Investing in any kind of business is risky. Investing in small, privately held businesses is even riskier, and when those businesses are in the marijuana space, doubly so. In addition to being generally uncertain on the business front, popular markets like marijuana are havens for fraud. This is why absolutely nothing in Noelle Crombie’s riveting story over the weekend about fraudulent fundraising in the Oregon licensed marijuana business market surprises us. Go read it, as it provides the context for this post. We have seen this all before: over and over in the marijuana industry. Perhaps the only unique thing in this Oregon story is that the state business fraud agency is getting involved.
To summarize the Oregon cannabis fraud story, a would-be pot entrepreneur received a letter stating she was going to get several pot licenses in Oregon because she was such a promising business person. The letter was a fake even though it looked like a real government document. The would-be entrepreneur hired some financial consultants to help find investments, because of course you need investors to finance seven new licensed businesses. And they did find investors, who paid hundreds of thousands of dollars into the “business” to get a piece of the action. Then, as everyone starts to learn that the original letter was fake, accusations fly. Investors want to pull their money out. Lawsuits abound. And, to put a cherry on top, the Oregon Department of Consumer and Business Services gets wind and starts a fraud lawsuit.
There are a lot of moving parts in the actual story. It’s not clear to what extent the entrepreneur was involved with the fraud. We don’t have any extra facts, so we have no ability to judge anyone involved in the Oregonian story. But this isn’t about one specific story. It’s about how every single actor in this Oregon morality play, along with its countless iterations that we see every day, almost certainly could have and should have been smarter, slower, and more careful about their actions.
The “Lucky” Business Owner
This paragraph could be written only in cliché and still make sense. If something seems too good to be true, it probably is. There’s no such thing as a free lunch. Don’t count your chickens before they hatch. Etc.
Never in the history of state business licensing has a state selected an individual in the industry to grant “special licenses” to because that individual would be an “asset.” The real world doesn’t work that way, and business licensing doesn’t work that way. That’s not to say there’s no such thing as insiderism. There certainly is, and it can pay dividends to have good relationships with state agencies. But those relationships pay off in the form of knowledge. Your contact at the state lets you know in advance that a new rule is coming down, or you get some advance notice of a new licensing window opening up.
If you get a letter from a government agency that makes it seem like you’re getting a business opportunity for free, you need to do one of two things — call the government agency that supposedly sent the letter or call your attorney because you are the victim of either a fraud or a prank. And even if you’re not, you have to do your homework to verify that. You don’t take a notice from the state that says you are going to get something and then turn around and immediately start fundraising.
The “Professional” Financial Consultants
I actually like financial consultants. I’m in the middle of finishing the sale of a company (not pot-related) where the financial consultants for the seller were key to getting the deal done. The best businesses in the country aren’t built by the investment people. They’re built by the product makers. Whether you’re dealing with software, manufactured goods, agricultural products, or even marijuana, the bulk of real success comes from people passionate about the product. When those people don’t have experience with finance and investing, and they don’t know the first thing about how to reach out to an investment network, it makes sense to bring on outside help.
But when making that hiring decision, you need to be dubious. The easiest place for con artists, charlatans, and frauds to worm their way into an industry is through offering vaguely defined consulting services. It is not hard to take advantage of small business owners who don’t know any better. They use finance jargon to make you think they are wizards that are going to make you rich, but it’s all flimflam. For more on this, check out Cannabis Consultants: The “Gift” That Keeps On Giving and Ten Things to Avoid To Succeed with Your Marijuana Business.
Here’s the number one rule on working with financial and business consultants: if you don’t understand exactly what they are doing or proposing that you do, don’t do it. If it’s too complicated for you to understand, make the consultant explain it to you. If you still don’t get it, there are only two possibilities: 1. You are involved in a scam, 2. They aren’t very good at their jobs and the advice is bad.
If this happens, you need to fire that financial/investment consultant and move on. When third parties, be they investors or customers, interact with your business, you’re the one on the line. You can’t blame professionals and consultants for your getting bad advice. You owe a duty to your investors and your employees and your customers to know what your business is up to. And that’s where it comes back to understanding what the finance guys are doing. If you don’t get it, then you aren’t living up to your obligations as a business-owner.
The “Savvy” Investors
Last but not least, we have the people who throw nearly $200k at a cannabis business based on documentation that doesn’t even pass the smell test. See above re: “insider-status” with state governments.
But when you’re investing six figures in a business, it should do a lot more than pass a smell test. I just wrote a couple of weeks ago about how businesses need to prepare for smart investors. They need to have their business licenses, contracts, employment relationships, current ownership roster, and more organized clearly and efficiently so that smart investors will take the business seriously.
But that doesn’t mean much if you are willing to invest money just because someone asks nicely. Doing proper due diligence on an investment (cannabis or otherwise) makes it almost impossible to defraud you as an investor. We cannot emphasize this point enough. If you are going to invest five, six, seven, or eight figures into a marijuana business, you have to verify independently pretty much everything that the business tells you, and certainly everything that might matter.
Sometimes, this leads to some head-butting. Business owners looking for financing find the due diligence process tedious, and some find it insulting, as if you don’t trust them. But in our experience, a little annoyance at the outset isn’t a problem. Just do what our other clients do — blame it on the lawyers.
And if that annoyance turns into actual hostility at the due diligence process, run away. If someone is raising money for their business but refuses to be transparent, it’s because they are hiding something from you. Don’t give them money.
In criminal law, victim-blaming is absolutely wrong. Not so with business fraud. There are many different ways to become a victim when engaging in a new business. And there are many people whose goal is to take advantage of you and to separate you from your money, or use you to take someone else’s money. It is everyone’s responsibility to make sure they are doing their part to avoid being swindled or to avoid allowing others to be swindled. When business actors work openly, clearly, and transparently, fraud like this almost never takes place. Being careful and smart while avoiding the kind of avarice that dulls your better judgment will yield better results.