Babbitt Column | Legal Risks in "Industrial Cannabis + Blockchain" Investment

According to the author: "Industrial cannabis" + "blockchain" combination is one of the hot spots of traditional capital market and blockchain. For market hotspots, investors should have at least a three-point risk awareness if they have a strong investment enthusiasm.

Since the beginning of this year, the market has ignited an industrial leprosy, and various companies have followed up and laid out. The excitement of the market has not only attracted frequent attention from stock exchanges, but also attracted the attention of anti-drug authorities. The craze has not completely faded, and the story of the capital market continues.

In this trend, some blockchain companies have begun to try industrial cannabis cultivation (such as Hong Kong listed company Xiong'an Technology (01647.HK)), and some industrial cannabis planters have introduced blockchain technology and passed securities generation. Coin issuance/STO for fundraising (such as Nasdaq-listed company TYHT) and has business cooperation with A-share listed companies (such as Xiong'an Technology and Guangzhou Langqi (000523); Shanggao and Shenzhen Datong (000038)).

Is the concept combination of “industrial cannabis” + “blockchain” a good investment worth doing? From the perspective of short-term gains, it may be (the short-term rise in the stock price of listed companies is proof); but from the accompanying legal risks, it may not be.

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This article does not talk about specific projects, but only uses these cases as an introduction, combined with a number of regulations and practices of Heilongjiang in the layout of many enterprises, suggesting some Chinese legal issues and risks that may exist in the investment of “industrial cannabis” + “blockchain”. For investors who are interested in participating in related fields of investment.

1. Legal issues and risks associated with industrial cannabis

(1) There are restrictions on the use of cannabis

According to the Single Convention on Narcotic Drugs of 1961 ("1961 Convention"), the Notice of the Office of the National Anti-Drug Committee on March 27, 2019, on the Strengthening of Industrial Cannabis Control ("Control Notice") ( I have not been able to access the document from public sources, but from the stock exchange 's letter of concern to a number of A- share listed companies, the document may exist, but it has not been publicly released ) and relevant officials of the anti-drug agencies are on the news media. The publicly expressed view clearly states that the use of industrial cannabis is limited to fiber and seeds, and that industrial cannabis has not been approved for medical and food additives in China. For those that do not comply with the 1961 Convention, all localities are required to take measures to correct and stop the approval of the permit; to re-examine the past approval and approval, if it is found to be beyond the scope of the Convention, it is recommended to suspend the relevant industrial activities and warn the law. And economic risks. Cannabis plants for other purposes are subject to control and must be approved by the competent authority for planting.

According to the "Standards of Foods and Chinese Herbs According to Tradition" and "Catalogues of Used Cosmetic Materials (2015 Edition)", the applications of cannabis plants and their ingredients in the fields of medicinal, daily use and food are only included. : Cannabis can be used as a traditional Chinese medicine or health food; cannabis leaf extract, hemp seed, hemp seed oil, cannabis stem powder can be used as a cosmetic raw material. The active ingredient cannabisdiol (CBD) extracted from industrial cannabis by domestic companies is not included in the above list and is currently used mainly for scientific research and export.

Heilongjiang's "Three-year Special Action Plan for Hemp Industry in Heilongjiang Province (2018-2020)" issued in March 2018 has a supportive orientation for the application of related cannabis plants in the terminal, as proposed in the plan "to develop kenaf "End products such as textiles, clothing, food, medicines, health products", "Relying on the scientific research strength of the province in the hemp industry, increase scientific research efforts in the degumming of hemp fiber, special machinery, food, medicine, health care products, etc. The transformation of scientific research results has been carried out." The support content in these action plans is one of the reasons for attracting many companies to invest in the industrial cannabis industry in Heilongjiang.

However, local actions must not deviate from national regulatory policies. In the context of national tightening of industrial cannabis regulation, there is uncertainty about whether the CBD can be liberalized and liberalized at the application end of medicinal, edible, and daily use . Investors need to take a rational look at the future application prospects of the CBD to prevent them from being lost in the company's paintings.

(2) High breeding standards and long-term approval process

According to the "Anti-Drug Regulations of Heilongjiang Province", if the unit selects and introduces industrial cannabis, it shall apply to the provincial agricultural administrative department for variety identification. According to the "Heilongjiang Province Industrial Hemp Variety Identification Measures" and "Heilongjiang Province Industrial Hemp Variety Identification Standards", obtaining industrial cannabis varieties identification, not only need to meet relevant standards (including but not limited to tetrahydrocannabinol content standards, quality standards, production Standards, resistance standards, etc.), and need to perform the following procedures:

(A) Application – The applicant submits an application to the Technical Office of the Provincial Crop Variety Approval Committee, and the varieties to be identified shall have the conditions stipulated by the Measures;

(B) Conducting tests – Applicants carry out regional trials and production trials by themselves. Normally, the regional test is not less than 2 production cycles; the production test is carried out after the completion of the regional test, and the test time is not less than one production cycle. The location, area, quantity and direction of the harvest shall be reported to the local public security organ;

