You own part of a cannabis company. Can you see its books?
You invested in a cannabis company. Management sends occasional updates. Sales are “improving.” A new product is “getting traction.” Distributions are coming “once cash flow stabilizes.”
But you have not received a balance sheet. You do not know what the company owes. And the operating expenses include payments to another business owned by the majority investor.
An investor update is not the same as meaningful access to financial information.
For minority investors in privately held cannabis businesses, the important questions are what information they can obtain, when they can obtain it, and what happens if management refuses. California law provides certain inspection and information rights, but investors should also negotiate a practical reporting package before investing.
Start with what you own
Before asking what records you can inspect, identify the entity and the interest you actually hold.
Did you acquire membership in an LLC? Shares in a corporation? A convertible note? Or a contractual right to receive a percentage of profits?
Do not treat those positions as interchangeable. Like most states, California’s LLC and corporate inspection statutes apply to specified categories of people, and LLC law also provides certain information rights to holders of transferable interests. The investment agreements and the investor’s legal status both matter.
Then identify where the business operates. An investor might own an interest in a holding company while separate entities hold the cannabis licenses, employ workers, own the brand, and lease the premises. Often, the structures can become quite complex.
Before investing, the diligence question is simple: Will your rights to access the information reach the entities where the money is earned, spent, and owed?
Statutory rights provide a foundation
For California LLCs, the Corporations Code provides rights to obtain specified information and inspect required records, subject to the applicable request and purpose requirements. The LLC is required to maintain certain records, including specified organizational, tax, and financial records, which owners have a right to access.
For California corporations, the Corporations Code generally gives shareholders inspection rights over accounting books, records, and minutes upon a written demand for a purpose reasonably related to their interests as shareholders. The statute also addresses records of subsidiary corporations.
Those are important protections. But a right to request existing records is different from an obligation to deliver a defined financial package every month.
Investors should use the applicable statutory protections as a foundation, then negotiate reporting obligations that fit the investment.
Updates are not financial reports
“We had a strong quarter” does not explain whether the company collected its receivables, paid its taxes, or borrowed money to cover payroll.
A useful reporting package should answer three questions: Is the business profitable? Can it pay its obligations? Where is the money going?
Consider negotiating delivery of:
- Financial statements: A balance sheet, income statement, and cash-flow statement, with prior-period and budget comparisons.
- Receivables and payables: Aging reports showing overdue customer balances and unpaid obligations.
- Debt and taxes: Outstanding borrowings, payment obligations, tax balances, and material defaults.
- Ownership and distributions: An updated capitalization table and records of distributions, capital contributions, and new issuances.
- Operating information: Relevant sales, inventory, margin, and other business-specific reports.
- Affiliate payments: A schedule of transactions with managers, controlling owners, and related businesses.
These are recommended contractual deliverables, not a claim that every investor automatically has a statutory right to receive every item on a recurring schedule.
A tax return or Schedule K-1 also should not be treated as a substitute for timely operating information. Negotiate those deliverables separately.
Give cannabis company reporting obligations teeth
“Management will provide reasonable updates” leaves too much unanswered.
A meaningful information-rights provision should specify the documents, delivery schedule, accounting basis, covered entities, and level of detail. For example, the parties might agree to monthly management accounts within 30 days after month-end and a more detailed quarterly package. Those are negotiated deadlines, not universal legal requirements.
Also distinguish inspection from an independent audit. If an investor wants audited or reviewed financial statements, specify the engagement, timing, accounting firm selection, and payment responsibility.
Avoid obligations the business cannot realistically perform. A clear, consistently delivered management package may be more useful than an ambitious reporting promise that immediately falls behind.
Negotiate visibility before investing
Before wiring funds, request a sample reporting package. Confirm which entities it covers, who prepares it, and whether the company can meet the proposed deadlines.
Then put those obligations in the signed documents.
A minority investment does not need to come with day-to-day control. It should come with a reliable way to understand what management is doing with the money.
“We will keep you posted” is a courtesy. Meaningful information rights are a negotiated protection.
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The post You Own Part of a Cannabis Company. Can You See Its Books? appeared first on Harris Sliwoski LLP.
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