SEC vs. Tilray: What regulators wanted to know about the largest U.S. pot IPO

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As the largest pot IPO in the U.S. was on deck earlier this year, the Securities and Exchange Commission sought to cut down on Tilray Inc.’s soaring rhetoric and add disclosures about the side effects of weed, according to SEC documents made public this week. Among other changes, the SEC’s comments led the company to pull a letter to shareholders from Chief Executive Brendan Kennedy.

Changes to initial public offering documents at the behest of regulators are nothing new, but the cannabis industry is, and Tilray’s exchange with regulators will give investors an early taste of what to expect in the future as more companies follow in its footsteps. Among the 36 initial comments SEC officials had for Tilray TLRY, +0.58% were requests for increased disclosure around the cannabis company’s complex capital structure as well as the risks associated with operating in the hazy regulatory environment in the U.S. and side effects of the drug.

“As is customary with most IPOs, we had to make a number of changes on the preliminary prospectus based on comments we received from regulators at the SEC,” Tilray spokesman Zack Hutson wrote in an email.

Though cannabis is set to become legal for adult recreational use in Canada, and already is in several U.S. states, it remains illegal under U.S. federal law.

Don’t miss: Five things to know about the first pot company to go public on Nasdaq

The SEC’s concerns with Kennedy’s letter were, in short, that it was long on promises and rhetoric about the industry’s promising future, but short on the conservative couching that the agency prefers.

“Together, we are improving patients’ lives and methodically breaking down barriers to end cannabis prohibition and the harms it causes,” Kennedy wrote in the letter contained in a draft registration document, now public. “With every milestone, we erode the stigma associated with cannabis and raise the standard for cannabis products to a level trusted by doctors, patients and mainstream adult consumers.”

The SEC was blunt: “Delete the statement that you are improving people’s lives,” officials said, and asked Tilray to “limit its content to supportable facts and balance your stated goals with the risks and obstacles you face.”

CEO letters were made popular in 2004 by Google’s IPO, which included a now famous letter from Larry Page and Sergey Brin. That the SEC would take issue with a CEO letter is a fairly predictable development, though removing it altogether is unusual.

Hutson said that by the time Tilray’s attorneys had finished editing the letter, it was no longer in the CEO’s voice, so they pulled it from the filing documents.

Tilray IPO is ‘validation’ for pot companies, CEO says

Kennedy’s now-removed letter aside, the SEC officials had a number of questions about the exact status of Tilray’s patents and clinical trials, as well as a request to include further risk disclosures about the potential side effects of cannabis use.

The company’s complex capital structure came under scrutiny too, since it remains under the majority control of the venture capital firm Privateer Holdings, based in Seattle. The SEC wanted Tilray to include more detail about the debt agreement with Privateer, as well as the potential effects if Privateer decided to sell some of its stock, among other things.

Pot, being illegal, was the subject of a number of SEC comments which sought to have Tilray expand on the risks associated with U.S. laws, in the section of its filing document that discussed why the company believes it is not subject to the Controlled Substances Act (its cannabis cultivation is based in Canada and Portugal, while its executive offices are in Seattle).

The SEC also asked Tilray to discuss in depth its terms of agreements with the Novartis A.G. NVS, +0.44%  subsidiary Sandoz Canada and Shoppers Drug Mart, among others. At the time of filing the IPO documents, Tilray said both contributed less than 1% of the company’s revenue.

Tiilray stock closed up 0.6% to $29.50 in regular trading Thursday. Tilray shares have shot up 74% since its July IPO, as the S&P 500 index SPX, +0.79%  has risen 1.3% in that time.

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