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One of the most persistent and common failures in the cannabis industry is using handshakes instead of written cannabis contracts. This is an issue I’ve written about for years (most recently here), and it doesn’t seem like there has been much of a willingness to change. A lot of companies would like to move into good contract practices, but written cannabis contracts can be too expensive or take too long to negotiate. It might be tempting to resort to AI to solve this problem, but there are a host of reasons why that’s not the case.
First off, precision is key in contract drafting. If a written cannabis contract is not precise, it could create an entirely new set of problems for the parties beyond what you’d expect in a handshake deal. While AI can be great for certain things, it would be very difficult for AI to generate a cannabis contract that precisely tackles all of the issues the parties want to negotiate. Sure, a competent individual might be able to work with the AI tool to hone in contract provisions, but that involves time and effort – the same thing an old school written cannabis contract requires.
Second, and on a related note, AI programs have been known to get things wrong or make things up. Take the case of some lawyers who were sanctioned (penalized) in part for submitting briefs with case citations that AI completely made up. Granted that was a litigation-related issue, but any transactional lawyer knows that there are circumstances where something like this could occur in a contract (say, a false representation and warranty).
Third, there have been many concerns about AI and its effect on data security laws, as well as confidentiality. To the extent that contracts contain confidential information or information that is protected by US or international data security laws, disclosing information to the AI program may lead to legal or regulatory violations or risk the confidentiality of information in the agreement.
Fourth, there are all kinds of other obscure and as-yet unresolved issues with using new technologies to draft cannabis contracts. For example, if a person inputting information into an AI program to generate a cannabis contract does so on behalf of an entity, does that constitute the practice of law? If so, that person may violate their state’s prohibition on the unlawful practice of law (commonly referred to as UPL). Or, if there is a massive error in an AI-generated cannabis contract, who can the injured party blame for the error – the person inputting the data? These issues are sure to be resolved in the coming years, but for now, it’s too early to tell how things will shake out.
Above are just a sampling of the key issues I expect to see with respect to AI-generated cannabis contracts. I’ve reviewed AI-generated contracts in the past and, while I’m sure that AI contracts will be huge in the future, I still think that what I’ve seen to date has a ways to go.
The post Don’t Use AI to Write Cannabis Contracts appeared first on Harris Sliwoski LLP.
Wishing all of our readers, along with friends and families, the very best this holiday season.
Whether you celebrate Hanukkah, Christmas, Kwanzaa, Winter Solstice, Festivus, or something else, we hope you can kick back and enjoy this wonderful time of the year.
Happy holidays!
The post Happy Holidays from the Canna Law Blog 2023 appeared first on Harris Sliwoski LLP.
2024 in weed strains, politics and more.
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The artisans at STIIIZY are bringing their legendary quality to a smoke shop near you with all-natural leaf blunt wraps.
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Heading into 2024, the cannabis industry is as dynamic as ever. New states continue to come online, legacy states continue to refine their programs, and the federal government is looking harder at cannabis than ever before — starting with a purported recommendation by Health and Human Services to move the plant to Schedule III, and renewal of the (extended) 2018 Farm Bill.
Our cannabis business attorneys have thoughts on all of this and more! On January 10th, please join Harris Sliwoski partners Vince Sliwoski (Oregon, transactions), Jesse Mondry (Oregon, litigation) and Griffen Thorne (California and Washington, transactions) for a wide-ranging and informative discussion on the state of the cannabis industry headed into 2024.
This webinar will be conducted in an “Ask Us Anything” format, giving you an opportunity to ask questions and gain insights into this complex industry from seasoned legal practitioners. Questions can be submitted in advance of the webinar at the registration links above and below. We will also take questions from attendees in real time on January 10th.
For now, we anticipate covering the following hot topics:
Whether you are a cannabis operator, investor, service provider, or just curious about the future of cannabis, this free webinar is not to be missed.
See you January 10th!
The post Attorney Insights on the Cannabis Industry 2024: Ask Us Anything (for FREE!) appeared first on Harris Sliwoski LLP.
That's a wrap on 2023—here are all the weed cup winners coast to coast to ring in 2024.
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Don't miss out on these five unique strains by Royal Queen Seeds. You won't find these cannabis seed strains anywhere else.
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Welcome to the eighth annual “State of the State” post on Oregon cannabis. Last year was memorable for Oregon the industry, pockmarked by OLCC scandal, heavy regulatory swings, and even marquee litigation. We also saw the state’s first very-large-business failure, more trade association consolidation, and other altibajos as my mother-in-law might say. Let’s go!
According to OLCC data, retail sales between January 1, 2023 and November 30, 2023 clocked in at $874 million. By my math, the state is on pace for roughly $953 million this year. That tally would be a 4.1% decrease from $994 million in 2022, which itself was the first calendar year cannabis sales contracted in Oregon. Someone with better credentials than me could ascertain whether this year’s drop is due to pricing decreases, volume decreases, or both, alongside whatever other factors (like population shrinkage). Overall, a 4.1% decline isn’t great news for industry, but it’s not terrible.
Nearly half, or 48.7%, of retail sales are “useable marijuana” (dried leaves and flower). The concentrates/extracts category sits at 24.7%; edibles/tinctures are 13.7%; inhalable products with “non-cannabis additives” are 7%; “other” is 5.2%; and industrial hemp products bring up the rear at 0.7%. This follows a years-long trend of usable marijuana sales decreasing per capita in favor of other categories. Like last year, my impression is that near-term growth may be limited to select SKUs and product categories.
