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ACKRELL
CAPITAL CHAPTER IV U.S. Legal Landscape
as publicly traded companies, but ordinarily will market its securities using a private placement mem-
orandum (PPM) that includes information similar to some of the information required to be disclosed
by publicly traded companies. An issuer in a private placement is subject to liability under federal secu-
rities laws for misrepresentation or fraudulent statements made in a PPM or otherwise in connection
with the private offering.
By all indications, federal securities laws do not prohibit companies engaged in federally illegal
cannabis activities from raising capital through the issuance of securities, nor do they prohibit industry
participants like stock exchanges and investment banks from performing their ordinary market func-
tions in connection with such companies. The SEC has allowed the registration and sale of securities
offered by companies engaged in federally illegal cannabis activities and the trading of those securities
on multiple U.S. stock markets. Although the SEC has on occasion suspended trading in some of
these securities, those suspensions generally have been due to alleged violations of securities regulations
rather than unlawful cannabis activities.
A cannabis company offering or selling securities must comply with federal securities laws—like
any other issuer—by making required notice or registration filings and by providing truthful material
information to investors. Any discussion of risks delivered to investors, whether required by securities
laws or volunteered by the issuer as part of a private offering, should include a thorough discussion of
the unique risks posed by operating a cannabis business engaged in federally illegal conduct. For an
example of some of these risks, refer to Chapter IX, Cannabis Industry Risk Factors.
Federal Bankruptcy Law
Bankruptcy is a legal proceeding by which a debtor resolves its debt obligations and creditors are
afforded certain rights in the debtor’s assets in full or partial satisfaction of the debts owed to them. In
the United States, bankruptcy is governed primarily by the Bankruptcy Reform Act of 1978 (Bank-
ruptcy Code). Bankruptcy proceedings are conducted primarily by federal bankruptcy courts and gen-
erally involve administration of a debtor's assets either by a court-appointed trustee or by the debtor
with approval and oversight of the court. Bankruptcy can be voluntary (initiated by the debtor) or
involuntary (initiated by creditors), Bankruptcy provides certain rights and protections to the debtor
and the creditors and is intended to fairly and finally resolve debts so the parties can pursue other
affairs.
Debtors whose assets relate to federally illegal cannabis activity, as well as their creditors, gener-
ally are not eligible for bankruptcy protection for two reasons: First, federal courts refuse to appoint
trustees to administer or take control of unlawful assets or business operations. Second, pursuant to
an equitable doctrine known as “unclean hands,” federal courts typically decline to honor creditor
claims that arise from knowingly transacting with a debtor in furtherance of unlawful activity. A federal
bankruptcy court in Arizona invoked both these reasons in its 2015 decision in In Re Medpoint Man-
agement, LLC; details of this case follow.
Medpoint Management, LLC (Medpoint) managed the cultivation and business operations of a
state-legal Arizona medical cannabis dispensary. Medpoint defaulted under various loan and consulting
agreements directly related to its dispensary activities, and the four creditors under those agreements
© 2017 Ackrell Capital, LLC | Member FINRA/SIPC 81
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