Question:  An Arizona business has a website on which it is offering to put together a group of people to own minority interests in an entity that will seek to obtain a license to operate a medical marijuana dispensary in Arizona.  In exchange for paying $25,000 I would become a part owner with several other investors in the entity that will seek the license.  Is this legal?

Answer:  Maybe, but be cautious.  It appears that the people who are seeking the investors are soliciting investors to purchase a security.  Federal and state securities law regulate the offer and sale of securities.  The general rule is that no person or entity can offer to sell or actually sell a security unless the securities are registered with the United States Securities and Exchange Commission or offered and sold as a private offering under one of the SEC’s rules that provide for exceptions to the general rule.

In the famous United States Supreme Court case of Securities & Exchange Commission v. W. J. Howey Co. the Court ruled that the sale of real estate coupled with a mandatory leaseback of the land was a type of security called an “investment contract.”  The Court said that”

an investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

If Sure Thing Investments, Inc., solicits me to join nine other investors who will each contribute $25,000 to World Wide Widgets, LLC, and my only involvement with the company is as a silent investor, I have purchased a security, i.e., the 10% membership interest in the LLC.  Sure Thing Investments, Inc., and the people who put the deal together must comply with applicable federal and state securities laws or they will be liable to me  and the other investors for any loss I suffer plus be subject to sanctions by the SEC and each state where an investor resides.  Complying with securities law involves many things, including  a requirement that the promoter deliver to investors before purchase a written prospectus or private placement memorandum that contains all material facts concerning the investment and that does not fail to disclose a material fact.

Given that the medical marijuana industry is brand new in Arizona and that its core busi9ness involves violating federal law, it is especially important that promoters and prospective issuers of securities involving an Arizona medical marijuana dispensary provide all prospective investors with a detailed disclosure document that lists all of the many risks arising from the unusual type of business.

Note:  Federal law provides that no person or entity can be compensate or receive property of value for finding an investor who purchases a security unless the person or entity is licensed as a securities broker or licensed as a securities sales agent working for a licensed securities broker.  For example, if Joe solicits investors on his website to invest $25,000 to become one of ten people who form an Arizona limited liability company that seeks to obtain a license to operate an Arizona medical marijuana dispensary and the LLC pays Joe $500 for each investor he brings to the deal, Joe must be a licensed securities broker or a licensed securities salesman working for a licensed securities broker.

Query:  What if Joe finds the investors for the would be dispensary LLC, but the LLC does not pay Joe any money or property for finding investors.  Instead, the LLC hires Joe  for big bucks to assist the LLC in obtaining a dispensary license.  Must Joe be a broker or a salesman working for a broker?  I don’t know, but it is a good question to ask a securities law lawyer or the Securities Division of the Arizona Corporation Commission.  You could argue that Joe must be licensed because the only reason the LLC paid Joe the money was because of Joe’s efforts that caused the investors to form the LLC for the purpose of hiring Joe.  My advise to Joe is to consult with an experienced securities law lawyer and if necessary, get licensed.

Warning:  Any person or business that solicits investors over the internet is by definition involved in a public offering that must be registered with the Securities and Exchange Commission.  As an Arizona business lawyer I have had people come to me from time to time because they placed an ad in a newspaper soliciting investors and received a cease and desist letter from the Securities Division of the Arizona Corporation Commission.  If you know of a website that is making a public offer to sell a security that has not been registered with the SEC or that is exempt from registration, contact the SEC.  If you have any inquiries or complaints regarding salesmen, investment advisers or securities involving offers or sales of securities to an Arizona resident, call the Securities Division of the Arizona Corporation Commission at  (602) 542-0662.

See “Arizona Corporation Commission Takes Action Against Sellers of Unregistered Real Estate Investments,”  “But is it a security?” and “Federal Securities Laws Basics.