Crowdfunding for medical cannabis companies is cowboy country and the sheriffs are few and far between, writes Kate MacNamara.
In late 2018, Greenfern Medicinal Marijuana was already touting an agreement to buy cheap power.
Director Tim Johnson put out a media release at the time, quoting himself copiously.
"Johnson said the company had secured an agreement with the power station operator that would see Greenfern's power usage billed at a significantly reduced commercial rate," the release read.
The upshot would be lower cannabis production costs, affordable prices for the New Zealand market, and "an enormous competitive advantage".
What Johnson didn't say was that he owned a majority stake in the power station himself.
Though Greenfern did disclose that detail in its crowdfunding campaign of the time (it raised $1.8-m in 2018 through Collinson Crowdfunding) the information was initially missing from investor disclosures for the company's recent $2.8-m equity raise through Equitise.
Early this month Greenfern (now called Greenfern Industries) updated its disclosure to investors, noting that the power station, which it now intends to buy with the funds raised, is owned by Greenfern shareholders, the majority by Johnson.
Johnson stood down as a director last year in an unrelated controversy over his online comments about Greenfern.
Equitise managing director Jonny Wilkinson said he is comfortable negotiations related to the power station were conducted at arm's length.
Dozens of medical cannabis companies like Greenfern have sprouted in New Zealand over the past few years. Two have gone public on the NZX. Many have raised money through private channels, some tapping sophisticated investors. A subset, including Greenfern, have turned to crowdfunding.
Through these platforms, Greenfern has raised nearly $4m (it closed the additional $2m in recent days). Marlborough-based Puro raised $2m in late 2019. Waiapu, also known as Hikurangi Cannabis and now folded into Rua Bioscience, raised $2m in 2018. And in August, Medical Kiwi raised $2m.
In addition, the companies have also used crowdfunding platforms to raise millions of dollars from wholesale investors, broadly required to have some business or investing experience.
By law, companies are limited to raising no more than $2m from "the crowd" in a 12-month period. But despite that cap, the crowdfunding cannabis companies are raising concerns. Crowdfunding allows companies to tap hundreds and sometimes thousands of inexperienced investors in a raise, even as those firms are subject to very light-touch regulation.
Greenfern isn't the only crowdfunding medical cannabis company to face questions about the information it has provided to investors.
In August and September, Nelson-based Medical Kiwi raised some $3m, in part on the strength of a licence to cultivate cannabis for research purposes. In its Information Memorandum intended to provide investors with details of the company, Medical Kiwi failed to mention that the licence had expired, and that the licence had never been active because its conditions were never met, details which were confirmed to the Herald by the Ministry of Health.
Of the funds raised, $2m came from retail investors through the crowdfunding platform PledgeMe, and the further $1m came from wholesale investors.
The Financial Markets Authority (FMA) is still looking into the matter.
"Our inquiries into Medical Kiwi are ongoing and we cannot comment further at this time," a spokesman for the regulator said.
Puro New Zealand also faces questions stemming from its November 2019 crowdfund.
Managing director Tim Aldridge described company director Wayne Bailey as "independent" in an exchange with investors on the crowdfunding forum PledgeMe, where the company ultimately raised $4m, half from retail investors.
It was clear in Puro's disclosure that Bailey's company, Taurus Group, had provided services including a valuation of Puro's business.
The work put the value of Puro at $23m before the capital raise (based on a multiple of two times projected 2021-year earnings).
The valuation was also described as "independent". But while Bailey owned no Puro shares, the size of his firm's fees and the extent of the work Taurus had completed for Puro was not clear.
Taurus appears to have provided services to Puro since its inception in 2017.
Incorporation documents for Puro lodged with the Companies Register show they were filed by Taurus staff (Puro was originally called Erba).
There is no clear threshold for fees owed by Puro to Taurus that would determine Bailey's independence as a director, or lack of it. The FMA's guidance is principles-based. But the regulator's corporate governance handbook says that among the factors that affect a director's independence are, "a recent or current material business or contractual relationship (eg supplier or customer) with the entity or any of its subsidiaries".
