Cannabis Crowdfunding: A Viable Business Model?

With the legalization of industrial, medical and recreational cannabis, many businesses have been popping up following the niche. This has given a rise in cannabis crowdfunding because it’s arguably the only way to get money for startups. 

To start an average microbusiness, you would need a minimum of $2,000 – $5,000, but apparently things are different if you think about launching a cannabis enterprise. Legal fees and insurance would cost at least $50,000. Add expenses for growing, manufacturing, storing facilities and the costs to start a cannabis store can easily grow to $1,000,000. 

That’s a lot of money for a startup. 

Due to the cannabis stigma, banks are reluctant to give loans. They understand that there are a lot of unclarities, that a cannabis business is somewhat grey or shady, and they don’t want to be a part of the “regulatory wrath”.

Venture investors try to avoid such businesses, too. It looks like crowdfunding is the only viable option for a cannabis startup to raise funds. But is it so considering that crowdfunding platforms are also regulated? 

Cannabis Crowdfunding Examples

Crowdfunding for cannabis stores and businesses has different scenarios. In some cases it works if the platform is right, but sometimes it doesn’t.

On the one hand, NextRX was raising money on StartEngine, but the platform had to close the account of a cannabis-related software development company because the bank was not comfortable with the marijuana-related business even though the company “didn’t touch the plant”. 

On the other hand, there are cases when companies that research the properties of cannabis for medical use had successful CBD crowdfunding campaigns. The Med-X. Inc case shows clearly that such cases are possible. 

The company had researched cannabis long before the effort to raise money from the public. They work with medical cannabis, and the company’s policy is “do no harm”. 

Before proceeding with an equity crowdfunding campaign, Med-X had been working in the industry and had over $1 million in reservations. It was one of the first cases when a company working with cannabis raised funds via crowdfunding successfully.

However, there are many more cases when investors were scammed: by fundraisers or even by so-called platforms such as Juicy Fields. In both cases, the promises of big profits were made but none of the investors saw them. 

Cannabis Crowdfunding Regulation, Hemp and CBD

In the USA marijuana is a Schedule I drug. It is forbidden in many other places, too. So, when we speak about cannabis crowdfunding, we mean those legal applications of marijuana that can be used for a business. 

Before we delve into the legal details, it would be good to make a clear distinction between cannabis, hemp, and CBD:

• Cannabis is a term used to denominate the plant in general. Strains that contain high levels of cannabinoids are also called cannabis. 
• Hemp is the same plant grown for industrial or medical use. 
• CBD or cannabidiol is a chemical contained in marijuana. It doesn’t have THC and is used as medication even though for now, its effects are not studied to the full extent. 

When we speak about legislation on cannabis crowdfunding, we shall understand clearly the difference between the three mentioned types of cannabis.

Cannabis in Europe

In Europe, legislation on cannabis is not uniform. The majority of countries forbid cannabis. In some countries such as the Netherlands, selling, producing, and growing cannabis is illegal, but smoking it in special places (e.g. authorized coffee shops) is allowed. 

The situation is different when it comes to hemp and CBD. Europe is a major producer of hemp which is legal and grown all across Europe. CBD falls under the category of novel foods and is legal if it complies with the conditions of EU legislation on novel foods. Crowdfunding for hemp or CBD startups is absolutely legal in Europe.

Cannabis Crowdfunding in Canada

In Canada, the use and production of cannabis are permitted, but strictly regulated. So, an adult can possess up to 30 grams of legally produced cannabis. Other limitations such as age or licensed production of cannabis are also applied and compliance with them is controlled.

Producing hemp is permitted under certain conditions. CBD-containing substances are also permitted if they are produced and sold by authorized retailers. In Canada, cannabis, hemp, and CBD crowdfunding campaigns are legal if the fundraiser obtains all the licenses. 

Cannabis Crowdfunding in the USA

In the USA, cannabis is prohibited under the federal law. Only research companies that have obtained special permissions can be involved in cannabis-related activities. 

Hemp is permitted under the United States farm bill, but farmers growing marijuana for industrial use have to obtain permission to do so. Without a permit, growing marijuana is illegal. 

Cannabis for recreational and medical use is licensed by each state. The federal government though has a right to criminalize cannabis for both medical and recreational use. 

In the USA, hemp crowdfunding is legal if the fundraiser obtains all the licenses. CBD crowdfunding is regulated by each state, and cannabis crowdfunding is illegal.

Cannabis Crowdfunding Sites and Platforms

Despite being a tricky business, there are lots of cannabis crowdfunding websites that allow raising capital for startups in the industry. The list of CBD crowdfunding platforms features some of the big names such as Seedrs, so it certainly adds more trust to the niche itself. 

Arcview Capital

Arcview Capital is a platform that supports several investment types:

• Crowdfunding
• Private funds
• Private placements

The platform specializes in offering investment options in the cannabis industry. But it specifies explicitly that those willing to invest in a cannabis-related industry carry numerous risks and indicates that the “possession, use, cultivation, transfer, manufacture, distribution or dispensing of marijuana is illegal”. 

Startups raising funds on the platform work either with hemp or recreational and medical use cannabis.

Enexis

Enexis helps to raise funds for the legal use of cannabis. Pharmaceuticals, hemp, and life sciences are among the industries included in the platform’s portfolio. Considering that hemp and CBD legislation in Europe is quite loyal, the range of startups raising funds on Enexis can be very wide. 

Budbo

Budbo aims to bring together blockchain, cryptocurrency, and cannabis to deliver investors top opportunities and users – a top experience. Even though the content is created in a way to attract the widest range of users, for investors, the platform states clearly that it works with legal cannabis only.

Along with investing opportunities, the platform also offers to buy cannabis-based products.

Seedrs

Seedrs is an equity-based crowdinvesting platform that enables raising funds for CBD startups. Considering that the platform is based in the UK where CBD-based products are legal if they comply with specific requirements, such crowdfunding type is legal, too. The same would apply to businesses raising funds for hemp production. If a large business has obtained a special license for growing hemp for the production of seeds and fiber, its crowdfunding campaign can be launched on Seedrs. 

Launching a Cannabis Crowdfunding Platform

To launch a cannabis crowdfunding platform, all you need is to comply with standard crowdfunding requirements by the FCA, ESMA, SEC or FINRA depending on your country of operations. Crowdfunding website owners don’t need a “special cannabis license”, because they simply provide a platform for raising funds and finding investors.

If you’re looking to build a CBD crowdfunding platform, check out our white-label crowdfunding software with full customizability options.

At LenderKit, we offer a crowdinvesting platform that supports debt and equity security types as well as features donation and reward-based crowdfunding flows. 

The extensive set of ready-made features enables the main functionality of a crowdinvesting platform from user onboarding and KYC to campaign marketing, money processing and funds disbursement. 

Check out the online tour to get an idea of how our crowdfunding software works or request a demo with our sales rep.