SEC Archives - Green Market Report

Debra BorchardtDebra BorchardtAugust 4, 2020
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6min4920

A cautionary tale for cannabis companies and the Securities & Exchange Commission (SEC) was laid bare last week when the Central District of California filed a $25 million complaint against nine defendants. The group raised money from investors by selling the unregistered stock for the purpose of funding a marijuana farm in Salinas California. 

The individuals named included Anthony Todd Johnson (aka Todd Johnson), Jeremy Johnson, Richard Portillo, Charles Lloyd, Mark Heckele, and Michael Gregory. The companies that wanted funds for the marijuana farm were named as Smart Initiatives, LLC, Valley View Enterprises LLC, Target Equity LLC, Zabala Farms Group, LLC, and Green Growth Ventures, LLC. The companies that raised money for a CBD extraction facility were named as – C Quadrant LLC, GPA Enterprises LLC, RJ Holdings Group, LLC, and Extraction Capital Tier 1, LLC. 

Alleged Actions

The group engaged in so many alleged actions, it’s easiest to just list them as follows:

  • Claimed the investments would generate returns of 100% or more
  • Misrepresented their compensation
  • Misappropriated $2.7 million
  • misled and deceived investors about a purported “business loan,” secured by C-Quadrant’s real property
  • Rather than using that business loan for the benefit of C-Quadrant, Gregory used the loan proceeds to pay off different investors in an entirely unrelated entity. 
  • Falsely claimed a relationship with a prominent California University
  • Acted as unregistered broker-dealers in connection with the offerings, none of which were registered with the Commission
  • Used general solicitation to attract prospective investors, including via cold calls, Craigslist, Facebook, and other websites and social media.
  • None of the securities offerings were registered with the Commission as required by the Securities Act
  • Many of the investors in each offering were unaccredited and unsophisticated. 
  • The defendants did not take reasonable steps to verify the investors’ accreditation status

The alleged behavior took place between 2017 and 2019. The Johnsons used pro-forma numbers when soliciting investors. The farm though revised those figures.   The revised pro forma P&L statement adjusted the farm’s projected net income significantly downward, from a range of $23 to 37 million per year to a range of just $6 – $23 million per year. The group though continued to raise money knowing the farm could not generate the amounts they are accused of touting. They also told the investors they would get quarterly payments, which the farm said it had not agreed to make.

C-Quadrant Property

The case says that the sales team touted C-Quadrant’s ownership of the property, the Johnsons and Gregory failed to disclose that they had collateralized C-Quadrant’s property and that Gregory had used the loan proceeds to pay off investors in an unrelated entity. In early 2018, C-Quadrant purchased a former recycling plant, where it planned to locate its extraction facility. In October 2018, prior to the start of the second C-Quadrant offering, the Johnsons and Gregory transferred ownership of the property to another entity they controlled and used it as collateral for an almost $2.9 million loan. Gregory used the majority of the loan proceeds to make payments to investors in an unrelated cannabis farm that he owned. 

Less Than Honest Bios

The group was also less than honest with investors about their backgrounds.  Johnson told prospective investors, in Gregory’s presence, that Gregory had an MBA, which he apparently did not have. Jeremy Johnson had filed for personal bankruptcy in 2012 but did not disclose this to investors. 

Portillo has an extensive criminal record that also wasn’t disclosed to investors. In June 2018, Portillo was convicted of felony domestic violence and witness intimidation. He had at least two prior convictions for domestic violence, and was on probation and subject to a restraining order at the time of the 2018 assault. Portillo also has prior convictions for felony possession of marijuana for sale, felony taking of a vehicle, and felony assault with a deadly weapon. Investors, no doubt, would have liked to have this information.  

Punishment

The SEC is asking the group to disgorge all the money received and pay civil fines.


Debra BorchardtDebra BorchardtJuly 23, 2020
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3min6060

Irth Communications and Andrew Haag may not ring a bell for many cannabis stock shareholders, but the group was hired to promote stocks and did not disclose that information. The two received a cease and desist order from the Securities Exchange Commission on Wednesday.

No cannabis companies were named in the order. The order states that the company, “Tweeted or retweeted twenty-three times positive news articles describing the business, products, and securities of nine clients. Irth received approximately $35,000 in compensation from these nine clients attributable to these twenty-three tweets and re-tweets.” this compensation was not disclosed.