Complicating matters, "the fees to Taurus and funds owed by Taurus to Puro currently form the basis of investigations by police and the NZ Institute of Chartered Accountants," Puro director Sank Macfarlane said in a written statement.
In February of this year, just 11 months after he joined, Wayne Bailey left Puro's board.
"Puro's directors made the decision to end their business relationship with Wayne Bailey in 2020 after concerns around his business, Taurus Group's, handling of company monies," Macfarlane said. "It would be inappropriate for us to comment while these are being actively investigated ..."
Bailey is a chartered accountant and both co-owner and executive director of Christchurch-based Taurus, a chartered accountancy with capital and finance and property and funds management services.
After initially declining to comment, Bailey provided a written statement: "I am aware that Mr Aldridge has made a complaint to the Police. However, I understand the Police consider this is a civil matter and are not taking the matter any further. As to all matters, we consider the allegations to be without merit and they will be defended should they arise."
Medical cannabis is a new industry in New Zealand, midwifed by the Misuse of Drugs (Medicinal Cannabis) Amendment Act, enacted in late 2018. The legislation required the Government to provide a regulatory framework for a medicinal cannabis industry, which is now in place, and has ushered in a wave of start-up companies eager to supply the anticipated market, both at home and abroad, particularly in Europe and North America.
The new industry has also thrust into the spotlight a range of controlling shareholders and founders whose CVs do not appear to be as company websites describe them.
Puro's head, Tim Aldridge, has promoted his business background setting up and growing the South Island company Party Warehouse and HireKing. But that background is also one of acrimony.
Aldridge's former business partner Mark Bacon says Aldridge is "a good businessman, but ruthless ... our values don't align". Aldridge, Mark Bacon and his sister, Carla Bacon (who had a romantic relationship with Aldridge in the early 2000s) co-owned Party Warehouse and HireKing until 2018. Mark Bacon says that in 2017, Aldridge wanted to take full ownership of HireKing, essentially in exchange for his stake in the Party Warehouse business. A legal dispute ensued.
"It was a very unpleasant period, he [Aldridge] basically threatened to push the businesses into liquidation if he didn't get what he wanted," Mark Bacon claims.
It was only after a lengthy legal dispute, including mediation, that Aldridge agreed to be bought out of the businesses by the siblings, Bacon says.
That necessitated hefty borrowing, though Bacon says he's pleased with Aldridge's resulting departure.
Contacted for comment, Aldridge supplied a written statement: "I initiated the process to sell my shareholding of both HireKing and Party Warehouse to Mark Bacon and his sister Carla (my former partner) in 2018. There is a confidentiality agreement that we all signed around this that I will honour, even if others have chosen not to."
Aldo Miccio, co-founder of Medical Kiwi, also appears to have a more chequered business past than his company bio reveals.
Even as Miccio was establishing Medical Kiwi in early 2019, Kela Charms, the Australia-based hair jewellery company Miccio ran as CEO and director, was struggling to pay its debts.
In January 2020 the company sought voluntary administration in the face of an untenable debt load. Miccio ran the company from 2017 until December 2019, and it raised over $2m in shareholder equity and loans.
But shareholder Lisa Woodsmith of Perth said she was concerned about the company's finances as early as April 2019. That's because a $25,000 loan Woodsmith made to the company had come due, and though she'd asked for the funds to be repaid, they were not forthcoming.
"I was getting quite desperate because we [Woodsmith and her husband] planned to use the money for a home deposit. We just kept getting excuses why they didn't have the money."
Ultimately, Woodsmith says, $10,000 of the principal was paid back, with interest.
But she was told that the sum of $15,000 would need to be rolled over. Through the plan of arrangement forged this year following the company's insolvency, Woodsmith, like other Kela creditors, expects to be repaid just a small fraction of that amount.
But despite the repayment difficulties, an update to shareholders emailed by Miccio in July last year continued to seek more shareholder loans.
