Cannabis Loyalty Program Structuring: Avoiding Securities Classification for Token-Based Rewards

Matter Overview

A vertically integrated cannabis MSO sought to launch a consumer loyalty program built on a blockchain-tracked token system. Holders would earn tokens through purchases and could redeem them for discounts, merchandise, or exclusive access — but the company's marketing team also proposed a secondary marketplace where tokens could be traded between consumers. Hoban Law Group was engaged to analyze whether the token program, particularly the proposed secondary marketplace feature, would constitute an offering of securities subject to SEC registration requirements under the Securities Act of 1933 or state blue sky laws.

Work Performed

Hoban conducted a Howey test analysis of the proposed token program, applying the four-part inquiry: (1) investment of money; (2) in a common enterprise; (3) with an expectation of profit; and (4) derived from the efforts of others. The analysis was structured around the secondary marketplace feature, which was the primary element that could transform a utility token into a security under the "expectation of profit" prong.

The analysis concluded that the secondary marketplace, as proposed, created a material risk of securities classification — specifically because the company's marketing materials emphasized token appreciation potential and the secondary marketplace's price discovery function. We recommended structural modifications: eliminating price discovery from the secondary marketplace (making it a redemption exchange rather than a price-setting market), removing any marketing language suggesting investment return, and incorporating explicit contractual restrictions on token transfers beyond one peer-to-peer transfer lifetime.

We also analyzed the state blue sky implications in the five states where the MSO operated, identifying two states with more expansive security definitions that required additional structural adjustment.

Hoban prepared a legal opinion letter confirming the restructured program did not constitute a securities offering, which the company's technology vendor required before building the exchange functionality.

Outcome

The restructured loyalty program launched without SEC registration or Regulation D filing. Consumer adoption exceeded the company's projections in the first 90 days. The program has operated without regulatory inquiry.

Lessons Learned

Cannabis loyalty token programs sit in a structurally ambiguous zone of securities law. The Howey test's "expectation of profit" prong is sensitive to marketing language — the same economic structure can be a utility token or a security depending on how it is positioned to consumers. Secondary marketplaces are the highest-risk feature and are usually unnecessary to achieve the consumer engagement objective; eliminating or restructuring them is almost always the right call.

Engage Hoban Law Group

Hoban Law Group advises cannabis companies on IP, brand, and novel program structuring at the intersection of cannabis and emerging technology law. [Schedule a consultation](/consultation?source=matter&matter_slug=cannabis-loyalty-program-securities-counsel-2024&matter_type=cannabis-intellectual-property).