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A Crowdfunded Cannabis Company That The Crowd Should Avoid

This article is more than 7 years old.

Med-X Inc. is being heralded as one of the first crowdfunded cannabis companies. It is a Registered A offering that both the Securities Exchange Commission (SEC) and FINRA have approved.

Sounds good, right? Give the public a chance to buy into a cannabis company. Unfortunately, this offering is not good and the company should have spent more time becoming established before asking people to part with their hard-earned income and give them money.

“This is a very rigorous process for any company to get through, and for even one second, if either of these regulatory bodies (who turn over every rock) thought that any company is not ethical or not a real company, they would not be cleared,” said Darren Marble of CrowdfundX.

The SEC, though, does not pass judgment on a company's credibility. As long as a company files the required paperwork in good order, the SEC gives its approval. They rely on prospective shareholders to read the material that is prepared for them in order to make their own judgment. Med-X is honorable enough to disclose its flaws in its offering circular, so at least potential stockholders can't claim they weren't warned.

“They say give us $15 million, it's only going to cost us $2 million. So then they have $13 million and they're going to go buy stuff,” said Alan Brochstein, founder of 420 Investor. Brochstein has been a very vocal critic of the Med-X offering. “I think it's stupid and I'm tired of seeing individual investors burned,” said Brochstein.

A seasoned investor that reads plenty of securities offerings will see the weaknesses pretty quickly. A not-so-savvy investor may not understand or recognize the problems with this deal.

First, Med-X has a very close relationship with a company called Pacific Shore Holdings (PSH). It is disclosed that this relationship presents conflicts of interest. The two companies share office space, executives and exchange money in the form of loans and equipment such as a truck. PSH also has a blemished securities past.

In 2011, the Pennsylvania Securities Commission issued a Cease and Desist Order directed at the company and its president Matthew Mills (who is also President and Chief Operating Officer at Med-X) for securities telephone solicitation. They settled with the commission and the order was rescinded. In 2013, it happened again, but this time in California. Pacific Shores then commenced a private placement of stock, which allowed general solicitation. Pacific Shores filed an appeal and it was also dropped from the court calendar. This is all disclosed in the offering, but it is red flag worthy. This could be overlooked, if this offering was strong, but it isn't.

The first issue with this company is that it is really aspiring to be four companies. It will start out as a media business, The Marijuana Times, which is what the initial fund raising will be used for. Then it will also be a pesticide company, a cannabis company and a kiosk company. There are numerous cannabis companies that specialize in just one of these sectors, but not all four and there's a reason why. The expertise for media is very different from agriculture and even more so from payments.

Med-X claims its first source of income will be advertising revenue from its media business Marijuana Times. The offering does not give website statistics. Med-X President Matthew Mills cites his knowledge in internet marketing and his experience as Vice President at Bidz.com where he led the company to $200 million in revenue. However, journalism is not the same as running an auction site.

When asked to provide statistics on the site, Mills only compares it to High Times suggesting that others like Vice don't have enough readers to rank via Quantcast. According to Quantcast, Marijuana Times gets anywhere between 3,000 and 10,000 views a day, but the unusual spikes and mostly desktop views makes it look like the views are purchased. A check with website ranking company Alexa rates Vice at 164 globally and Marijuana Business Daily is ranked 138,310 by Alexa. Marijuana Times is only ranked at at 854,199.

It's already a crowded field with approximately 15 specialized marijuana news sites. Plus, many main stream media organizations (like Forbes) are devoting more time to covering cannabis. Med-X says it will spend $600,000 in 2016 on the website and $900,000 in 2017. Then, it will earmark $2.5 million for acquisitions, but it also assumes it will earn no revenue for 2016 or 2017. So, Med-X's first source of income, Marijuana Times, will make no money until 2018.

“At present, readership in MJ digital space has limited readership with the exception of 'High Times,” said Mills. “It is clearly evident that “The Marijuana Times” is completely different than 'High Times'.” Mills only compares his site to High Times and nowhere in the offering does it cite the competition in this space. Plus, if readership is limited as he states, why then go after this business and make it the company's first source of income?

