Marijuana, Bud Genius, Tommy Chong — Keys to New SEC Action
Mentioning medical marijuana may spark almost as much public interest as crypto currency. Marijuana, of course, has a split regulatory personality. Some states have legalized medical marijuana. Others have not. The federal government flip-flops. It is illegal but at one time those statutes were not being enforced. Now they are being enforced. Against this schizophrenic background add a company called Bud Genius Inc., as a medical marijuana firm run by Angel Stanz and supposedly tied to, and marketing for, Tommy Chong of Cheech and Chong fame. and you have the Commission’s latest case. SEC v. Bud Genius, Inc., Civil Action No. 18-cv-01005 (S.D. Cal. Filed May 21, 2018).
Defendant Bud Genius is a Wyoming corporation known at one time as Rightsmile, Inc. It was in the business of testing and analyzing strains of medical marijuana. The firm had a platform which assisted patients in selecting cannabis medicine paired to their specific needs. The penny stock was quoted on OTC link under the ticker RIGH. Defendant Aaron “Angel” Stanz is the sole director and CEO of Bud Genius. Others involved, and named as defendants in a related action, are Taylor Moffitt of Halydean, a venture capitalist; Carlos Febles, a former multimedia sales consultant, business partner of Mr. Moffitt and the owner of U.S. CoProducts, LLC, a firm involved in processing deceased farm animals with no active operations. SEC v. Moffitt, Civil Action No. 18-cv-03034 (N.D. Iowa Filed May 22, 2018).
Bud Genius began as a privately held firm. In January 2012 Angel Stanz and a venture capitalist caused Bud Genius to enter into a reverse merger with OTC traded Rightsmile. The resulting public company did business as Bud Genius with Mr. Stanz as CEO.
Beginning two years later, and continuing for about ten months, the firm and its CEO issued a series of false press releases regarding the company and its business. For example, on August 20, 2014 a press release headlined Bud Genius Doubles Scope of Business was issued. It claimed that Bud Genius subsidiary Genius Biotech Corporation would more than double the revenue potential of the company since it is an established “beacon of quality for cannabis products . . .” creating the impression that the subsidiary was an operating business. It was not. The firm had no employees and no business. On the date of the press release the subsidiary did not even exist – it was formed a month later.
Similarly, in October 2014 a press release was issued stating that “exclusive celebrity endorsement contracts are being negotiated . . .” The release went on to again suggest that the firm and its by then newly formed subsidiary were operating. They were not. Each was a shell.
While no celebrity endorsement or partnership was ever secured, six press releases were issued in a stream that continued into April of the next year tied to the subject. A release issued on March 5, 2015, for example, described Bud Genius as a “licensee of celebrity-endorsed marijuana and hemp related merchandise.” Yet a proposed acquisition to obtain licensing rights associated with celebrity Tommy Chong “never materialized,” according to the complaint. Nevertheless, a subsequent press release from Defendants discussed an LOI to acquire Evergreen Licensing, an exclusive licensor of Tommy Chong. Mr. Stanz later acknowledged in an email that the LOI was “more of a cosmetic step than anything tangible” and, in any event, Bud Genius did not have the $500,000 required as part of the consideration for the deal.
Subsequent blog posts by Mr. Stanz confirmed the deal however. One post described the LOI as the firm’s “crowning achievement” and emphasized the magnitude of the announcement, noting that Defendants were “proud to be working with Tommy Chong. . .” Media reports repeated the claims as did a “pitch deck” for potential investors which cited “exclusive licensing rights” for Tommy Chong Products.
The financial reports for Bud Genius between 2012 and 2014 also contained false information. In 2012, 2013 and the first three quarters of 2014, for example, the “total revenue” of the firm was inflated by improperly adding the revenue for Bud Genius and that of a charter jet business of Mr. Stanz. In 2012 and the third quarter of 2014 the “intangible assets” of the firm were inflated and materially overstated for certain software developed overseas at low cost by improperly estimating what the cost would have been if the work was done in the U.S. And, the accounts receivable for 2013 and 2014 were overstated by improperly including loan payments owed to the company by Taylor Moffitt.
Finally, between late 2013 and mid-2015 Defendants facilitated the sale of millions of unregistered shares through Taylor Moffitt, Carlos Febles and U.S. CoProducts. The shares traced to a transaction before the reverse merger when the former CEO of Rightsmile obtained 300,000 restricted preferred shares of Rightsmile in exchange for the transfer of a web development company. The conversion rate was 10,000 to 1. Later Messrs. Moffitt and Febles, with the assistance of Defendants, converted the interests into three billion common shares of Bud Genius. Portions of the stock were transferred and eventually sold through U.S. CoProducts under an incorrect claim of an exemption. In fact those involved acted as a statutory underwriter. Over 1 billion shares were sold for total proceeds of $543,333 of which $141,084 was transferred to Bud Genius and Mr. Stanz. The complaint alleges violations of Securities Act sections 5(a), 5(c) and 17(a)(1) and (3) and Exchange Act section 10(b). To resolve the case each Defendant consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, a five year officer and director bar and penny stock bar was imposed as to Mr. Stanz. The settlement also requires the payment of disgorgement and prejudgment interest in the amount of $158,829.
To resolve the companion action, which alleged violations of Securities Act sections 5(a) and 5(c), each Defendant consented to the entry of a permanent injunction based on those sections. In addition, Messrs. Moffitt and Febles agreed to the entry of penny stock bars for, respectively three years and one year. Defendants will pay, on a joint and several basis, disgorgement and prejudgment interest of $435,595. See Lit. Rel. No. 24148 (May 22, 2018).