Marijuana IPOs Risk Class-Action Lawsuits
NEW YORK ( MainStreet) Colorado Green Tours is currently a private company in Denver with possible designs for an IPO.
"Going public is not at the forefront of our mind, but it's a possibility," said Peter Johnson, founder of the travel agency. "There's so much stuff going on right now."
Fortunately, Johnson is busy trying to raise $1 million for travel, tour and ground operations, because if a marijuana company were to go public, it would most likely face serious legal ramifications across state lines.
"How do you do a multi-state offering when marijuana laws vary state to state?" asked Timothy Sykes, an entrepreneur and trader who short sells cannabis penny stocks. "Do you only offer securities in states where cannabis is legal? If so, you limit your investor and capital base dramatically."
While legal in Colorado, marijuana use is still illegal at the federal level, ruling out many investors with big potential dollars to invest in a marijuana company going public.
"Institutional investors such as endowments, pension funds, foundations and insurance companies may be prohibited from investing in companies that are involved in activities that are illegal at the federal level," said Maclyn Clouse, a finance professor with the University of Denver's Daniels College of Business. "An IPO would possibly have to be targeted to only retail investors, which is a much smaller amount of investment dollars."
Couple that with the fact that national drug abuse advocates say marijuana use is not harmless among the youth.
"Regular marijuana use can have profound negative effects on the teenage developing brain," said General Arthur T. Dean, chairman and CEO of Community Anti-Drug Coalitions of America (CADCA). "It can hamper a young person's ability to learn and affect their development. Smoking the drug at a young age increases a young person's chances of becoming addicted to marijuana and other drugs into adulthood."
Historically, tobacco, alcohol, gambling and similar vice stocks have experienced boycotts by investors on moral grounds, which reduces demand and ultimately the price of those stocks.
"It is currently not clear how the SEC and other regulators of investment banking would respond to an investment bank dealing with a company that is breaking federal law," Clouse told MainStreet. "The investment banks would also have to consider the impact that working with cannabis companies could have on some of their existing clients, such as religious organizations, their foundations and endowments."
Like tobacco litigation, marijuana is sure to have its day in court eventually.
"It may not be immediate, and it may be on a smaller scale than tobacco, but it would be a distraction if not total disruption of a fledgling marijuana company's business," said Mark Britton, attorney and founder of Avvo.com, a legal website based in Seattle.