Buyer — and seller — beware.
Massachusetts Secretary of State William Galvin is warning marijuana companies and their investors to follow Massachusetts securities rules or risk getting busted in a new “sweep” of the emerging industry by regulators in his office on the hunt for fraudsters.
Galvin’s announcement Wednesday came as his office unveiled charges against a Holyoke man and his former company, Positronic Farms, which allegedly sold unregistered securities worth $1.3 million to dozens of investors in 2017 and 2018 before folding.
In an interview, Galvin said his office’s review of marijuana companies is not related to the drug itself. Instead, it was prompted by the high level of activity and excitement around the fast-expanding legal cannabis business — and an uptick in reports that some players in the space are exploiting and misleading investors who are eager to get in on the rush.
“No pun intended, but there’s a buzz around marijuana right now with investors,” Galvin said. “We’re concerned that people are attracted to these businesses, but because they’re non-banked entities, it’s very hard to determine whether they’re real or worthy of investment.”
By law, companies offering ownership shares must register with the securities division of Galvin’s office. Similarly, investors must be accredited in order to purchase securities.
Under the “sweep,” investigators from his office will be checking the registration status and ledgers of companies in the marijuana space — whether licensed growers and sellers or so-called “ancillary” businesses supporting them. Those selling shares without permission or making overblown promises to investors risk being charged, Galvin said.
“I would strongly urge anybody — before you give money to somebody, make sure they’re real and eligible to sell the interest they claim to have,” he added.
Positronic Farms, which was run by David Caputo and had planned to open a cannabis cultivation facility in a 200,000-square-foot former paper mill in Holyoke, failed to register with the state’s securities division, according to a complaint brought by Galvin’s office.
Nonetheless, the firm allegedly went on to sell the securities through private placement offerings to about 40 investors in Massachusetts and eight other states. Investigators said the company failed to determine whether those investors were accredited, and that many were not. They also alleged that Caputo freely intermingled investor money with other funds, and spent down their investments despite a pledge that he wouldn’t use them until at least $250,000 had been raised.
Caputo did not immediately respond to requests for comment, but told MassLive he denied any wrongdoing and had relied on an attorney to arrange the private placements.
Caputo’s failed effort to open the marijuana growing facility was marked by scandal throughout.
One early investor in Positronic Farms sued the company, saying Caputo and its other founders improperly stripped him of his shares after he objected to Caputo growing and selling marijuana at home.
Later, after police allegedly discovered more than 75 marijuana plants under cultivation in the attic of a home Caputo owned, he was forced to resign from another company — Holyoke Gardens — which would have grown marijuana as a tenant in the mill leased by Positronic Farms. Holyoke Gardens subsequently received local approval and a provisional license from the Cannabis Control Commission.
The charges against Caputo and Positronic Farms follow another enforcement action by Galvin’s office in the marijuana space: In April, investigators charged a Beverly-based executive who “lost control of more than $8 million in assets” he had raised in a quest to open medical marijuana dispensaries in Massachusetts.
Galvin said he strongly supported proposed changes to federal law that would make it easier for banks and other financial institutions to work with licensed marijuana businesses, saying such reforms would make it easier for his investigators and other regulators to trace the movement of money in the rapidly evolving sector.
“Most intelligent people would support that — it’s the logical thing to do,” Galvin said. “These are real businesses, and by denying them [banking]... you’re not helping.”