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Here’s How to Avoid Getting Taken by a Canna-Fraudster

July 27, 2016
Cannabis buds in a glass container
A story out of Oregon last week opened a lot of eyes around the cannabis industry. The Oregonian reported that the state-issued cannabis license owned by Portland’s Cannacea dispensary was not actually issued by the state.

The letter, apparently, was faked by a contractor for Green Rush Consulting, the Oakland, Calif.- based firm that Cannacea owner Tisha Siler hired to help her work through the state’s licensing process.

Green Rush officials, in response to the article, told Leafly they had been duped by both the consultant, David Jacobs, and by Cannacea itself. Sarah Ceti, Green Rush’s chief operating officer, said Jacobs did work for Green Rush during 2014, but was fired after a short time with the firm.

Leafly was unable to reach officials at Cannacea. The dispensary’s website domain has been cancelled, and their phone number has been disconnected.

“This is a lesson for the whole industry,” said Ceti. What happened with Cannacea “was a result of the lack of regulatory compliance in our system,” she added. “Had the appropriate systems been put into place, the message of due diligence would also have been in place.”

The importance of due diligence, according to Ceti, is the lesson Green Rush Consulting and the rest of the cannabis industry can take from the episode.

“We shouldn’t have to question whether or not a document we received from the state, or that was perceived [to be] from the state, is actually real,” Ceti said. But company officials do have to double-check things like that. The cannabis industry is “very vulnerable” to this sort of fraud, she added. “Due diligence with your partners, with your contractors, with everyone—we can’t say that enough.”

What exactly does due diligence look like?

The best answer we found came from attorney Robert McVay, a partner in the Canna Law Group boutique within the Seattle firm Harris Moure. McVay posted a recent guide to basic due diligence for investors—although the advice works just as well for entrepreneurs and consultants—at Harris Moure’s CannaLawBlog. McVay’s advice includes these steps:

  1. Demand to see, and verify, proof of cannabis licenses and compliance. (Records of cannabis licenses in legal adult-use states are all available online.)
  2. Verify proof of company ownership.
  3. Read through all existing contracts and licensing agreements.
  4. Pore over accounting books and records. Know about all debt obligations and verify working capital.
  5. Demand to know about all current litigation and potential legal claims.

According to McVay, all companies in the cannabis industry should have up-to-date folders with these agreements and documents to make them easily available to potential investors and business partners.

Sarah Ceti of Green Rush Consulting said, “We’ve put in a lot of new systems to make sure this doesn’t happen again with us, and so it does not happen with our clients, either. Our goal is to progress this business [and industry], not to do anything other than that.”

Consider it a hard lesson learned.

Industry Tips

  • davidaquarius

    This is unfortunate but not unexpected. Even the grandest ship has a rat or two. The question is how we deal with this. Either we wait for the various state legislatures write the restrictions or we establish effective self-regulating verification procedures this early in the game. I don’t know anyone who is comfortable with the prospect of clueless state pols hashing together a mish mash of regulations that do more harm than good. And of course, the anti-legalization forces will be more than willing to help them write that legislation. I believe the industry has an opportunity to set the standard should the DEA make a change in cannabis’ schedule. (50/50 chance) A national convention in Denver or Seattle or LA, somewhere the cannabis industry is doing well to establish a consensus on what the industry wants from the Government. Give the states a concrete set of standards that demonstrate that we’re more than tattoos, tie-dye and bongs. Many communities are looking at cannabis as a source of tax revenue but are uncomfortable with the cannabis community. We should be providing a realistic framework of how the industry would work in their communities with respect to their concerns and misgivings. A national framework that has the ability to craft itself to each state’s situation can be discussed and hammered out within this convention. I don’t want to take away from what’s be done already but I think we should push to take it national once we know which way the DEA swings. 2¢.

  • Due diligence should also involve “team” ~ checking how the principles work together. People with real, hands-on experience in the sector are rare. Expertise that extends to the actual skills required is essential. The real world environment is much more ‘startup’ & ’emerging industry’ rather than corporate development.