The order also stated that “Irth shall, within 10 days of the entry of this Order, pay disgorgement of
$35,000, prejudgment interest of $4,233.71, and a civil money penalty of $35,000 (for a total of $74,233.71) to the Securities and Exchange Commission.” Haag, who is the majority owner Haag was told that within 10 days of the entry of this Order, he was to pay a civil money penalty of $7,500 to the Securities and Exchange Commission.

Irth Clients

MassRoots (MSRT) was one of the companies that had hired Irth Communications, but insisted it did not know about stock promotions. Other cannabis companies said to have hired Irth Communications include 22nd Century (XXII), Lexaria Bioscience Corp. (LXX) and CV Sciences (CVSI). Having hired Irth Communications doesn’t necessarily mean that the companies violated regualtions as it was up to Irth Communications to disclose it had been hired and paid by these companies.

Irth Communications was also a sponsor of Benzinga’s February 2020 conference in Miami and the ROTH Conference in March 2019.

Sharesleuth chronicled in a lengthy investigative piece how Irth Communications was planting stories in various financial news websites. (None of these appeared in Green Market Report nor has GMR ever worked with Irth Communications writers.) The company appeared to have created ficticious authors to write stories touting certain stocks.

 


Debra BorchardtDebra BorchardtJune 20, 2019
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2min154211

The following is Litigation Release No. 24489 / June 4, 2019

Securities and Exchange Commission v. Covalent Collective, Inc., Civil Action No. 1:19-cv-03721 (N.D. Ill., filed June 4, 2019)

The Securities and Exchange Commission (“SEC”) announced today that it filed a subpoena enforcement action in the U.S. District Court for the Northern District of Illinois against Covalent Collective, Inc. f/k/a Doyen Elements International, Inc. f/k/a Advantameds Solutions, Inc. (“Doyen”) for failure to produce documents in an investigation.

The SEC’s application alleges that Doyen, through its founder, Geoffrey Thompson, may have violated the registration provisions of the securities laws by engaging in an unregistered offering of securities, and may also have made misleading representations to investors and potential investors about the operations, acquisitions, and projected stock price of Doyen and related entities.

As part of its investigation, the staff in the SEC’s Chicago Regional office served Doyen with a document subpoena on October 24, 2018. The SEC’s application alleges that Doyen repeatedly refused to produce any documents in response to the subpoena, notwithstanding multiple efforts by the SEC to secure its compliance.

The SEC’s application seeks an order from the federal district court compelling Doyen to comply fully with the subpoena. The SEC is continuing its fact-finding investigation and, to date, has not concluded that anyone has violated the securities laws.

Geoff Thompson was asked to comment but has not responded.


Debra BorchardtDebra BorchardtNovember 16, 2018
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5min19040

The Securities and Exchange Commission announced today that it has reached settlements with two companies that sold digital tokens in initial coin offerings or ICO’s. Cannabis-related company Paragon Coin was one of the businesses investigated by the SEC.

The SEC said that Paragon raised approximately $12 million worth of digital assets to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. The SEC statement wrote that Paragon did not register its ICO pursuant to the federal securities laws, nor did it qualify for an exemption to the registration requirements.

“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.  “These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”

Paragon faces a $250,000 penalty and must compensate the investors. They must register the tokens as securities and file periodic reports with the SEC. “By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Paragon’s CEO Jessica Ver Steeg would not comment on the settlement. However, it was well known that the money raised from the ICO was used to acquire a building in order to create a co-working space for cannabis startups in Los Angeles, called Paragon Space.

Paragon faced a lawsuit not long after the ICO. The lawsuit stated that approximately between August 15, 2017, through October 16, 2017, the defendants raised at least $70 million in digital cryptocurrencies by offering and selling unregistered securities in direct violation of the Securities Act. It also stated that on November 2, 2017,  Paragon ICO investors received an email updating them that during the Paragon ICO “crowd sale” they had collected 533 BTC and 8,092 ETH— worth approximately $7.3 million and $10.2 million, respectively, as of January 12, 2018. Unfortunately, these amounts did not include any of the cryptocurrencies they collected during the Paragon ICO “presale.”

