Providing Honest, Reliable Business Counsel For 29 Years

Crowdfunded financing for marijuana software business goes up in smoke

| Jun 13, 2016 | News

By James Rufus Koren, LA Times

For Ralf-Rainer von Albedyhll and his start-up, new rules that allow small companies to sell stock through Kickstarter-like online offerings might have been the answer to a question that has dogged him for years: How do you find investors willing to back a company in the medical marijuana business?
He’d tried to convince professional investors, including members of an Oakland marijuana investor network group Arcview Group, but to no avail. So he turned to equity crowdfunding, a newly legal practice that allows start-ups to raise up to $1 million from the general public.
He spent weeks on paperwork. He had his firm’s books reviewed by an accountant. He thought he’d jumped through every hoop. And on May 16, his firm, NextRX, started raising money through Santa Monica’s StartEngine Crowdfunding.
Two days later, the campaign was suspended. Not because NextRX had run afoul of the new crowdfunding rules, but because another institution – an Arizona bank – was concerned about federal drug laws.

When investors back a company’s crowdfunding campaign, their pledged cash goes into an escrow account at a bank. If the company reaches its funding goal, it gets the money in the account. If the company falls short of its goal, the cash goes back to investors.
But it turns out that Western Alliance Bank, the bank that holds escrow accounts for companies raising money through StartEngine, wasn’t comfortable holding an account on behalf of NextRX because it’s in the marijuana business, according to NextRX’s StartEngine campaign page.
StartEngine and Western Alliance declined to comment.
Banks are famously skittish about the marijuana business. Though pot is legal for medicinal use in California, and for recreational use in a handful of states, it’s still illegal at the federal level – and banks don’t want to risk the wrath of federal bank regulators.
Still, the decision to suspend NextRX’s campaign surprised von Albedyhll, who noted that his firm is a software developer, not a drug peddler. The company, which had been based in Santa Monica before moving to Las Vegas, is developing an online system that allows medical marijuana dispensaries to electronically store patient records.
“We’re ancillary. We don’t even touch the plant,” he said. “Because we’re just dealing with patient management, this shouldn’t really be an issue. I thought it wasn’t an issue. I guess I was wrong.”
He said he’s reached out to other crowdfunding sites to see if the banks they work with might be willing to work with NextRX, but so far he hasn’t found one.