As investor focus rapidly shifts beyond established industries toward emerging industries worldwide, it is imperative that due diligence providers rapidly adapt their tradecraft to ensure that clients are able to invest with confidence. In addition to gaining a thorough understanding of various emerging industries in order to tailor investigations to new sectors, diligence providers must be able to clearly and efficiently explain investigative methodology to clients who are themselves often new to emerging industry investment. Diligence practices for two popular emerging industries, cannabis and cryptocurrency, are highlighted below.
Cannabis
As marijuana legalization continues to expand across the United States, investment in the industry continues to grow. Cannabis industry due diligence is unique in that certain findings typically deemed adverse in a traditional due diligence investigation may be seen in a positive light. In a standard due diligence investigation, identifying criminal records for a subject pertaining to the purchase and sale of marijuana would typically concern clients. However, such a rap sheet for the head of a commercial cannabis grow operation may be viewed by potential investors as positive additions to the subject’s work history which indicate a deep knowledge of both product and market.
Cannabis specific due diligence also requires geographic and cultural understanding. In the wake of Michigan’s legalization of recreational marijuana sales in 2019, investors eager to fund cultivation and dispensaries failed to consider the demographic makeup of their chosen retail operations. For example, The Arab American News reported in December 2020 that the Muslim Community of Hamtramck strongly opposed the emergence of the marijuana industry. With expansion of the cannabis industry ongoing in Michigan, investors and diligence providers should be conscious of the state’s large Muslim population.
As the cannabis industry expands, so do industry specific regulatory bodies. Comprehensive due diligence requires an understanding of the relevant government regulators. While traditional diligence clients are familiar with national industry regulators such as the SEC, cannabis regulation is frequently state specific and diligence providers must prioritize tracking the evolving regulatory landscape. In an interview with Shawn Hauser, partner and chair of the Hemp and Cannabinoids Practice Group at national marijuana law firm Vicente Sederberg, for Vcheck Global’s podcast RiskWatch, we discuss evolving legal frameworks, navigating regulatory compliance, and some of the core requirements for conducting due diligence.
Cryptocurrency
Cryptocurrency is riding a wave of popularity. Despite mainstream familiarity with the term and a general understanding that it refers to a digital asset, further knowledge of the industry is limited. The relatively new emergence of the cryptocurrency industry and a lack of government regulation add to the complexity of performing due diligence in this sector. When examining subject individuals and entities operating in the digital asset space, a combination of traditional and innovative investigative strategies can provide investors with peace of mind.
The time tested investigative practice of searching legal records and media serves to alert clients to any red flags involving a subject entity’s key players and related entities. For example, reviewing records maintained by financial regulators including the SEC and NFA can notify investors of problematic regulatory histories.
As an internet-based industry, due diligence in the cryptocurrency space provides an excellent opportunity to utilize artificial intelligence (AI) social media reporting. Technology such as that utilized by Vcheck Global’s investigators scans social media posts for derogatory content. Incorporating social media checks in a digital asset space investigation is recommended as popular social media platforms including Facebook and Instagram are hotspots for cryptocurrency scammers.
With the continued popularity of emerging industry investment, prioritizing pre-investment due diligence provides an excellent opportunity for investors to mitigate significant loss while gaining a deeper understanding of prospective business partners and new industries. Leading investigative firms such as Vcheck Global employ proven pre-investment due diligence techniques to provide clients with comprehensive knowledge in support of their respective business dealings. Before heading to the moon with cryptocurrency or cannabis investing, consider consulting with a trusted and innovative due diligence provider like Vcheck Global to ensure safe travels.
Seth Harlan is Senior Associate, Market & Regulatory Affairs at Vcheck Intelligence.
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