(C) Submit the initial review – After completing all the test procedures, the applicant submits the test point data, summary results, test reports, etc. to the technical office of the Provincial Variety Approval Committee for review and preliminary examination;

(D) Publicity – By the first instance, the technical office of the Variety Approval Committee will publicize the preliminary examination opinions and test results on the official website of the agricultural administrative department at the same level within 30 days, and the publicity period shall be no less than 30 days;

(E) Recognition and Announcement – After the expiration of the publicity period, the technical office of the Provincial Crop Variety Approval Committee will submit the preliminary examination opinions to the Chairman of the Variety Examination Committee for review. The chairman committee shall complete the examination within 30 days, and the approval of the examination shall be passed. The certification shall be issued by the Provincial Crop Variety Approval Committee and the Provincial Agricultural Committee shall issue an announcement.

Based on the above regulations, combined with the introduction of industrial cannabis varieties identified in recent years in Heilongjiang Province, it usually takes three to four years from the time of filing an application to obtaining a certificate for variety identification.

In view of (i) the identification of new varieties of industrial cannabis needs to meet the various standards stipulated by the law, whether the selected varieties can meet the statutory standards, the uncertainty of obtaining the certification; and (ii) the comparison of the period from the identification of the application to the recognition of the application. In the short term, it is difficult for enterprises to invest in large-scale planting and profit through subsequent planting, sales and processing. If investors intend to invest in enterprises that breed new varieties of industrial cannabis, it is recommended to carefully consider before making investment decisions. And assess the likelihood that these new varieties will be identified, as well as the time period from the identification of the breeding variety to the achievement of profitability .

(3) Filing, sales and processing have filing requirements

According to the regulations of the Heilongjiang Province Anti-Drug Regulations, industrial cannabis, industrial cannabis flowers, leaves and seeds for sale, and industrial cannabis flowers, leaves and seeds, all need to be planted in the county within 10 working days afterwards. The public security organs of the people's government at the level of the record.

For the cultivation, sale and processing of industrial cannabis, Heilongjiang Province adopts an after-the-fact filing system rather than a prior approval system. Compared with Yunnan's licensing system for scientific cannabis cultivation, planting, industrial raw material planting and mosaic processing for industrial cannabis (requires the Industrial Cannabis Planting Permit and the Industrial Cannabis Processing License), in Heilongjiang The barriers to entry for industrial cannabis cultivation and processing are low.

However, as mentioned above, in the context of national drug control agencies have been concerned about and tightened industrial cannabis control, large-scale industrial cannabis cultivation will be carried out in Heilongjiang in the future ( currently, some companies disclose industrial cannabis planting area of ​​tens of thousands of acres ), sales and There is uncertainty in the processing, whether it can be successfully filed .

2. Legal issues and risks associated with blockchain

In the context of the state's support for the development of blockchain technology, if the selection, cultivation, sale and processing of industrial cannabis are in compliance with the law, there is no substantive legal issue in the use of blockchain technology in relevant links; If the blockchain technology is used for currency financing (the current financing path is mainly for STO outside the country), there may be some legal issues and risks.

At present, there are few companies that have the concept of industrial cannabis in China and carry out STO. However, if the future application of industrial cannabis is promising and the financing function of STO can be proved by the market, then fundraising through STO may become some domestic industrial cannabis enterprises. select. Investors should pay attention to the legal risks when facing STO with the industrial cannabis concept.

(1) Compliance with domestic fundraising

Legality outside the country does not mean compliance within the country . STOs conducted in accordance with overseas securities laws and regulatory requirements may not promote, recommend and raise funds in China even if they fully comply with overseas regulations , otherwise illegal financial activities may be suspected .

These risks have already been announced on December 4, 2018, when the Beijing Internet Finance Industry Association issued the "Prompt for Preventing the Implementation of Crimes and Crimes in the Name of STO". The association said that STO was suspected of "illegal financial activities" and informed the agencies involved in the activities to immediately stop all kinds of publicity and training, project promotion, financing transactions and other activities related to STO. Institutions and individuals suspected of violating the law and regulations will be severely punished by eviction, closure of the website platform and mobile APP, and suspension of business licenses. Although the risk warnings are only documents of individual local industry associations and have no legal effect, the upper-level regulatory attitudes reflected by them are actually similar to the state's supervision of ICO.

According to the "Illegal Financial Institutions and Illegal Financial Business Activities Banning Measures" and "Resolutely Preventing and Combating Illegal Fund Raising and Other Criminal Activities – The Legal Affairs Committee of the Standing Committee of the National People's Congress and the Head of the Legal Affairs Office of the State Council Answered by Xinhua News Agency", "Illegal Finance "Business activities" means engaging in financial activities without the approval of the relevant financial regulatory authorities, including illegally engaging in banking business (such as illegally absorbing public deposits or disguising public deposits, illegal fund raising, etc.), illegally engaging in securities business and illegally engaging in Insurance business activities, etc. The losses incurred by participating in illegal financial business activities shall be borne by the participants themselves . The author understands that the meaning of “illegal financial activities” referred to in the above risk warnings is similar to this concept.