The next business is Nature-Cide, a 100% natural insecticide approved by the State of Colorado Department of Agriculture for use in the cannabis industry. Med-X buys the product from Pacific Shore Holdings and due to the conflict of interest could “over pay for the product” according to the offering circular. Mr. Mills said, “Pacific Shore Holdings Inc. has given Med-X Inc. exclusivity to market Nature-Cide into the cannabis arena. This is a major keystone and places Med-X ahead of the curve and ready to supply the cannabis industry.” Mr. Mills owns the license for the product and is chief executive officer at Pacific Shore Holdings, so he gave himself an exclusive deal. Med-X has applied for a patent on the product. Med-X has sold no Nature-Cide according to the offering.

“Bottom line is Nature-Cide and “The Marijuana Times” are poised to begin positive revenue streams as stated in our offering circular,” said Mills. However, the offering stated the Marijuana Times won't make money for the next two years and no pesticide has been sold yet. There isn't even a website dedicated to Nature-Cide or a place to buy the product.

Brochstein does not hold back in the slightest when asked about the products. “It makes no sense to me,” said Brochstein. “Why didn't they run this through PSHR? Why did they have to set up a separate company? I'll tell you why, because they'd have to disclose that PSHR is a piece of crap. They would have to disclose this pesticide hasn't done anything. It's shit. If so, they wouldn't be raising money from the public.”

Med-X also plans on developing new strains of cannabis with higher CBD levels and will spend $500,000 on equipment. The plan is to create medicinal supplements. However, many CBD companies have already learned you can't claim medical benefits without going through extensive, expensive drug testing. Mills points out that many emerging drug companies start out with little and then through rigorous testing end up with a viable product. True, but then most emerging drug companies aren't also running a media business and selling insecticide as well.

Med-X will also spend shareholders money to use $1.5 million to buy land to grow marijuana for research and development. Med-X currently grows marijuana under a personal medical use in California. Med-X is very up front that it “touches the plant” for research.

Here's another red flag – if marijuana is still federally illegal, how can a securities business engage in selling stock in a company that “touches the plant?” Med-X clearly states that it touches the plant when it does its research and even has a video showing them working with marijuana plants.

Startengine, which is hosting the the offering for Med-X did not respond to a request for comment. Med-X plans to hire FundAmerica Securities, a registered broker-dealer for administrative and escrow services. FundAmerica also didn't respond to a request for comment. The Securities Exchange Commission did not respond to a request for comment.

Any government agencies have taken the position that they do not want to work closely with any cannabis company that “touches the plant” for fear of running afoul of federal law enforcement. Chase recently closed the account of a website that merely offered a coupon for a discount at dispensary. This is a huge risk for a securities firm to take.

Moving on, Med-X is also going to engage a robotics fabrication firm to design a proprietary dispensing machine. This will cost another $1.5 million. Again, there are already numerous kiosk companies that have created cannabis focused products. They have been in the market for a few years already and adoption seems to be limited. Many customers prefer the one-on-one attention from a bud tender.

Med-X takes great pride and saying its executives draw no salaries, but in fact they will begin drawing salaries in the second half of 2016. That's another $1 million for 2016 and $1. million in 2017. Plus, several employees are drawing salaries from PSH.

Finally, there is the aggressive marketing of this offering. Marijuana Times is owned by Med-X and frequently writes positive stories about the company and it isn't clearly communicated that this is sponsored content. Many investors may not be aware that these articles are written by people hired by the company.

They also hired a marketing tech company called Vytmn that slaps on an ad for the offering over other journalists stories. Here's how it works. A link to a story from Forbes could be tweeted out and when the reader clicks on the link in the Tweet, a box appears in the lower left side advertising the offering. It looks as if Forbes (or whatever publication the article is linked to) approved this pop-up ad. Considering the past trouble with securities solicitation, this is troubling.

The company is trying to raise $15 million in this offering. With the outstanding shares, it values the Med-X at approximately $70 million for a company with no sales and no revenue expected until 2018.

In defense of his company Mills said, “The company has a lot more work to do, but many of the aspects of our blueprint in the offering circular are being built, on what we feel is firm bedrock.”

“I'd like to see them succeed and do it right,” said Brochstein. “I just don't think this is right.”