be no assurance. Each subsidiary was formed with different investors, thus necessitating the need for multiple entities with different strategic partners and advisory board members.  In addition, we anticipate each subsidiary will service a different geographical market in Nevada.  Effectuation of the proposed business of each of (i) MediFarm, LLC (a Nevada limited liability company (“MediFarm”), (ii) MediFarm I, LLC, a Nevada limited liability company (“MediFarm I”), and (iii) MediFarm II, LLC, a Nevada limited liability company (“MediFarm II”) is dependent upon the continued legislative authorization of medical marijuana at the state level. We expect to allocate future business opportunities among MediFarm, MediFarm I and MediFarm II based on the locations of such opportunities.”

Thus, Terra Tech is not yet in the marijuana cultivation and sales business, but will commence that business if and when it receives the necessary licenses in Nevada. This appears to be the first SEC allowance of registration of shares of a cannabis grower and seller, albeit one not yet in production.

In November 2014 Terra Tech filed a registration statement for the resale of stock owned by one of its investors. The Wall Street Journal LawBlog reports that the SEC recently allowed the registration statement to go effective without action, which means it becomes effective 20-days after the SEC approves the disclosures in the registration statement. Typically, an issuer will request, and the SEC will grant, acceleration of the effective date to allow the issuer to immediately sell its shares. The SEC refused to grant Terra Tech’s request for acceleration. The article at the WSJLawBlog includes a good discussion of the significance to issuers of not receiving accelerated effectiveness – it makes it difficult if not impossible to do an underwritten public offering. However, that was not an issue in this case because Terra Tech was registering for resale stock acquired earlier by an institutional investor, Dominion Capital LLC, who purchased convertible notes and warrants from Terra Tech. Under the terms of the notes and warrant, Dominion had a right to require that stock be registered for resale in the future (registration rights). Therefore, Terra Tech was not registering its own stock for sale, and will not directly receive any of the proceeds from the sale of the registered stock for use in the marijuana business. It will be interesting to see whether the SEC allows a registration statement for direct sale to the public by a marijuana company.

What About Colorado?

Terra Tech is a Nevada corporation that plans to conduct its marijuana business in Nevada through Nevada subsidiaries. Currently, Colorado law prohibits ownership or beneficial financial interest in a Colorado licensed cannabis business, by any person who is not a Colorado resident as defined under Colorado marijuana regulations. To qualify, the owners must submit exhaustive and detailed identification information, including fingerprints, to the Colorado Marijuana Enforcement Division, and be approved for ownership by the MED. Under current Colorado law, there would be no reason for a Colorado licensed marijuana company to register its shares with SEC, unless it can also control the sale of those shares solely to persons who qualify to own a financial interest in a licensed company. Failure to do so would cause the loss of its license. Colorado’s regulatory scheme precludes registration and public trading of shares in a marijuana company on any exchange or bulletin board, since it is not possible to limit ownership to qualified Colorado residents. Only time will tell if allowance and registration by the SEC of stock in marijuana companies will provide some incentive for Colorado regulators to loosen the ownership restrictions on licensed Colorado marijuana companies, long term.

By | 2016-12-21T05:11:19+00:00 January 29th, 2015|Uncategorized|Comments Off on SEC Allows Cannabis Company to Register Shares