At the time Ver Steeg said, “Paragon is dedicated to staying compliant with all applicable laws, and endeavored to do so throughout the entire ICO process. As U.S. Securities and Exchange Commission Chairman Jay Clayton recently stated, “there are cryptocurrencies that do not appear to be securities,” and whether an initial coin offering implicates the securities laws “depends on the facts.” We are confident that the ParagonCoin token is not a security and can prove so in a court of law.” Apparently, the SEC disagreed.

In order to reimburse the investors, it will need to somehow retrieve the tokens from the market, make the investors whole and then reregister the tokens as securities. A daunting task to be sure.

Paragon’s case follows the SEC’s first non-fraud ICO registration case, Munchee, Inc.  The Commission did not impose a penalty or include undertakings from Munchee, which stopped its offering before delivering any tokens and promptly returned proceeds to investors.

Blockchain

Paragon is moving forward with its ParagonChain, based on smart-contract interaction with the Ethereum blockchain. The company said it would begin to roll out user interfaces for different aspects of the supply chain, for both cannabis businesses and consumers. Paragon said it has entered into agreements with several major cannabis companies who are expected to start using ParagonChain for their day-to-day operations as early as December, including Dreamfields, Fundanna, Flux, Oakland Distribution, Pearl Pharma, Mammoth Labs, and THC Design (TBD).

 

 

 

 

 


StaffStaffNovember 16, 2018
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11min23710

Resolution gives the PRG token and other ICOs a path to full compliance with U.S. securities laws

Los Angeles, CA, November 16, 2018 /AxisWire/ “Paragon is making history! We’re excited to announce an important settlement we’ve been working on for over a year — a very positive agreement with the U.S. Securities and Exchange Commission that will effectively put an end to the uncertainties of the legal status of our PRG tokens,” said Jessica VerSteeg, CEO of Paragon.  “Working shoulder to shoulder with an amazing team of lawyers from Schulte Roth & Zabel LLP, as well as an extremely knowledgeable team at the SEC, we have been able to reach this trailblazing deal that we expect will serve as the model for compliance for ICOs going forward.”

Under the terms of the settlement, Paragon will be given the opportunity to pursue registration of the PRG tokens as a class of securities under Section 12(g) of the Securities Exchange Act of 1934 by filing a Form 10, and will also be issuing a claims form allowing certain eligible ICO purchasers to elect to obtain a payment for purchases of PRG tokens before and including October 15, 2017.  The settlement also provides for the payment of a monetary penalty to the SEC.

“This resolution with the SEC gives Paragon the path forward to full compliance with the U.S. securities laws and clears the way for Paragon to pursue its vision of bringing transparency and accountability to the cannabis industry through blockchain technology.  Paragon is proud that the PRG token is included in today’s action by the SEC and are thereby being granted the opportunity to avail itself of this groundbreaking path forward while continuing to pioneer efforts and to participate in the ever evolving ICO marketplace,” said Ms. VerSteeg, CEO of Paragon.  “We believe many purchasers of PRG tokens share our vision of revolutionizing the cannabis industry through blockchain technology, and this action today is an important step in solidifying our compliance and furthering developments of our state-of-the-art cannabis seed-to-sale technology platform and co-working space.”

2018 has been an exciting year for Paragon: we’ve purchased, rebuilt, and launched ParagonSpace—a first-of-its-kind co-working space for cannabis startups in Los Angeles, California, the world’s capital of the “Green Rush.” In the heart of Hollywood, industry leaders are meeting, working, and hosting events to educate, support, and strengthen the community. Over the last few months a variety of companies have become tenants at ParagonSpace, and the energy and excitement generated in this innovation incubator is helping fuel the continuing growth and acceptance of the cannabis industry.

Paragon has also made significant advances in our software solution development. The core elements of ParagonChain are ready, based on smart-contract interaction with the Ethereum blockchain. Soon we’ll begin to roll out user interfaces for different aspects of the supply chain, for both cannabis businesses and consumers. Paragon has entered into agreements with several major cannabis companies who are expected to start using ParagonChain for their day-to-day operations as early as December, including: Dreamfields, Fundanna, Flux, Oakland Distribution, Pearl Pharma, and Mammoth Labs. As for the mobile app, Paragon has launched Phase 1, with the first functionalities including the official PRG wallet and ParagonSpace member portal. As one of the first beta partners to implement Civic Technology’s secure login solutions, you can expect to see official ID verification online by the end of Q4.

