Cannabis and Hemp Securities Offerings: A Lawyer's Guide to Disclosure and Regulatory Risk

Cannabis and hemp companies face a capital-raising environment unlike any other industry. A company can be fully licensed under state law, compliant with local regulations, and still operate in violation of the federal Controlled Substances Act. That tension creates a disclosure problem at the heart of every securities offering in the space. Investors must be told, clearly and completely, what federal illegality means for the business, its assets, and their investment.

This article is for cannabis and hemp issuers, their officers and directors, and the investors evaluating these offerings. It explains the regulatory framework that must be disclosed, the enforcement risks that follow from incomplete disclosure, and how a securities attorney structures an offering to withstand SEC review.

The Federal-State Conflict Is a Material Fact

Under the federal Controlled Substances Act, cannabis remains a Schedule I substance. The Department of Justice has historically exercised prosecutorial discretion through memoranda — the Cole Memorandum, the Sessions Memorandum, and current DOJ guidance — but discretion is not legalization. A change in administration or enforcement priority can alter the risk landscape quickly.

For disclosure purposes, this means several things:

• › Federal illegality is not a remote risk. It affects banking access, bankruptcy protection, interstate commerce, intellectual property enforcement, and the ability to deduct ordinary business expenses under Internal Revenue Code § 280E.
• › State legality does not cure federal illegality. An issuer cannot disclose only that it is licensed in a state and leave the federal framework unstated.
• › The DOJ's current posture can change. Disclosure should describe the existing guidance and the risk that it may be rescinded or modified.

The SEC has made clear that cannabis companies must disclose the federal-state conflict in registration statements, private placement memoranda, and periodic reports. Omitting or minimizing that conflict is a material omission.

State Licensing and Compliance Disclosure

A cannabis issuer's value is usually tied to licenses, permits, and regulatory approvals. Investors need to understand:

• › Which state licenses the company holds and what activities each license authorizes.
• › Whether the licenses are provisional, conditional, or fully operational.
• › The ownership and control restrictions imposed by state regulators, including whether passive investors or non-residents are permitted.
• › Renewal requirements, application backlogs, and any pending disciplinary or administrative proceedings.
• › Local zoning, municipal approvals, and the risk that local government action could block operations.

A common mistake is to describe a license as an asset without explaining the restrictions on its transfer. In many states, a change of control requires regulatory approval. An offering that contemplates a public listing or a reverse merger must address how those restrictions affect the transaction.

Hemp, CBD, and the FDA

Hemp and CBD companies operate under a different but still uncertain framework. The 2018 Farm Act removed hemp from the Controlled Substances Act definition of marijuana, but it did not legalize all hemp-derived products for all uses. The FDA has taken the position that CBD cannot be marketed as a dietary supplement or added to food under existing statutory frameworks, and it has issued warning letters to companies making drug or health claims.

Disclosure issues for hemp and CBD issuers include:

• › Whether the product is lawful under the Farm Act and whether the THC concentration stays below 0.3% on a dry-weight basis.
• › FDA regulatory status, including any warning letters, inspections, or product recalls.
• › State-by-state legality of CBD products, which varies significantly.
• › Health and efficacy claims that could trigger FDA enforcement or consumer fraud actions.

An issuer that describes its CBD products as "wellness" or "therapeutic" without explaining the FDA's position is creating enforcement exposure.

The Section 280E Tax Problem

Internal Revenue Code § 280E disallows deductions for business expenses incurred in trafficking Schedule I or II controlled substances. Cannabis businesses therefore face effective tax rates far higher than similarly situated legal businesses. This is a material financial risk that must be disclosed in any cannabis securities offering.

Disclosure should address:

• › The company's historical and projected effective tax rate.
• › Any tax planning strategies, including inventory accounting methods.
• › The risk that the IRS challenges those strategies.
• › The impact of § 280E on cash flow, profitability, and valuation.

Banking, Custody, and Cash Risks

Because federal law discourages many banks from serving cannabis businesses, issuers often operate on a cash-heavy basis. That creates operational, security, and accounting risks. Disclosure should explain:

• › Whether the company has a banking relationship and under what terms.
• › How cash is stored, transported, and reconciled.
• › Insurance coverage for cash and inventory.
• › The risk that banking access could be terminated.

Offering Structure Considerations

Most cannabis and hemp offerings rely on Regulation D private placements or Regulation A+ mini-IPOs. Each path has specific disclosure obligations:

• › Rule 506(b) and 506(c): Accredited investor verification, bad actor disqualification, and general solicitation restrictions all apply. The offering memorandum must contain the same material disclosures as a registered offering.
• › Regulation A+: Requires audited financial statements and SEC qualification. The SEC staff has commented extensively on cannabis disclosure in Form 1-A filings.
• › Registered offerings: Form S-1 cannabis disclosure must be thorough enough to survive SEC comment and potential enforcement review.

What the SEC Looks For

SEC enforcement and Corporation Finance staff review cannabis offerings for the same thing they review in any offering: whether the disclosure is materially complete and not misleading. Common problems include:

• › Overstating the legality or permanence of state licensing.
• › Failing to quantify the § 280E tax burden.
• › Making unsupported claims about market size or product efficacy.
• › Omitting the risk of federal enforcement or regulatory change.
• › Describing licenses as freely transferable when they are not.

Practical Conclusion

Cannabis and hemp companies can raise capital lawfully, but only with disclosure that matches the complexity of their regulatory environment. A well-drafted offering document does not minimize the federal-state conflict — it explains it, quantifies it, and gives investors the information they need to price the risk.

If your company is preparing a cannabis or hemp securities offering, the right time to address these disclosure issues is before the offering circulates.

Related Reading

• › Regulation D Enforcement Triggers
• › Form S-1: Where the SEC Applies Scrutiny
• › The Crowdfunding Law Guide: Navigating Regulation CF for Startups
• › When Offering Optimism Becomes a Misleading Statement

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About the Author

Frederick M. Lehrer

Former SEC Enforcement Attorney  ·  Former SAUSA, S.D. Florida  ·  25+ Years in Securities Law

Frederick M. Lehrer served as an enforcement attorney in the SEC's Division of Enforcement at the Southeast Regional Office from 1991 through 2000, and concurrently as a Special Assistant United States Attorney in the Southern District of Florida from 1997 through 1999, prosecuting securities-related financial crimes. He has practiced securities and corporate law in private practice for more than twenty-five years, advising issuers worldwide on SEC registration, disclosure obligations, Regulation D private placements, Regulation A offerings, and going public transactions. The firm is based in Florida and serves clients internationally.