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$12M Lesson Learned: Futuristic Marijuana Vending Machine Company Busted by SEC

By George Khoury, Esq. | Last updated on

MedBox, the company that promised to bring biometric medical marijuana vending machines into existence, was recently busted by the SEC for some rather deceptive practices, which surprisingly doesn't involve the controversial substance. Rather, MedBox was busted for deceiving investors by using fake earnings generated by a secret affiliate and not MedBox to claim the company had substantial revenue and was a marijuana industry leader.

The founder of MedBox, and the company itself, have settled the claims made by the SEC by agreeing to disgorge profits and pay fines, totaling over $12 million, and by the founder agreeing to not be a corporate director or officer of any public companies, and for him not to participate in any penny stock offerings. Others involved, including former corporate directors and officers, are still being investigated and/or pursued by the SEC for their involvement, or complacency (which likely won't suffice as a defense).

The founder of MedBox, in order to make the marijuana vending machine company appear like a good investment, formed a shell company that completed illegal stock sales, which were funneled into MedBox to appear to be actual earnings. In Q1 of 2014, the SEC reported that 90% of MedBox's earnings were actually these same fake earnings. These earnings were used to deceive investors into putting their money into MedBox.

During the investigation, the SEC discovered a text message sent by the founder which shockingly, but accurately, stated: "the only thing we [MedBox] are really good at is public company publicity and stock awareness. We get an A+ for creating revenue off sheer will but that won't continue." The founder knew that the end was coming, but it is unlikely he envisioned the SEC killing his marijuana-adjacent business.

The lesson for entrepreneurs looking to secure funding, or investors, or even to start crowdfunding, is to follow the rules regarding disclosures and compliance, or get competent legal help to make sure you do. When it comes to marijuana related businesses, entrepreneurs should be extra careful as federal laws still conflict with state laws regarding legal and even medical marijuana use. Compliance with state and federal laws that surround securing investors can be exceedingly tricky, and contacting a qualified attorney is generally a smart business decision.

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