Likewise, ParagonAccelerator is picking up speed: it is on the verge of announcing the first “startup” developed through its comprehensive business acceleration program.

 

This emerging company has joined the co-working space and has been utilizing Paragon’s vast network and internal / external resources, anticipating to officially launch next year. Paragon has been building out a partner network full of platforms, services, media, influencers, brands and products to help members grow and connect across the industry. Additionally, our offering includes marketing and PR support, and helping companies connect with legal and finance teams to navigate through the complications of the cannabis industry. Soon we’ll be announcing how we’re collaborating with other cannabis co-working spaces in the nation to bring members the utmost value by joining our community.

Paragon has been a topic of conversation across the cannabis industry, landing features in some of the top national publications. Q1 brought much anticipation for ParagonSpace with High Times announcing “In the City of Angels, the moment cannabis entrepreneurs have been waiting for is finally here.” The news quickly spread across DOPE, Leafly, and The Hollywood Reporter to name a few. Leading up to the official launch and opening, Paragon was also featured in Inc, Forbes, Bitcoin Magazine and Nasdaq, highlighting the innovation behind our technology developments. Since the official opening of ParagonSpace, and the live NBC airing of the launch event, the company has continued to make waves across both the media and cannabis industry alike. Over the past 6 months, we’ve proudly worked with some of today’s top brands, including MedMen, Daily High Club, Eaze, CannaRegs, CCTV, Merry Jane, DOPE, PROHBTD, Stone Road, Levo Oil, Greenbox Robotics, Lowell Herb Co, Atlas Ediles, Green Helix, and Kiskanu, to name a few. Before the end of Q4, you can expect to see more updates and announcements surrounding Paragon’s partnerships, blockchain seed-to-sale technology, co-working space developments, and overall business expansion.

About Paragon

Paragon seeks to pull the cannabis community from marginalized to mainstream by building blockchain into every step of the cannabis industry and working toward full legalization.  Our strength lies in the unique blockchain/cannabis connection that uses smart contracts. We believe in blockchain, and we believe in the benefits of cannabis. More uses of cannabis are coming to light, and we want to accelerate that process.  We believe cannabis is good for individuals and good for countries. We are passionate about moving forward in an ethical, morally responsible, and legal way. To learn more about Paragon, visit https://paragoncoin.com/ or follow us at https://twitter.com/paragoncoin.

Forward Looking Statements

This press release contains forward-looking statements of the Company that involve substantial risks and uncertainties.  All statements, other than statements of historical facts, contained in this press release are forward-looking statements.  Forward looking statements can be identified by the use of the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions.  The forward-looking statements in this press release represent the Company’s views as of the date of this press release. The Company anticipates that subsequent events and developments will cause its views to change. However, while it may elect to update these forward-looking statements at some point in the future, it has no current intention of doing so except to the extent required by applicable law.  You should, therefore, not rely on these forward-looking statements as representing the Company’s views as of any date subsequent to the date of this press release. All forward-looking statements are qualified in their entirety by this cautionary statement.

 


William SumnerWilliam SumnerMay 22, 2018
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4min13900

Leafbuyer Technologies (LBUY) is in hot water after the OTC Markets Group, Inc. flagged the company for heavy stock promotion. In an announcement made after the close of the markets, Leafbuyer disclosed that OTC Markets had questioned the company about a recent distributed newsletter and e-mail promoting the company.

Since February of this year, Leafbuyer has engaged the services of MIDAM Ventures, the parent company of MarijuanaStocks.com, to promote its stock. The amount in which MIDAM was paid by Leafbuyer to promote its stock is somewhat in dispute.

According to the disclaimer in one of the recently released promotional “reports,” MIDAM was paid up to $445,000 in cash as well as 77,000 restricted common shares of the company. Leafbuyer contents that the disclaimer was incorrect and only paid $225,000; which is nevertheless a substantial sum.

The sheer size of this sum becomes even more apparent when you consider the company’s financial situation. According to the company’s most recent filings with the SEC, the company reported sales totaling to the amount of $287,224 and a loss of $1.1 million for the quarter ending on March 31, 2018; up from a loss $339,820 during the same period last year.

