Casey W. Baker

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Marijuana-related businesses have blossomed into an industry with an estimated total market value of $7.2 billion in 2016, with annual growth projected at 17%. Industry surveys report that 62% of marijuana-related businesses have offered equity stakes to investors and approximately one-half of marijuana-related businesses planned to actively seek investment funding in 2017. Along with the investment opportunity comes heightened fraud risk, with regulators cautioning investors against investment due to the lack of accurate and publicly-available information. Also, despite state-level decriminalization, marijuana possession, sale, and distribution continues to be a crime under federal law. The criminal nature of the marijuana industry can have ripple effects on investors, even if never prosecuted. This paper explores the risks to investors presented by the similar but distinct doctrines of unclean hands and in pari delicto, both of which provide that a court should not allow a person engaged in wrongful conduct to profit therefrom. Because marijuana-related businesses are criminal enterprises, the doctrines may bar investors from pursuing civil actions for securities fraud or other misconduct. Existing case law does not provide sufficient guidance to courts in resolving the potentially competing policies of securities law enforcement and controlled substance enforcement. This article therefore proposes a two-step analysis for courts that would encourage courts to ascertain whether lawmakers have articulated a clear legislative policy preference when applying unclean hands and in pari delicto to criminal conduct. If there is not a clear policy preference, courts should allow the fraud suit to proceed.

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