Editorial: Cannabis investment needs greater oversight

Fears are growing that a laissez-faire regulatory approach could result in a "wild west" environment for cannabis investment

Equity crowdfunding has been a welcome platform for early stage companies to raise capital and is seeing significant interest from investors, both large and small.

But it's time the financial regulator paid greater scrutiny to what some of the companies are telling investors in their offer documents.

This is especially so given some serious questions arising from recent crowdfunding by medicinal cannabis companies. See our business feature here.

Furthermore, depending on the outcome of the New Zealand cannabis referendum with preliminary results due today, there is likely to be fresh interest from recreational cannabis businesses in the crowdfunding sphere.

It would be only natural for businesses looking for seed capital to expand cannabis operations to turn to the crowd for funds.

When equity crowdfunding was introduced in 2014, the Government chose to take a light-hand approach to regulation.

Under the current regime the offers can be promoted to the general public under a reduced disclosure regime, compared to normal requirements.

This reduces the regulatory cost and burden, opening the door to funding for companies which aren't yet ready to conduct an initial public offering and sharemarket listing. It also presents an alternative to banks, angel investors, and venture capital.

The regulations allow a company raise up to $2 million from retail investors (and more through wholesale or other eligible investors) in any 12-month period. The platforms themselves have been pushing for the retail cap to be raised to $10m.

However, the Financial Markets Authority (FMA) also elected not to enforce any particular requirements for equity crowdfunding companies to disclose any particular information.
This is in contrast to some far more prescriptive US and Canadian rules.

While no crowdfunded companies have been revealed as fraudulent, there are lingering concerns that this relatively laissez-faire regulatory approach could result in a "wild west" of substandard platforms.

The FMA is now looking into at least two equity crowdfunded companies in terms of their disclosures to investors.

This comes two years after the FMA warned equity crowdfunding platforms and companies offering financial products through them not to put out false or misleading advertising to investors.

It even published a guidance paper prompting platforms and issuers to take care when advertising and communicating to customers to help them make appropriate investment decisions.

The Financial Markets Conduct Act's fair dealing provisions ban misleading and deceptive conduct, false or misleading representations, unsubstantiated representations, and offers of financial products during unsolicited meetings.

It is telling that Sally King, who heads the New Zealand Medical Cannabis Council, is concerned about some disclosure issues she's seen.

Her organisation is already taking steps to improve transparency, including plans to publish a list of companies with valid medicinal cannabis licences next month. The change is designed to help prevent companies from misrepresenting their licences.

Of course, it's not just cannabis companies that need to be scrutinised. But the sector is a hotbed of activity at the moment with some of the capital raisings filled within just a few hours.

It's important that early-stage and small companies get this right, especially in the current economic climate. After all, these sorts of businesses are seen as vital in creating new jobs as the country looks to rebuild in the wake of the Covid-19 crisis.