The Ebbu Files
A high-profile Colorado marijuana start-up misled prospective investors and promoted an investment structure that may have violated state laws, according to internal company documents and emails leaked to WeedWeek. The company, Ebbu, subsequently rewarded its investors when it sold its assets in a cash-and-stock deal worth roughly $250 million.
Publicly available court filings and press accounts suggest fundraising irregularities at Ebbu, but these apparently never attracted scrutiny from Colorado regulators or law enforcement. The situation raises questions about how effectively the state enforces its marijuana investment laws. Ebbu’s story shows why money of unknown origin — akin to “dark money” in politics — could be a significant problem in the fast-growing and federally illegal marijuana industry.
The documents also shine light on the early days of a bellwether cannabis start-up. Ebbu, which had a portfolio of U.S. patent applications, was the “poster child” for the value of cannabis-related intellectual property, a senior attorney told Bloomberg Law this summer.
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Soon after its founding in 2013, Ebbu generated buzz with its plan to release “Feelings,” a line of marijuana products that would produce specific mood states: Energy, Chill, Create, Giggle and Bliss. Pot delivers a notoriously unpredictable high that can make users sleepy, chatty, horny or paranoid, among other sensations. A marijuana product that induces a specific high on demand is considered by some to be the industry’s holy grail. Over the years, many companies have made similar promises about their products, though there’s scant data to back them up.
Ebbu co-founder Michael “Dooma” Wendschuh, who led Ebbu’s fundraising efforts for its first two and a half years, said the production techniques necessary to produce the Feelings products were well-established in the perfume industry. A few months after Ebbu’s founding, Dooma said the company also had a chemist who, for six years, had been studying how cannabis affects the brain.
The company hired several Ph.D. scientists and bought some very expensive lab equipment. Dooma was interviewed in major media outlets like Fortune, The New Yorker and Fox Business, further boosting Ebbu’s credibility.
In an industry obsessed with respectability, it surely helped Ebbu’s fundraising that both founders were clean-cut guys with experience in the mainstream economy. Dooma is a Princeton grad who co-wrote the blockbuster video game “Assassin’s Creed.” Ebbu CEO Jon Cooper was the equivalent of student body president at the University of Colorado, Boulder, before beginning a business career with stints in finance and tech.
Now in their early forties, Cooper and Dooma became friends early in their careers when both lived in Los Angeles. Cooper moved back to his native Colorado and they reunited there to start Ebbu, months after Colorado voted to legalize recreational marijuana in 2012. (Neither Cooper nor Dooma responded to emailed questions for this story.)
Ebbu never released the Feelings product line. But in October 2018, one of Canada’s largest marijuana companies, Canopy Growth Corporation, acquired Ebbu’s assets in a deal reportedly valued at C$327 million (US$250 million). Cooper is now a Canopy executive, according to his LinkedIn profile. (Spokespeople for Canopy and Constellation Brands, an American liquor company which is a big Canopy investor, did not respond to requests for comment.)
Like many U.S. marijuana companies, in Ebbu’s early years, it struggled to raise money. Dooma eventually raised about $10 million for Ebbu, but Colorado law, he later told an interviewer, made it “a tremendous challenge, almost impossible.”
Since its first-in-the-nation market for legal recreational marijuana opened in 2014, Colorado has required all direct and indirect investors in legal — i.e., licensed — pot companies to go through a criminal background check, which includes fingerprinting and financial disclosures. It is intended to ensure organized crime doesn’t profit from the industry.
The process is invasive and time consuming, but perhaps more importantly, lots of people with the money and the inclination to invest in pot start-ups had jobs, custody battles and other life situations that could be adversely affected by association with a stigmatized and federally illegal industry. Colorado does not publicly disclose the names of all investors in licensed marijuana companies, but even so, keeping their involvement confidential was — and remains — a priority for some would-be cannabis investors.
In a February 2018 court filing, Dooma acknowledged that Ebbu tried to help investors back the company “without publicly revealing their identities,” and said similar practices are common in Colorado’s marijuana industry. To Dooma’s knowledge, Ebbu’s policy of helping investors to mask themselves “was not intended to avoid compliance with any state or federal laws,” the court filing said.
