Cannabis start-up raising funds without mentioning expired licence

A medical cannabis company which raised millions of dollars from investors while touting its Ministry of Health authorisation never had an active licence, and the licence it did have expired while the company’s August and
September fundraising efforts were ongoing.

In an Investment Memorandum required by regulators for Medical Kiwi’s recent crowdfunding campaign, company founder and chairman Aldo Miccio claimed the company was in a “unique position” as “one of the few licenced [sic] New Zealand companies poised to create value …”

The document says the company received provisional approval for a research licence in June, 2019 and it was granted a licence to cultivate a prohibited plant in August of that year.

The licence was for research purposes and is described as a “milestone,” apparently aimed at convincing investors the company has experience that will help it succeed in a heavily regulated industry, especially in light of the numerous further licences the company’s plans require.

However, the Ministry of Health describes the Nelson-based start-up’s single licence differently. The ministry confirmed Medical Kiwi has had only one cannabis licence issued to it, R14510005-00, and the licence was “never active” for cultivation.

“The conditional licence was issued for the cultivation of cannabis for the purpose of medical or scientific research, with activities not able to commence until certain conditions were complied with. However, the conditions of the licence were not completed so the licence was never active for the cultivation of cannabis or for any other purpose,” a ministry spokesperson confirmed.

In addition, the inactive licence expired on August 22, 2020, according to the ministry.

On August 28, Medical Kiwi closed a $2 million equity raise through the platform PledgeMe. Thereafter it continued to solicit equity funding of a further $1m from wholesale investors, a restricted group considered to be experienced. The licence expiry was not disclosed in the Investment Memorandum; neither was the licence’s earlier status as conditional and not active.

Two million dollars is the maximum a company is allowed to raise through crowdfunding in a 12-month period under New Zealand rules because investors reached through such platforms are typically inexperienced and because only light disclosure rules apply to the companies raising money.

Earlier this week, the Herald asked Miccio, by email, what current licences the company holds. Miccio did not reply. However, Jason Whitelay, the company’s Christchurch general manager, responded. “Medical Kiwi has a research and development licence (licence number R14510005-00) from the Ministry of Health, he wrote in an email. In later communication he said the licence was superseded by The Misuse of Drugs (medicinal Cannabis) Regulations 2019.

Regulator steps in

A spokesman for the regulator, the Financial Markets Authority (FMA), said it is “assessing” the information Medical Kiwi provided to investors.

Any offer information provided, or statements made by an issuer making an offer through a licensed crowdfunding provider is covered by the “fair dealing” provisions of the Financial Market Conduct Act. “This means that all information and statements must be accurate, not misleading (including by omission), and able to be substantiated,” the spokesman said.

New Zealand Shareholders Association chief executive Michael Midgley said: “I would have thought the fact that a licence has expired was a material fact that they ought to have disclosed in my view. This is fundamental stuff.”

Midgely said the fact the licence was never active “also appears to me to be fundamental and material”. Companies are required to disclose material information when raising money in order to avoid misleading prospective investors.

Crowdfunding platforms like PledgeMe are licensed by the FMA.

PledgeMe CEO Claire McGowan said the company did not review a copy of Medical Kiwi’s licence.

“Under the regulations of the Financial Markets Conduct Act, we require all campaigners to not be ‘false and misleading’ which means confirming that they can provide proof for all statements of fact if requested,” she said.

Medical cannabis was legalised in New Zealand in December, 2018, but domestic production remained very restricted. In 2019 a handful of companies were issued licences to conduct research and development, conditional on meeting strict terms.

This year, the Government began issuing licences that cover medicinal cannabis cultivation and possession for manufacture. Such commercial activity however, also requires a slew of other certifications including those for manufacturing standards and licences for export if that is anticipated (the domestic market is currently tiny).

Former mayor’s involvement

Miccio, who is a former mayor of Nelson and promotes both his business expertise and governance experience, is also embroiled in a dispute with Australian companies Kela Holdings and Kela Charms (Kela Holdings owns the trading company Kela Charms).

Miccio was director and CEO of Kela Charms from 2017 until December, 2019. He says he resigned before the companies sought voluntary administration.

A February report by the independent administrator, BPS, said, “it is our opinion” that a dispute between management and officers of the company contributed to the firm’s failure. It also cited the company’s “significant trading losses” that were unable to be met by continued shareholder capital injections and or loans.

Kela’s revenue, the administrator said, never came close to covering its rising advertising and administration expenses. “At no point in KC’s [Kela Charm’s] history was it generating sufficient funds from trading to enable it to service its debts,” the administrator said.

Creditors of the companies were expected to recover between 14 and 25 cents on the dollar, the administrator reported. The company was reorganised under a Deed of Company Arrangement and remains a going concern.

Ambitious forecasts

Meanwhile, Medical Kiwi has some very ambitious forecasts with Miccio promoting a $90m deal to sell dried cannabis over the next two years to a company called Hektares, but the details are scant.

Medical Kiwi estimates it will have a leased Christchurch facility, licensed and with cannabis growing underway, by the middle of next month. It says the licences it requires for this activity have not yet been issued.

The company describes Hektares as a “global player in the medicinal cannabis industry”.

While Medical Kiwi’s current sales are zero, it forecasts the Hektares deal will drive sales of $23.58m in 2021, and that sales will continue to rise dramatically in years thereafter.

Hektares is opaque in its structure. Singapore’s Accounting and Corporate Regulatory Authority records show Hektares SG Holdings is a private company, established in August, 2019. It does not appear to be a trading company; its “principal activities” are listed in the Authority’s records as “other holding companies.” It is owned by Australian company Hektares Investments Pty Ldt, Singapore records show.

Neither company has a website, and no details of any commercial transactions or operations are apparent on the public record.

Hectares Investments is owned by Frederick Industries Pty Ltd and Mrs Bruce Pty Ltd, respectively owned by Christopher Frederick of New South Wales and Bruce Donald Ring of Victoria, ASIC records show.

None of the company shareholders or directors appear to have any significant business profile in medical cannabis or related industries.