SEC Targets Cannabis Industry Stock Promotion Scheme

It looks like the Securities and Exchange Commission (SEC) has its eye on the cannabis industry and specifically stock promotion schemes. Last month, the Commission announced charges against two cannabis companies and associated individuals for their involvement in “a fraudulent scheme to promote the securities.” The companies at issue are Elegance Brands Inc., Emerald Health Pharmaceuticals Inc., High Times Holding Corp., and Cloudastructure Inc. Elegance Brands produces a product called Gorilla Hemp, a CBD energy drink.

What is a stock promotion scheme?

Stock promotion schemes involve scenarios where public companies hire promoters or marketing firms to generate publicity for their stocks, and those promoters/marketers hire writers to publish articles boosting those stocks – while failing to publicly disclose that they’re receiving payments from the companies. Those writers will post seemingly unbiased, glowing articles or reviews about the companies when they’re really nothing more than paid advertisements.

Sometimes, the count of articles can get into the hundreds, which may even include false statements that the writers had not been compensated by the companies they’re writing about. In a 2017 press release, Stephanie Avakian, then-Acting Director of the SEC’s Division of Enforcement, stated:

“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public.  These companies, promoters, and writers allegedly misled investors by disguising paid promotions as objective and independent analyses.”

SEC v. Mikula, et al.

This SEC complaint alleges that Jonathan Mikula unlawfully promoted the securities of four issuers without disclosing the fact that he was paid for those promotions. Mikula allegedly promoted the securities through a newsletter called Palm Beach Venture. One of the articles stated that Gorilla Hemp was retailing for $3.95 per can, that Gorilla Hemp could yield Elegance Brands a 2,630% price increase, and that there were distribution agreements in place which could potentially increase Elegance Brands’ share price by 9,900% in five years. He presented the “recommendations” to invest as unbiased and not paid for, even though he actually was compensated via cash and extravagant expenses.

Mikula’s associates were also charged for acting as middlemen. They allegedly arranged to receive a percentage of investor funds under the guise of “consulting agreements” with the companies. And of course, the companies themselves were charged as having participated in the schemes and having made material misrepresentations and omissions in SEC filings and other investor materials.

The complaint alleges that investors purchased approximately $80 million in the securities offered by these companies after the fraudulent promotion. No wonder it caught the SEC’s attention.

The SEC settlements

Most of the parties have settled with the SEC by agreeing to permanent injunctions (meaning, there is a laundry list of things they can never do again, effective immediately). Monetary penalties range from the $100,000s to the $700,000s, and the individuals have agreed to various bans from serving as an officer or director of any company. Mikula and one of his associates have yet to settle.

While the SEC’s pursuit of stock promotion schemes is no new development, their attention to the cannabis industry makes sense in light of the fact that securities violations (and associated lawsuits) abound. We’ll monitor this space and report on any new cases, including what lessons can be learned from any stock promotion schemes.