WeedWeek previously documented a September 2013 transaction in which an individual who appeared to invest $140,000 in Ebbu was not disclosed to Colorado regulators, as Colorado law required. The transaction looked like this: On September 13, 2013, an individual, “E.,” transferred $140,000 to Dooma via a document called a “Custodian Agreement.” One week later, Dooma invested $140,000 in Ebbu.
In court filings, Dooma identified himself as the investor and didn’t mention E. According to Dooma, it was the first investment Ebbu received. “This financial and security structure was fully vetted with Ebbu’s counsel,” Dooma said in a March 2018 lawsuit.
Under penalty of perjury, Colorado marijuana license applications and renewal applications require companies to identify “all investments and funds used to start and/or finance” the business. As WeedWeek has previously reported, documents Dooma filed in court suggest Cooper facilitated the $140,000 transfer from E. to Dooma. But when Cooper signed Ebbu’s license and license renewal applications, he did not identify E. to Colorado regulators. Last year, a spokesperson for Cooper said E. had never “invested or loaned money to Ebbu,” and Cooper didn’t respond to questions about the apparent financial relationship between E. and Ebbu.
In an email to Cooper sent weeks before the $140,000 transaction, which Dooma later filed in court, Dooma describes a similar deal structure: “Basically the agreement would say that the person who is paying for the investment will give the money to the person who is actually investing,” he wrote. Dooma also raised the possibility of a “template agreement,” which could be used for multiple similar investments.
“I totally agree with … a template agreement,” Cooper responded. The $140,000 “Custodian Agreement” signed by E. and Dooma a few weeks later appears to have performed this function.
The transaction occurred at the very beginning of Colorado’s experiment with marijuana legalization, a confusing time of rapidly shifting regulations. It wasn’t clear to me from the material available whether Ebbu’s failure to identify E. to Colorado regulators on its subsequent license applications was an attempt to skirt the law or a misunderstanding of it.
Newly leaked emails appear to show that, several months after Dooma’s $140,000 investment, Ebbu’s attorney said he would not participate in deals structured like this, but Ebbu continued to promote the investment structure.
The new leak consisted of about 200 pages of internal documents and emails from the company’s first year; they mostly involve raising capital. In emails, Cooper and Dooma talk up the company’s potential to dominate the industry, though Ebbu didn’t yet have a permanent headquarters to develop and produce the Feelings products. The documents also shed new light on three-plus years of ongoing litigation, which followed Cooper’s firing of Dooma in early January 2016.
In a leaked email dated two months after the initial $140,000 investment, Cooper appears to indicate that the company’s lawyer, Christian Sederberg, founding partner of powerhouse cannabis law firm Vicente Sederberg, could not endorse this investment structure.
Under the subject line “RE: ‘how to invest in ebbu’ presentation,” Cooper wrote to Dooma:
“Is [a prospective investor] expecting to talk to Christian about gifting? I am happy to arrange a call — but I think we have to tell [the investor] before the call:
“1. Christian is happy to talk about a the [sic] current laws and regs, and about an [investment] structure…
“2. Christian will not discuss ‘gifting’ as that is something that needs to happen outside of the company and without our knowledge…”
In response, Dooma told Cooper to set up the call. He didn’t address gifting or the lawyer’s view of it. (Sederberg declined to comment citing rules governing Colorado lawyers.)
Despite its lawyer’s counsel, Ebbu still promoted the “gifting” structure as an option for investors. In a January 2014 email, Dooma wrote to a prospect, with Cooper cc’d:
“GIFTING: It is possible to ‘gift’ funds to a Colorado resident who would purchase equity on your behalf.”
Dooma attached two slide presentations to the email. It’s not certain which slides he included, but a slide Dooma filed in court illustrates a “gift scenario”:
The slide appears to model — without explicitly saying so — how an investor (“you” in the slide) could remain unknown to Colorado regulators, as E. apparently did. In a court filing, Dooma said the slide was part of a presentation “developed by Ebbu and distributed by at [sic] Jon Cooper’s request to any prospective [investor] concerned about reputational issues” associated with investing in a marijuana company.