If the STO project party raises funds within the territory, even if it is not for the purpose of illegally possessing funds, if its behavior is in line with the "Interpretation of Several Issues Concerning the Specific Application Laws in the Trial of Criminal Cases of Illegal Fund Raising", "Illegal absorption of public deposits or disguise in the public Characteristics of “deposit” behavior: (1) to absorb funds without the approval of the relevant departments or borrowing legal business; (2) publicizing the public through the media, promotion conferences, flyers, mobile phone text messages, etc.; Repayment of principal and interest or payment in the form of money, in kind, equity, etc. within the time limit; (4) Absorption of funds to the public, that is, socially unspecified objects, constitutes the "illegal financial business activities" mentioned in the above-mentioned measures, and will violate the criminal law of our country. .

Before making investment decisions, investors recommend comparing the behavioral characteristics listed in China's relevant regulatory policies and judicial interpretations, and paying attention to the legality of the relevant STO project parties in the territory to carry out related activities.

(2) Legality of advertising

The Advertising Law stipulates that advertisements must not contain false or misleading content, and must not deceive or mislead consumers. Merchants and other advertisements for goods or services that have an expected return on investment shall have reasonable warnings or warnings about possible risks and risks, and shall not contain a promised commitment to future effects, benefits or related circumstances, express or implied. , risk-free or guaranteed income .

In the law enforcement practice of relevant regulatory authorities, some financial products issued by the financial management company in their official website contain propaganda terms such as “expected annualized interest rate”. The regulatory authorities believe that the expression “expected annualized interest rate” is misleading investment. The misunderstanding of the loss of such financial products, risk-free or guaranteed income, in violation of the above provisions of the Advertising Law, has imposed administrative penalties on the company.

According to the above provisions and practices, if the STO project party publicly raises funds in the territory, express or implied that it is guaranteed, risk-free or guaranteed, even if it does not constitute a crime, it may be suspected of violating the Advertising Law.

(3) Foreign exchange risk of domestic individual investors participating in STO

(A)   Direct investment is difficult to handle foreign exchange registration

According to the "Regulations on the Administration of Foreign Exchanges of the People's Republic of China", domestic individuals who invest directly abroad or engage in the issuance or trading of overseas securities and derivatives, shall register in accordance with the regulations of the foreign exchange administrative department of the State Council. If the state requires prior approval or filing by the relevant competent authority, it shall go through the approval or filing formalities before the foreign exchange registration.

However, at present, apart from the special fields such as foreign exchange registration of returning natural persons in China and the participation of domestic individuals in the equity incentive plan of overseas listed companies, due to the lack of specific operational procedures, domestic natural persons cannot handle foreign exchange registration of overseas investment in other situations. Therefore, even if the token issued by the project party in the STO belongs to the securities under the overseas law, it is difficult for the domestic individual investors to handle the foreign exchange registration of the overseas investment .

(B) Indirect investment is difficult to apply

The current path of high-net-worth domestic individuals participating in overseas securities investment without having to perform overseas direct investment government procedures mainly includes: purchasing QDII (Qualified Domestic Institutional Investors) funds or asset management plans, and investing in QDIE (Qualified Domestic Investment Enterprises) licenses. Institutions, etc.

However, these paths are not applicable to the current STO, mainly because the regulated investment institutions such as QDII and QDIE are currently unlikely to use high-risk securities tokens as investment targets.

If a domestic individual investor purchases a securities token by participating in an overseas STO, or holds an equity of an overseas company (in the case where the securities token can be converted or converted into an equity of an overseas company), once the project party defaults, the Such overseas investment behaviors have not fulfilled any domestic government procedures, and involve jurisdiction over foreign law and dispute resolution procedures. It is difficult to safeguard rights, and the results of rights defense may be difficult to guarantee recognition and enforcement by Chinese courts . If domestic investors participate in STO investment through private placement and investment, they may face more legal risks and rights protection barriers.

3. Conclusion

This article focuses on China's relevant legal risks in the field of "industrial cannabis" and "blockchain". In order to avoid investment losses, investors should not only understand the domestic policy risks of industrial cannabis, but also be aware of the applicable scenarios and application methods of blockchains.

In addition, similar legal risks do not exist only in the field of “industrial cannabis” and “blockchain”. For some concepts of market speculation, if investors have a very strong investment enthusiasm, at least they need to have a risk awareness of three points , especially in the face of STO, no matter which industry STO is used in, even in overseas compliance. STO, once it involves domestic fundraising, investors are also required to pay special attention to the Chinese legal risks. Although the legal party is responsible for the project, the investors who ultimately suffer economic losses are often investors .

Author: Zhang Ling, a partner at law firm Han

Disclaimer: This article only represents the author's personal opinion and does not represent the opinions of the organization. The contents of this article do not constitute legal advice and investment advice. To reprint or cite any of the content in this article, please include the author's name.

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