But less than six months after that deal was sealed, Parallel’s underlying financial problems began to surface.
In September 2021, the plan to go public via the SPAC deal imploded. Ceres Acquisition Corp. declined to comment for this story, but Reuters reported at the time that the parties mutually decided to walk away from the merger and that the SPAC had lost faith in Parallel’s financial projections that it had relied on when cutting the deal.
Struggles with accessing capital due to federal illegality helped make SPACs a popular way for cannabis companies to access the public markets in recent years, thanks to the lower barriers than a traditional IPO. SPACs — also known as “blank check companies” — woo investors with the express goal of acquiring another firm and taking it public. Typically, if the SPAC hasn’t made a successful acquisition within two years, investors are entitled to get their money back.
But they’ve drawn scrutiny from federal regulators and lawmakers, who have expressed concerns that many of the deals are built on questionable financial figures. The SEC has proposed rules that would impose greater disclosure requirements for SPAC transactions, aligning them with more traditional IPOs.
The collapse of the SPAC deal left Wrigley and other top company officials scrambling to scrounge up cash to pay off debts and keep the business from collapsing, according to an investor lawsuit filed in the U.S. District Court for the Southern District of Florida in March.
The ultimate goal: to make the company look attractive enough to entice a new purchaser in the first half of 2022, according to the complaint.
Those plaintiffs allege they were persuaded to provide $25 million, with the understanding that the company would raise an equal sum from other parties, including Wrigley himself.
Parallel officials told them that “cannabis industry players were lighting up their phones and lining up, unsolicited, to buy the Company,” according to the complaint.
But as soon as they shipped the funds in September 2021, according to complaint, it became clear that Parallel was in much more dire financial shape than they’d been told. The complaint alleges the following details: In August, the company had projected 2022 revenues of $618 million. But by October that figure had fallen to $492 million. Three months later, projected 2022 revenues had sunk to $362 million. That group of investors also allege that they discovered shortly after committing the $25 million that Parallel was in the process of defaulting on more than $300 million in debts.
“Its projections were an inflated fantasy,” the complaint states. “It needed the [$25 million investment] to make Ponzi-like its payments to other investors.”
Attorneys for the company declined to comment about the allegations.
It’s common to see outrageous projections in investment decks in the cannabis industry, in part because the pace of policy changes is so unpredictable, said Matt Karnes, founder of Greenwave Advisors, a cannabis-focused financial analysis firm. Lucrative state markets like New York might seem close to legalizing marijuana, but end up taking years to do so. And even after a state has legalized weed, it often takes longer than expected to get markets up and running.
Over the last nine months, many large cannabis companies have lowered their revenue targets or missed projections, Karnes said. Parallel is “not out of line in that regard, it’s just the magnitude is more profound.”
Kaufman, the New York cannabis attorney, further points out that it’s not necessarily out of the ordinary for companies to revise financial projections down after securing funding or to raise money that would help pay off earlier investors.
“That’s business. You see that in the tech world all the time,” Kaufman said. “It’s going to be very hard to tell at this stage of the proceeding” whether it was a Ponzi-like scheme, since Parallel had an actual business.
Sweetheart deals and insider paydays
A second investor lawsuit was filed in the Supreme Court of the State of New York in March. That group of aggrieved investors includes John Morgan, a prominent attorney and Democratic donor known in the Florida cannabis world as “Pot Daddy.” That moniker stems from the fact that he bankrolled the 2016 medical marijuana legalization campaign and funded a lawsuit that opened up the market to allow cannabis flower. Morgan didn’t respond to requests for comment for this story.
It’s likely that Morgan isn’t the only prominent individual among the disgruntled investors. Other plaintiffs in the suit are investment vehicles registered in the British Virgin Islands and Cyprus — known for being international tax havens with strong anonymity protections.