As the cannabis industry continues to expand in Massachusetts following the state’s legalization of recreational marijuana, Massachusetts Secretary of State William Galvin warned that cannabis companies will face increased scrutiny from the state’s securities regulators.

On June 19, Galvin announced an enforcement action filed by the Massachusetts Securities Division against a Holyoke man and his former company for making false statements to investors and for selling unregistered securities.

The complaint alleges that David Caputo and Positronic Farms, Inc. illegally marketed and sold $1.3 million of unregistered securities to investors throughout the country, without verifying whether investors were accredited (as required for such private placement offerings).  It also alleges that Caputo and Positronic Farms violated the anti-fraud provisions of the Massachusetts securities laws by making misrepresentations to investors regarding when and how their funds would be used.

Among other things, the complaint seeks rescission of investor assets, an administrative fine, and an order permanently prohibiting Caputo from serving as an officer or director of a Massachusetts company and from offering or selling securities in Massachusetts.

This is the second enforcement action in just the past two months brought by the Massachusetts Securities Division that focuses on alleged securities fraud in the cannabis industry.

In April, Massachusetts investment advisor Frederick McDonald, Jr. was charged with defrauding over 100 investors in his medical marijuana businesses despite the fact that he did not have the proper license or a dispensary.  The complaint alleged that McDonald took more than $8 million in assets from investors but failed to disclose key risk factors and his own conflicts of interest in the offering documents.

Secretary of State Galvin made clear that this trend will continue.  In an interview with the Boston Globe, Galvin warned that the rapid expansion of the cannabis industry has increased the risk that certain companies will seek to mislead investors hoping to capitalize on the new market.  “No pun intended, but there’s a buzz around marijuana right now with investors,” Galvin said.  “We’re concerned that people are attracted to these businesses, but because they’re non-banked entities, it’s very hard to determine whether they’re real or worthy of investment.”

As a result, Galvin indicated that the Massachusetts Securities Division will perform a proactive “sweep” of companies operating in the cannabis industry, to ensure that they are complying with the securities laws and providing all necessary disclosures to investors.  Any entities that sell securities without permission or make false representations to investors may face charges.

This increased scrutiny by securities regulators in Massachusetts underscores the importance of consulting counsel for any companies that plan to sell securities or solicit investments in the cannabis industry.  Even in states where there has been legalization, there are still complex regulatory requirements that must be navigated, and any company that fails to comply with those requirements can face substantial penalties.