In an email to WeedWeek, Franklin Snyder, a Texas A&M University law professor who teaches a course on marijuana law, policy and business, wrote the “gift transaction” structure seems to have no reason “for independent existence apart from the secret investment.”
“It appears to be a sham transaction designed solely to cover up,” the source of the funds, Snyder wrote. “The investor is the real (or ‘beneficial’) owner of the interest, and not disclosing that fact would make all of the license applications false statements to government officials.”
Any “agreement of the parties to make false statements could amount to conspiracy,” Snyder added. ”So there may be serious potential criminal violations.” (Snyder is not licensed to practice law in Colorado, and his assessment is based solely on documents provided to him by WeedWeek.)
The above slide “would scare the bejeezus out of me if it were my client!” Snyder wrote. “I’m trying to fathom who could possibly think it was a good idea to even write it down, let alone distribute it.”
Another slide Dooma filed in court depicted three of six proposed investment structures involving a “gift”:
Cooper didn’t answer whether Ebbu had raised any money from “gifting” transactions. In December 2018, he told me he was not aware of any investigations into Ebbu by any regulators, which he meant as evidence of Ebbu’s good corporate citizenship.
It’s a reasonable argument — or would be if Colorado were effectively enforcing its marijuana investment laws. Despite numerous queries by WeedWeek over at least a year and a half, past and present state officials have refused to discuss investment law enforcement.
Colorado’s Marijuana Enforcement Division, known as “The MED,” regulates more than 1,500 cannabis companies. Despite the reputational concerns held by many cannabis investors, The MED refuses to acknowledge the possibility of dark money finding its way into marijuana companies.
The issue made it into the news this week when an unsealed federal indictment alleged associates of Rudy Giuliani, President Donald Trump’s personal lawyer, “took steps to hide” the identity of a foreign investor in a Nevada recreational marijuana business they hoped to start, part of a complex campaign finance scheme. In response, Nevada Gov. Steve Sisolak(D) immediately pledged to step up marijuana enforcement.
In Colorado, the MED has “overlapping and reinforcing” measures to maintain financial compliance, a spokesperson said, including at the time of licensing, annual license renewals and during any change of ownership. The agency wouldn’t make anyone available to discuss scenarios such as the potential compliance gap at Ebbu. Citing statute, the spokesperson declined to comment on Ebbu. (After Dooma’s departure, Cooper pivoted Ebbu to focus on cannabis research and voluntarily surrendered its MED licenses in March 2018, about seven months before the Canopy acquisition.)
While several states have struggled to govern their new marijuana industries, Colorado’s market has generally been considered among the better regulated. “We had regulations that work,” former Governor John Hickenlooper (D), who oversaw the first years of regulation, told a reporter in April. “To a certain extent, the largest challenges have passed.”
Andrew Freedman, who served as Colorado’s first director of cannabis coordination from 2014 to 2017 before founding cannabis consulting firm Freedman & Koski, declined to respond to a list of detailed questions.
In May 2019, Colorado Gov. Jared Polis (D), who co-founded the cannabis caucus while representing Boulder in Congress, signed an industry-supported bill to loosen the state’s investing rules. Starting this November, public companies will be able to invest in Colorado marijuana companies.
Last year, Hickenlooper shut down a similar bill, calling it “premature” in his veto letter. “We have significant concerns about this broader access to capital markets, particularly as it relates to…keep[ing] criminal enterprises out of the regulated marketplace,” he wrote.
Polis’ office did not respond to multiple requests for comment. Ean Seeb, a cannabis entrepreneur whom Polis’ appointed his special advisor on cannabis also did not respond to requests for comment.
With almost no apparent coordination or assistance from Washington, D.C., other states are openly struggling to regulate this new industry. Notably, a July 2019 audit in California found the state cannabis regulator is too short-staffed to conduct investigations.
