Issue
The issue is whether the SEC are authorized to take action against the group. This comes after the SEC issues a Wells Call and a subsequent Wells Notice following an investigation.
Rule of Law
The SEC can carry out investigations where there is a risk or suspicion of illegal activity. In the present case it seems that the issue revolves around the offense of money laundering. Whereas the SEC is mainly tasked with oversight on financial organization, it can also look into issues of money laundering. This assertion is based on a broadening of the duty to protect investors. From this point of view, the SEC can move in to prevent the businesses used as avenues for money laundering from misappropriating the investor funds.
Money laundering is where a person tries to engage in a monetary transaction with money which is acquired from an illegal activity (18 U.S.C. § 1957). For one to be liable for money laundering, the following elements must be proved: First, he/she has engaged or plans to engage in the transaction. This means that the respondent is planning or has already used the money in the transaction in question. Second, the transaction has to be monetary in nature (United States v. Wittig, 425 F.Supp.2d 1204 (2006)). This excludes all other transactions that do not deal with the use and exchange in currencies. Thus, charities and contributions cannot amount to money laundering. Third, the transaction is one which is illegal or arises out of a criminal activity. Thus, where the money is lawfully acquired, there can essentially be no money laundering 18 U.S.C. § 1957(f)(2). Criminal activity here includes fraud. Fourthly, the respondent must have knowledge that the money was derived from criminal or illegal activities. Fifth, there as to be proof showing that the property or money is a proceed of crime (US v. Lake, 472 F.3d 1247 (10th Cir. 2007)).
Fraud in this case is defined as the act of planning to get monetary gain through the use of false statements or fraudulent misrepresentation with the intention to deceive. Fraud would also still suffice where the accused has hidden information. What is required is that there has to be a plan or a scheme that intends to deceive (Carpenter v. United States, 484 U.S. 19 (1987)).
Analysis
With regard to the first part of the issue the company seeks to initially want to carry out business as a SPAC. The use of money from its investors would be used in this case for the purchase of a cannabis-based company. They however change their decision and seek to buy a psychedelic company. Notably, the purpose for which funds are sought was no the purchase of the psychedelic company but a cannabis-based business. Cannabis can be seen as more of a psychedelic drug a cannabis-based company is not in the current state of affairs, a drug company.
The investors are therefore investing in a company that will carry out a function different from that which the money is procured for. The SPAC in this case therefore could be liable for money laundering. First, the company seeks to carry out monetary transactions which includes the purchase of a cannabis-based company to earn profits. It however plans to engage in the purchase of a psychedelic company. Second, the transaction that the group plans to engage in is monetary in nature. With regard to the third requirement, the group has to be seen as to be applying funds acquired out of the proceeds of crime. The suspected crime in this case is the offense of fraud.
The money acquired within the 6 months was intended to purchase a cannabis-based business. The purpose for which the money is actually intended for is the purchase of the psychedelic company. This was due to the fact that financial transaction requirements would not apply in this case. Thus, there is deception. The investors who raised the $300 million were made to believe that the money would be applied for another purpose. The company thus uses funds acquired through fraud and deception. The group knows of such deception and it can be argued that the new company would be intended to launder the money.
Conclusion
The group intends to purchase a company with funds intended to purchase a cannabis-based business. The use of such funds for a different purpose would be fraudulent as it deceives the original investors and shareholders as to the actual source and purpose of that money. As such, the SEC could authorize the action against this group.
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