Medicinal cannabis company Medical Kiwi Limited has admitted to breaching the fair dealing provisions of the Financial Markets Conduct Act (FMCA). In August 2020, Medical Kiwi launched an offer for shares on equity crowdfunding platform PledgeMe Ltd. The accompanying information memorandum and campaign page contained false and misleading statements in relation to Medical Kiwi's medicinal cannabis licenses and its contractual arrangements.
Medical Kiwi has given an enforceable undertaking to The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko, which the the FMA has accepted. As part of the enforceable undertaking, Medical Kiwi will make a payment in lieu of a pecuniary penalty in the sum of $250,000, and will also offer to refund and exit shareholders who participated in the crowdfunding offer. The enforceable undertaking includes the admissions of various breaches and sets out the steps Medical Kiwi must take to improve its governance processes and disclosures.
The misleading statements included:
- Medical Kiwi stated in various places in the information memorandum that it had a "cannabis licence". Medical Kiwi had one licence to cultivate a prohibited plant for medical or scientific research. However, this licence was due to expire and did expire during the offer period. The offer period was from 17 to 28 August 2020, and the relevant licence expired on 22 August 2020. From 23 August, during the Offer, Medical Kiwi held no licences. The statements were also misleading in that they omitted any explanation of other licences required, but not yet obtained, in order to lawfully produce medicinal cannabis.
- False or misleading references to contractual arrangements between Medical Kiwi and Hektares, a company Medical Kiwi describes as "a global player in the medicinal cannabis industry". In particular, Medical Kiwi claimed to have a signed partnership agreement with Hektares for the pre-selling of its entire first two years of production, worth $90 million. However, Medical Kiwi's contract with Hektares was only a 'letter of supply intent' which was non-binding and contained a clause which enabled Hektares to terminate immediately.
Karen Chang, FMA Acting General Counsel, said: "Equity crowdfunding has a lower level of required disclosure than the large companies on the sharemarket, but investors are still protected through the fair dealing provisions of the FMCA. Crowdfunding issuers cannot leave out essential information or make misleading statements in their offer documents. Investors need high quality disclosure to be able to make informed decisions and Medical Kiwi has fallen markedly short of the required standards.
"This enforceable undertaking penalises Medical Kiwi, requires the company to carry out a number of actions to address the issues, and holds it to account publicly," Ms Chang said.
The FMA acknowledges Medical Kiwi's cooperation throughout the regulator's enquiries, avoiding the need for legal proceedings.
Enforceable undertaking requirements
The enforceable undertaking provides that Medical Kiwi:
- Admits to contravening fair dealing provisions in the FMCA (sections 19, 22(e) and 22(h))
- Will issue a correction of any misleading statements/omissions via its website, the PledgeMe campaign page, and communications to all investors;
- Will offer to shareholders who participated in the crowdfunding campaign the opportunity to exit their investment at the purchase price of their shares (i.e. a refund);
- Create policies and practices that provide proper governance of disclosure (whether it be for an offer or possible continuous disclosure) to be reviewed for compliance by an independent consulting firm that is approved by the FMA;
- In the event the company seeks to compliance list on a licensed market (such as the NZX), it must wait until its shares have been quoted for at least nine months before undertaking a "same class" offer, which allows listed companies to raise capital with reduced disclosure requirements. This requirement will not affect Medical Kiwi should it seek to list by way of an initial public offering (IPO), which requires full compliance with Part 3 of the FMCA; and
- Make a payment in lieu of pecuniary penalty in the sum of $250,000. This amount will be applied first to the FMA's costs.
