Winery raising funds without allegedly disclosing that it hadn’t received licensure yet nets ex parte cease-and-desist order from state regulators. A cautionary lesson for wineries, breweries, and distilleries raising start-up capital.

The Vermont Department of Financial Regulation recently issued an ex parte cease-and-desist order to a winery based on concerns that the winery’s SEC Regulation D, Rule 506(b) exempted offering failed to disclose important facts concerning the winery’s lack of licensure.

You can read the order in the link above. According to the order, a former employee’s attorney reached out to the Vermont Department of Financial Regulation regarding the winery’s business practices. A deputy commissioner checked the Vermont Liquor Control website and learned that the winery’s license was “pending” but not issued raising concerns and the belief that the winery operated without a license.

The order states that the winery’s offering disclosure materials made certain representations about the wine industry but failed to disclose that the winery did not have licensure:

7. Disclosure materials also outlined various business risks, including Zafa’s vulnerability to agricultural risks, reliance on market acceptance and other risks facing the overall wine industry, competition, and reliance on a single product.     

8. The Offering and related disclosure materials failed to disclose specifically Zafa’s need for multiple liquor control and related state and federal licenses in order to legally manufacture, bottle, sell and distribute wine, either within Vermont or to neighboring states, nor of the fact Zafa held none of the required licenses at the time of the Offering. Relevant disclosures say only that “as a manufacturer of wine, the Company will be subject to extensive government regulation,” but “the Company does not expect that compliance with existing laws and regulations will have a material adverse effect upon its operating results.”    

9. Based on these disclosures and its active winery operations, a reasonable investor would have concluded that Zafa had all the necessary alcohol related licenses to operate its business although it held none. The fact that Zafa did not hold these licenses was fundamental and material to Zafa’s business. 

The Department raised concerns regarding the winery’s financial performance with the winery’s counsel and the order states that it received no information regarding the winery’s actual financial performance as opposed to its projected financial performance. The order also notes that the winery’s “continued operation without proper licensure create material financial and other risks not disclosed in the offering materials. These risks threaten to significantly impact the value of the securities sold to Vermont investors and to have a material adverse effect on the value of any future [winery] securities.” Ending with the note that “simply put, [the winery] has been operating without the fundamental regulatory approvals required to conduct its core business and it has not disclosed this material risk to investors.”

The order asserts that the failure to disclose the need for, and lack of appropriate, licensure amounts to a scheme to defraud investors that bought securities pursuant to the offering, and directs the winery to cease and desist from continuing to offer the securities, to hold the funds raised in the offering in escrow, and to preserve all documentation related to its activities.

So, some practical editing to start-up winery, brewery, and distillery solicitation materials and offerings appears in order to attempt to avoid these perceived failures in disclosure. The start-up should consider also disclosing whether or not it has its necessary permits, notices, and licensures and delineating the steps for achieving them with the caveat that success and obtaining those is not a sure thing.

Ashley Brandt

Hi there! I’m happy you’re here. My name is Ashley Brandt and I’m an attorney in Chicago representing clients in the Food and Beverage, Advertising, Media, and Real Estate industries. A while back I kept getting calls and questions from industry professionals and attorneys looking for advice and information on a fun and unique area of law that I’m lucky enough to practice in. These calls represented a serious lack of, and need for, some answers, news, and information on the legal aspects of marketing and media. I've got this deep seeded belief that information should be readily available and that the greatest benefit from the information age is open access to knowledge... so ... this blog seemed like the best way to accomplish that. I enjoy being an attorney and it’s given me some amazing opportunities, wonderful experiences, and an appreciation and love for this work. I live in Chicago and work at an exceptional law firm, Goldstein & McClintock, with some truly brilliant people. Feel free to contact me at any time with any issues, comments, concerns… frankly, after reading this far, I hope you take the time to at least let me know what you think about the blog and how I can make it a better resource.

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