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Cooper fired Dooma in early 2016 for reasons Cooper has never publicly discussed. In court filings, Dooma accused Cooper of orchestrating a “coup” at Ebbu. Dooma alleges Cooper paid a consultant named Daniel Clemens $240,000 to investigate Dooma and find a reason to fire him so Cooper could take over over the company. (Cooper has denied participating in any “unlawful conspiracy” against Dooma.) In a court filing, Clemens said he witnessed Dooma make “serious factual errors and materially misleading statements” to investors independent of Cooper.
A suit filed by Dooma against Cooper has been confidentially settled, but a suit Dooma filed against Clemens is still in play. A central question of the litigation is whether Dooma provided incorrect information to prospective investors to make Ebbu seem more attractive. “I’ve told people what they need to hear to get their money in,” Dooma said in a meeting with Cooper, which Dooma recorded days before Cooper fired him. Dooma later retracted his admissions in a February 2018 court filing, and provided several examples where he alleges Cooper misled investors.
In February 2019, Clemens filed a lawsuit against Cooper alleging that Cooper engaged in “fraudulent schemes at Ebbu and actions in violation of state and federal securities laws…and that Cooper had conspired with [Dooma] to circumvent Colorado laws.” (Cooper has denied violating any state or federal securities laws, according to the lawsuit. Clemens did not respond to requests for comment.)
The newly leaked documents indicate Dooma provided inaccurate information about Ebbu to investors, and did so with Cooper’s knowledge.
According to Colorado records, Ebbu first applied for a license in May 2014 and received it in December 2014. But in an October 2013 email to a potential investor, Dooma, with Cooper cc’d, wrote Ebbu is “fully licensed and duly accredited.”
The following April, Cooper wrote to Dooma: “fyi — what have you told him about the license? It could be a problem if he shows up for his apt and we don’t have a license… or even an application in”.
In June 2014, a week after Ebbu applied for a license, Dooma wrote to Cooper: “Fyi when I spoke with [an individual] yesterday I told him we had a license…” In the leaked documents, at least one investor whom Dooma prematurely told Ebbu had a license indicated he would invest. “We’ll be doing something with Ebbu,” the investor wrote.
Ebbu’s pitch to investors was that its Feelings products would be superior to conventional marijuana products because they would be more predictable. In November 2013 Dooma wrote he was “99.99%!” confident Ebbu could create the five Feelings. “The science is proven. We know how to do it,” he wrote. “We’ve created a precursor to the ‘high energy’ feeling on borrowed machinery.”
It’s not clear how close Ebbu came to developing the Feelings product, but in leaked emails Dooma appears intent on showing prospective investors a “prototype” even if it was not actually the company’s product.
In January 2014, Dooma emailed Cooper: “See if [an individual] can join the meeting to provide product samples. If he cannot or will not, please go to the Clinic [a Colorado marijuana dispensary] and pick up a nice CO2 oil and remove it from its container and put it in a tupperware or something and just tell everyone it’s our prototype.”
In December 2015, not long before Dooma was fired, a senior Ebbu scientist wrote to him after a meeting with a prospective investor: “I was put on the spot when you were acting like we had prototypes for Feelings at this moment…I emailed you previously to ask you please not to say this and I was disappointed that you never replied.” (In 2016, a spokesman for Dooma told me Ebbu had prototypes of the Feelings in the second quarter of 2015.)
After he left Ebbu, Dooma started raising money for a new company, with another idea for a “change the world” marijuana product: a THC-powered beer brewed from the cannabis plant. Province Brands’ Instagram is packed with pictures of the huge, elaborate brewery it is building in southern Ontario. The company says it will unveil its first products next year.
After Dooma’s departure, Cooper redirected Ebbu to focus on cannabis research rather than product development. When Canopy acquired Ebbu’s assets in October 2018, the press release didn’t mention the Feelings product line or Dooma, who no longer had a financial stake in Ebbu. The release described Ebbu as a “hemp research” company.
After the deal closed, Cooper wrote to WeedWeek, “We are not aware of any investors that are disappointed with their investments in Ebbu.”
Alex Halperin is the editor and publisher of WeedWeek.
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