CANNABIS SEED & ANGEL FINANCING ATTORNEY CALIFORNIA
Early-stage cannabis companies face a financing environment that differs sharply from conventional startup fundraising. Most traditional financial institutions decline to lend to or service cannabis businesses because cannabis remains federally prohibited — a reality that has been partly addressed but not resolved by FinCEN’s February 2014 guidance to financial institutions regarding marijuana-related businesses. Angel investors and early-stage venture funds willing to invest in cannabis operators and startups must therefore structure their investments with greater care, because the standard instruments of early-stage investing — SAFE notes, convertible notes, and equity financing rounds — carry cannabis-specific regulatory requirements that general corporate counsel frequently overlook.
The Law Office of Shay Aaron Gilmore advises cannabis startups seeking to raise capital from angels and early-stage investors, as well as the investors themselves, on the documentation, securities compliance, and regulatory implications of seed and angel financings in the cannabis and hemp industries. Recognized as one of the Top 20 Cannabis Lawyers in California by the Los Angeles/San Francisco Daily Journal, as a Northern California Super Lawyer and one of the Top 100 Lawyers in Northern California by Super Lawyers® Magazine, and among the Top 200 Global Cannabis Lawyers by the Cannabis Law Journal, Shay Aaron Gilmore brings both transactional precision and cannabis regulatory expertise to early-stage financing engagements. Shay also serves on the Board of Directors of the International Cannabis Bar Association and as Chair of the California Lawyers Association Cannabis Practitioners Group.
The Law Office represents both founders raising seed capital and investors deploying it — providing the dual-sided perspective necessary to negotiate terms that protect both parties’ interests in a highly regulated industry.
Recognized By
Super Lawyers® Magazine
Top 20 California Cannabis Lawyers
The Daily Journal
California NORML
Global Top 200 Cannabis Lawyer
Cannabis Law Journal
SAFE Notes and Convertible Notes in Cannabis Financing
Simple Agreements for Future Equity (SAFEs), originally developed by Y Combinator in 2013, have become a standard seed-stage financing instrument for startups precisely because they avoid the need for a company valuation at the time of the investment. Under a SAFE, the investor provides capital in exchange for the right to receive equity at a future date — typically triggered by a priced equity financing round, a sale, or a dissolution — at terms defined by a valuation cap, a discount rate, or both. Unlike convertible notes, SAFEs do not accrue interest and do not have a maturity date, making them administratively simpler for early-stage companies.
Convertible notes function similarly but are structured as debt instruments: the investor loans money to the company at an agreed interest rate and maturity date, and the loan converts into equity at a discounted price upon a triggering event. Cannabis companies that cannot obtain traditional bank debt may find convertible notes particularly useful because they allow an investor to deploy capital quickly, with conversion mechanics that reward the investor for early-stage risk. However, convertible notes that are not repaid at maturity can create significant pressure on cannabis businesses — which, because of § 280E and banking restrictions, often have less liquidity than comparable non-cannabis businesses.
| Instrument | Key Features | Cannabis-Specific Considerations |
|---|---|---|
| SAFE Note | No maturity, no interest; converts on triggering event; valuation cap and/or discount rate | Securities law compliance required; Regulation D exemption must be confirmed; DCC owner disclosure may be required if investor acquires ≥20% |
| Convertible Note | Interest-bearing debt; maturity date; converts at discount to next round price | Maturity pressure elevated due to cannabis cash flow constraints; § 280E limits EBITDA available to service debt |
| Priced Equity Round | Definitive valuation; preferred stock with liquidation preferences and anti-dilution provisions | DCC approval required before equity transfer; NVCA model documents may need cannabis-specific modifications |
| Secured Loan | Collateral-based lending; does not require equity conversion | Collateral enforcement constrained by state licensing requirements; creditor |
| takeover requires DCC approval |
Securities Law Compliance for Cannabis Seed Financings
Every SAFE note, convertible note, and equity investment in a cannabis company constitutes an offer and sale of a security under the Securities Act of 1933 and the California Corporate Securities Law of 1968. Cannabis companies and their investors cannot avoid securities compliance simply because the investment is small or between parties who know each other.
The most commonly used federal exemption for seed and angel financings is Regulation D, and specifically Rule 506(b) under 17 C.F.R. § 230.506, which permits issuers to raise an unlimited amount of capital from an unlimited number of accredited investors, plus up to 35 non-accredited but sophisticated investors, without general solicitation. Accredited investor status is defined at 17 C.F.R. § 230.501(a) and includes individuals with a net worth exceeding $1 million (excluding primary residence) or annual income exceeding $200,000 ($300,000 jointly with a spouse) in each of the two most recent years, with a reasonable expectation of the same in the current year.
At the California state level, a separate exemption is required under the California Corporate Securities Law. The most commonly applicable California exemption for seed financings is the Limited Offering Exemption under California Corporations Code § 25102(f), which exempts offerings to no more than 35 unaccredited investors with a pre-existing personal or business relationship with the offeror, provided no advertising is used and all purchasers represent they are purchasing for their own account. A § 25102(f) filing must be made with the California Department of Financial Protection and Innovation (DFPI) within 15 calendar days after the first sale in reliance on the exemption.
DCC Ownership Disclosure Requirements in Seed Financings
One of the most frequently overlooked issues in cannabis seed financings is the California Department of Cannabis Control’s definition of “owner” and the DCC’s requirement that all owners be disclosed on the license and approved before any change in ownership. Under DCC regulations, any person who holds 20% or more of a cannabis licensee, or who has the right to control the management or policies of the licensee, is an “owner” who must be disclosed and approved by the DCC.
A SAFE note or convertible note that converts to 20% or more equity in a cannabis company at a triggering event constitutes a change of ownership for DCC purposes, and that change cannot be effectuated without prior DCC approval. Cannabis companies that issue SAFEs or convertible notes without accounting for this requirement may find themselves in the position of having investors who are technically unlicensed owners of a cannabis business — a license violation that can lead to suspension or revocation proceedings. The Law Office structures seed financings to include DCC notification and approval triggers as conditions precedent to conversion, protecting both the investor and the licensed business.
Representative Matters
The Law Office of Shay Aaron Gilmore has handled the following types of seed and angel financing engagements:
- Led all aspects of an angel investor’s $500,000 investment in a licensed commercial cannabis manufacturer in Santa Cruz, including investment documentation and subsequent unwinding of the transaction. This matter involved structuring investor rights in a complex regulatory environment in which the target business experienced significant criminal activity.
- Represented a secured investor in a $500,000 secured investment in a cannabis retail development company building multiple retail locations in California. Negotiated investment agreements designed to safeguard the investor’s interests while providing the cannabis retailer with needed capital for expansion.
- Served as counsel for the financial creditor and landlord in a $1,500,000 financing and restructuring of a cannabis manufacturing business. Negotiated and executed lease, promissory note, and money management agreements within San Francisco’s complex cannabis regulatory environment, working toward regulatory approval of the restructured ownership.
- Represented the majority shareholder in the restructuring of a cannabis retail entity, navigating a minority shareholder dispute that threatened to derail the restructuring of the company’s governance and ownership structure.
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