With a significant portion of the company’s revenue being spent on promotion, some have begun to question the soundness of this strategy. Alan Brochstein of New Cannabis Ventures described the move as bordering on “sheer lunacy” and urged investors to ask “why the company has been so promotional, as the business certainly appears to be real though not financially stable.”

For their part, Leafbuyer defends its actions by stating that the company’s directors, officers, and controlling shareholders have not sold any company stock on the open market within the last 90 days. Furthermore, Leafbuyer contends that the company’s stock has only declined since engaging MIDAM’s services and that none of its promotional material contained false or misleading information.

In a statement the company said, “The company states definitively that its officers, directors and, to the Company’s knowledge, its controlling shareholders (i.e., shareholders owning 10% or more of the Company’s securities), of which there are only three, have not sold or purchased the Company’s securities within the past 90 days on the open market. The promotional material primarily consisted of previously disclosed and available information. After a review of the material, the statements contained therein are neither materially false nor misleading.”

News of the inquiry by OTC Markets caused the company’s stock to plunge at the opening of the markets today, falling 3.29% from $1.33 per share to $1.29, with some fluctuations.


Debra BorchardtDebra BorchardtApril 6, 2018
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5min41770

The OTC Markets Group, which is home to most cannabis stocks, is taking the lead on identifying stock promotions for its investors. Stock promotion isn’t illegal. What is illegal is not being transparent about it.

Microcaps or penny stocks are especially susceptible to these types of manipulations because information on these companies can often be limited. In 2014, the SEC charged four people with manipulating stock prices for GrowLife Inc and Hemp Inc.

The OTC Markets has employed various tactics to help investors like what it calls the “blunt club” or the skull & crossbones icon that warns the market of bad behavior. However, the OTC doesn’t have the power to engage in disciplinary measures which falls to the SEC. The SEC though doesn’t move very quickly and even if it is investigating a company or person, that information is rarely made public. The OTC believes it can at least react more quickly and warn investors of questionable activity.

In its latest action, the OTC has set up a “Promotion flag” to warn market participants that the trading could be under suspicion. “For market forces to work, it’s got to be about providing more information so investors can make the right decisions,” said Cromwell Coulson Chief Executive Officer of the OTC Markets Group. “The companies have a responsibility to immediately address information regarding trading rumors. We’ve removed issuers because they weren’t truthful about sponsoring promotions.”

Investors can check this page for a list of companies that have recently paid for stock promotions. For example, Hemp Americana (HMPQ) appears on this list and also has a skull and crossbones icon. On the company Overview page under the Caveat Emptor designation, there is now a megaphone icon underneath that says stock promotion.

The process relies on mostly human observation, with either the OTC team spotting the behavior or an investor bringing it to their attention. “The job of the market is to sniff out what’s true and false,” said Coulson, “In the long term, it usually comes out. In the short term? Not so much.” Coulson said the OTC was pushing for changes to the rule called 17-B around anonymously paid promotions.

The SEC also warns about press releases announcing events that never happen or contracts that never get finalized. Other behavior in stock promoting companies that issue a lot of shares without a corresponding increase in assets. The SEC said in a statement, investors should exercise extreme caution if there appears to be more promotion of the company’s stock versus its actual products. It also said that guaranteed high investment returns, “limited time” stock promotions and unsolicited stock recommendations.

Investors are also warned not to feel more comfortable if the promoter suggests you buy the stock through your own brokerage account. Your purchase may be their “sell.” The SEC wrote, “Even if you do not give the promoter any money directly, your stock purchases may enable the organizers of the promotion to offload their otherwise valueless shares.”

In addition to the promotion flag, the OTC has added a shell-risk flag. This icon identifies whether a company is a shell as defined by the SEC. “The term shell company means a registrant, other than an asset-backed issuer as defined in Item 1101(b) of Regulation AB that has: (1) No or nominal operations; and (2) Either: (i) No or nominal assets; (ii) Assets consisting solely of cash and cash equivalents; or (iii) Assets consisting of any amount of cash and cash equivalents and nominal other assets.”

“Over-valuation is the biggest risk,” said Coulson. “It happens even with electric car companies. With small companies, we need to build markets to fit .”



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