"As we move down this path of coming months [sic] to secure a substantial investment partner to take Kela to the next stage in its growth we are still looking for debt funding to help drive and maintain brand and sales growth and would like to offer all shareholders the opportunity to participate," the update said.
In a written response to questions, Miccio said: "The full board resolved that shareholders with existing loans to the company be asked to extend the repayment date while we sought further capital funding from the market. Subsequently all the shareholders with loans agreed to extend the repayment date and the board also resolved to ask them if they wanted to lend further funds to the company before we went to the market."
Ultimately, in December 2019 Miccio recommended a new investor to the company. The foreign-based investor could supply a cash injection of A$920,000-$940,00, Miccio's lawyers wrote to inform Kela shareholders.
The proposed transaction failed, however, because its terms also handed 51 per cent control of the company to Miccio through the new investor's proxy votes.
The independent administrator's report early this year said the company never came close to meeting its rising costs: "At no point in KC's [Kela Charms'] history was it generating sufficient funds from trading to enable it to service its debts." The report also noted the administrator's view that a dispute between management and officers of the company contributed to Kela's failure.
Such details mean Sally King, executive director of the New Zealand Medical Cannabis Council, has her work cut out for her.
The industry group she heads (both Puro and Rua Biosciences are members) hopes to build a sterling reputation for the emerging sector. King says she's concerned about some disclosure issues she's seen, and would also like to see some companies take a more conservative approach, particularly to their financial projections.
One change King has advocated for is already underway. The Ministry of Health says it has plans to begin publishing a list of companies with valid medical cannabis licences next month.
Affected companies will be notified in the coming weeks and they will need to provide a "compelling reason" to have their names withheld, a ministry spokesperson said. The change should help prevent companies from misrepresenting their licences.
Crowdfunding brings in the cash
Crowdfunding, however, is likely to remain a popular platform for medical cannabis companies. Despite the fact that companies are in the very early stages of development, and are broadly without revenue, campaigns to raise funds from retail investors have typically hit their $2m maximum, most in record time.
And there has been a notable success. In 2018, Waiapu became the first medical cannabis company to raise funds in New Zealand ($2m, through PledgeMe). Last week the company, now trading as Rua Bioscience, debuted on the NZX. Waiapu crowdfund investors' shares (purchased for $1 each in 2018) convert to 4.41 Rua shares, worth roughly $2.20 at the time of listing.
Whether Rua or any of New Zealand's medical cannabis companies can turn a profit remains to be seen. But Michael Midgley, CEO of the New Zealand Shareholders' Association, says investors can at least take comfort in the rules that govern the stock exchange.
"The highest standards of transparency and disclosure are for NZX-listed companies," he says. "It's all downhill from there."
The Financial Markets Conduct Act does apply to that other public forum, the crowd platforms. But the FMA licenses the platforms, and, in turn, the platforms monitor the companies.
Platforms receive only an undertaking from companies that they can provide proof for all statements of fact if requested; they are not required to vet or verify information contained in offer material.
The FMA says that at times it has intervened in equity crowdfunding campaigns based on complaints, or intelligence from the market "that has raised concerns about some of the issuer material". Its interventions, it says, have prompted updated offer information "and investors were given the opportunity to respond". However it has never taken enforcement action over crowdfunding.
Licences to commercially cultivate and produce medical cannabis have been available in New Zealand only since April. And companies are still preparing, and hoping to meet rigorous manufacturing standards before they start making finished products.
Revenue, never mind profit, still sits on the distant horizon, as do exports, and the separate licences that requires.
"The financial hopes of a lot of these companies are just out of this world," says Max Percy, co-founder of Puro, who left the company last year.
"I wasn't keen on the crowdfunding route," he says, "but I was outvoted and that's fine."
Percy is now a vocal critic of the disclosure failures and exaggerated claims of many companies in the sector, especially the crowdfunders.
"There are an awful lot of naive investors out there who don't do their homework. And then there are the cowboys running some of these companies."
On a landscape, Percy adds wryly, that hasn't got many sheriffs.