Could CBD companies face scrutiny from another US regulatory agency?

The US Securities and Exchange Commission (SEC) has just announced that it has charged a hemp company, CanaFarma Hemp Products, and its co-founders with fraudulently raising approximately $15m from investors as well as misappropriating a significant proportion of those funds for personal use and other unrelated purposes.

The SEC alleges the Canadian/American company raised funds from investors based on misrepresentations. This includes claiming that CanaFarma was a fully vertically integrated company processing hemp from its own farm whereas it was in fact making its products using hemp supplied by third parties, as well as mis-stating historical revenue numbers and using “baseless” future revenue projections.

At least $4m of the funds raised was allegedly used for personal purposes or purposes unrelated to CanaFarma, the SEC added.

“As alleged in our complaint, the defendants pitched investors with falsehoods about a fully integrated hemp company with rosy financial projections,” said Richard Best, director of the SEC’s New York regional office. “We will relentlessly pursue those who deceive investors and misappropriate and misuse their funds.”

The complaint has been filed with the US District Court for the Southern District of New York and includes charges alleging violation of anti-fraud provisions of federal securities laws.

 

Co-founders in the dock

 

In a parallel action, the US Attorney’s Office for the Southern District of New York announced criminal charges specifically against Vitaly Fargesen and Igor Palatnik, the company co-founders.

The SEC will now seek to gain permanent injunctions, disgorgement (giving up the profits made from the alleged illegal conduct) plus interest and civil penalties against the defendants. It also seeks officer-and-director and penny stock bars against them.

The SEC’s actions appear to have more to do with the fund-raising activities of the founders of this specific company than with the industry or sector per se. But given the number of civil lawsuits alleging similarly misleading fund-raising practices in both the hemp and cannabis spaces it is hard to see the CanaFarma incident as a completely isolated one.

It may be less that hemp, CBD and other related cannabinoid sectors are now on the SEC’s radar than SEC investigations dating to the heyday of the “Wild West” atmosphere of the early growth in CBD and related sectors are starting to come to fruition.

As a result, it could certainly be that we see more similar complaints filed by the SEC against those in hemp, cannabis or wider cannabinoid-related sectors. But this is likely less to do with increased overall regulatory scrutiny – as is more likely the case with the continued actions being undertaken by the US Food and Drug Administration (FDA) – and more to do with specific bad actions and timing of investigations.

– Freddie Dawson CBD-Intel staff

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