Disclosure in Industries the Regulators Watch

Cannabis and Hemp

Cannabis companies operate at the intersection of state legalization and federal law. A cannabis company that discloses federal illegality in a single generic paragraph is not adequately disclosing the specific operational risks that flow from it: limited access to banking and payment systems, restrictions on interstate commerce, the tax consequences of federal treatment, the implications for employees and insurance, the effect on intellectual property protection and bankruptcy access, and the risk that federal enforcement priorities could change.

Disclosure should describe the company's federal and state status precisely as of the date of the filing, including the status of any proposed change in federal scheduling, and should explain what a change would and would not mean for the company. Hemp and CBD companies have a different, but equally specific, set of issues under the agricultural laws and the authority of the FDA and USDA. Those issues should be described, not assumed.

Artificial Intelligence

Companies describing artificial intelligence capabilities are under particular scrutiny. The SEC has brought actions against companies and advisers for "AI washing," meaning statements about the use of artificial intelligence that were false or overstated.

An artificial intelligence company that describes its technology in aspirational terms without explaining what it actually does today, what it depends on, and what can go wrong is creating exactly the kind of disclosure gap that generates comment letters. Disclosure should distinguish between capabilities in production and capabilities in development; identify dependence on third-party models, data, or computing resources; address risks of model error, bias, and failure; describe data privacy, intellectual property, and cybersecurity exposure; and explain how evolving regulation in the United States and elsewhere could affect the business. Chapter 3 applies here with special force: claims about performance must be supportable.

Cryptocurrency and Digital Assets

The threshold question for any digital asset issuer is whether the instrument it offers is a security. Under the Howey test, an investment contract exists where there is an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. The analysis turns on the economic reality of the arrangement, not its label.

The federal regulatory approach to digital assets has changed significantly in recent years, through Commission statements, staff guidance, new exemptions, and legislation, and it continues to change. A digital asset company's disclosure should describe the specific regulatory status of its assets and activities as of the filing date, the basis for any legal conclusions it relies on, and the risks that those conclusions could be challenged or that the framework could change again. Custody, valuation, cybersecurity, and counterparty risk require their own specific treatment.

The Common Principle

Across all of these industries the principle is the same. Disclosure should describe this company, in this industry, under this regulatory framework, as of this date. When a regulator reads a risk factor and could substitute any other company's name without changing a word, the risk factor has not done its job.