Oregon psilocybin licensing kicks off in just over a month. We are finally in the home stretch of the two-year run-up following the passage of Measure 109. At this point, many people are forming psilocybin businesses and raising money for these new ventures.
What’s old is new again
We went through similar business structuring and capitalization cycles with Oregon cannabis in the early days. Then, we did it again with hemp. At the onset of each program, a typical set-up looked something like this: a couple of founders with limited capital, traditional market bona fides and maybe credit card debt, would join forces with an investor and their few hundred grand. This crew would then form an LLC or corporation to secure a license on somebody’s property.
In psilocybin, we’ve been forming small LLCs and corporations all over again. One commonality among most of these transactions, large and small, is something called “securities.” Simply defined, a security is a negotiable financial instrument (company stock, certain debt instruments, investment contracts, etc.) offered or sold to an investor who lacks real authority to manage the investment.
Yes, you are selling securities
Many psilocybin companies are trading in securities, even if unaware of this fact. And many of the corner-cutting companies will skate by. But given the liability exposure here — including lawyer liability for bad deals — it’s crucial to get the securities issuance right.
Federal and state securities laws are very complex, but they apply even to small businesses (including psilocybin businesses) offering or selling a security to even just one person. Federal law requires that the issuer either: 1) register the offering and sale with the SEC (“go public”), or 2) conduct that offering and sale within a registration exemption. Fortunately, there are quite a few exemptions available, but you’ve got to hit the target square. And even when you don’t have to register, it’s a bad idea not to make extensive disclosures to offerees and investors in conjunction with any solicitation.
Finally, in addition to federal securities laws, an Oregon psilocybin business issuing securities must comply with Oregon blue sky laws and also the blue sky law of each state in which a purchaser is located. For this reason, many of our psilocybin company clients will end up paying registration fees in other states. Those can add up pretty fast and there may be circumstances where it’s just not worthwhile.
All of that said, below are the Oregon small offering exemptions that may be used for an Oregon psilocybin business, which do not require registration when done correctly.
1. Sales to accredited investors
An “accredited investor” is an investor with special status under financial regulation laws, generally due to high net worth. ORS 59.035(5) exempts transactions between start-ups and accredited investors from registration, so long as there is no public advertising or general solicitation in connection with the transaction. This is a self-executing exemption, which means that no state filing is necessary to take advantage of the exemption.
2. The “10 in 12” exemption
ORS 59.035(12) exempts from Oregon registration requirements transactions that result in not more than 10 purchasers within Oregon during any consecutive 12 months. Note that accredited investors do not count as “purchasers” here. Repeat transactions with the same purchaser during a 12-month period also do not increase the number of purchasers (in other words, each purchaser is counted as one purchaser for the 12-month period). To use this exemption, no commission or other remuneration can be paid, and no public advertising or general solicitation can be used.
3. Federal Rule 506 (Regulation D) offerings
If you’ve made it this far, I won’t treat you to an outline of SEC Rule 506; instead, there is a good overview of kosher offerings here. Suffice it to say that in Oregon, for any Rule 506 offering, ORS 59.049(3) provides that the local start-up must, within 15 days after the first sale in the state, file a completed Form D (including the state signature page) with the Oregon Securities Division. There is also a $250 filing fee requirement.
The bottom line
The bottom line is that most new Oregon psilocybin businesses raising money are subject to securities laws. That is true even if the business intends to break federal laws by trading in a controlled substance, and even if the business is taking on investment (equity, loan, whatever) from just one person. With a new wave of psilocybin businesses coming online, it’s important to get it right. The alternative may be getting sued for securities violations — or even controlled substances investment fraud — and that’s no fun at all.
For more on this topic, check out Oregon Psilocybin Business Issues, Part 2: Banking, Raising Money, Siting.