In addition to decreased volume, prices remain low; but not as bad as last year. At this time in 2022, wholesale useable marijuana had been sitting at $600/lb for months, bottoming out at $550/lb for December. For the most recent three months of 2023, we’ve hovered at a respectable $745/lb. That said, the full effects of the Croptober harvest haven’t rippled through the system. This year’s harvest came in at an unwelcome 15% higher than 2022.
To the plus, we have slightly fewer licensees vying for market share than a year ago today. It’s not a big drop, but this was the first year I saw license numbers fall since the 2016 roll-out of the adult use program. Despite the number of “pending” license applications below, you can expect the number to flatline or fall a bit again next year. Yes, the HB 4016 licensing moratorium sunsets on March 31, 2024, but I’m guessing our legislators will pass an extension bill early in the 2024 session. Let’s see.
| 2022 | 2023 | 2023 (active + pending) | |
| Producers | 1,408 | 1,389 | 1,520 |
| Processors | 331 | 312 | 363 |
| Wholesalers | 276 | 269 | 299 |
| Retailers | 827 | 818 | 881 |
| Labs | 19 | 15 | 15 |
| Research | 1 | 1 | 4 |
Last year at this time, I wrote that “quite a few businesses are struggling and others have failed.” Same deal today. All throughout the year, we helped people sell (and try to sell) businesses we had helped them buy just a couple of years ago. It feels like the largest number of “business sales” are little asset purchase agreements for naked licenses. We’ve also helped quite a few clients throw in the towel, and our litigation team continues to assist in a series of disputes related to business dysfunction—for those who can actually afford to litigate.
Nothing better exemplified the weak state of the Oregon market than the Chalice receivership sale (see: Chalice Receivership Update: Weak Market, Insiders Pounce). Interest was scant, offers were few, and ultimately 20+ businesses sold for a mere $3 million. Last year at this time, I observed that Chalice was one of the largest operators in Oregon, trailing only Nectar Markets. Today, in one of the biggest Oregon cannabis stories of 2023, the Canadian heavy has gone belly up, to the detriment of stiffed creditors and hapless employees.
If one state agency should be happy to leave 2023 behind, it’s got to be OLCC. I explained in an earlier post that OLCC and the cannabis industry were “at a nadir with two-bit scandals” this spring. Stellar investigative reporting around OLCC’s handling of the La Mota chain caused the Oregon Secretary of State to resign, but also lead to some unfortunate, reactionary rules for the cannabis industry (more on that below). Separately, the OLCC’s Executive Director resigned as well, in the context of separate misconduct.
Most recently, the Commission got some good news in that the former Secretary of State’s cannabis program audit will stand, albeit with a disclaimer, turning the page on a difficult chapter for pretty much everyone and giving the Commission room to maneuver. As an aside, one former OLCC official commented that the audit “reads like a Leafly blog”, due to its general and specific recommendations to loosen regulatory strictures. Industry favored those findings obviously, and it’s a shame the process was tarred.
In my view, however, a key issue with OLCC remains unaddressed, and that is the Commission’s disparate treatment of large and small cannabis companies (see: The Real OLCC Scandal is that There are Two Sets of Rules). OLCC has allowed the largest Oregon cannabis retailers to coast after citing them for significant and repeated violations– including allegations of cannabis diversion. Small businesses get their tickets punched for less. In all, I see scant rhyme or reason to OLCC’s erratic enforcement efforts.
The Oregon regulatory landscape is ever changing. We had new rules to kick off the year, followed by new laws passed in Salem. Rulemaking commenced throughout the fall per usual. The biggest change, however, was the advent of “emergency” (and now permanent) tax compliance rules that arose from the La Mota scandal referenced above. All retailers and their “applicant” owners (but not producers or processors or wholesalers) are now required to certify tax compliance with OLCC via the Oregon Department of Revenue, to renew or transfer a marijuana license. Here in the office, we’ve seen the rules impact quite a few renewals and sales already.
Another huge story in Oregon cannabis for 2023 involves a rule that came and went, regarding aspergillus testing. In March, the Oregon Health Authority (OHA) promulgated a rule that required marijuana testing for certain microbiological contaminants, including aspergillus. The Cannabis Industry Alliance (CIAO) and others filed a motion for emergency relief. These parties won a temporary “stay of enforcement” of the rule, pending completion of judicial review. Rather than defend the rule at a subsequent hearing, OHA withdrew it. And doesn’t appear to want a second bite at the apple.
This is a great result for our cannabis producer clients, at least in the short term. I admittedly did not think they could win. Whether it’s a good long-term play remains to be seen. Oregon producers have long pushed for cannabis export rights— which conceivably could happen sooner rather than later if federal law changes. (See: Audit: Marijuana-rich Oregon must prep for US legalization.) This is salient due to the fact that most states require aspergillus testing for cannabis. It’s hard to imagine a scenario where those states agree to accept Oregon cannabis “contaminated” with aspergillus.
Finally, we have just one major trade organization in Oregon cannabis. Prior to October, the Oregon Cannabis Association (OCA) and the Cannabis Industry Alliance of Oregon existed side by side (quite a few others have come and gone over the years). Now, it’s all CIAO. Judging by all the emails I’m getting, the big-tent outfit is energized.
The first big task for CIAO should arise in the 2024 legislative session. I submit that the Oregon legislature seems less keen on dealing with cannabis issues over the past couple of sessions, than it has been historically. Given collateral damage to OCA from the La Mota scandal and all of the oxygen being taken up by Measure 110 scrutiny, CIAO will have its work cut out come February.
Oregon has only issued 187 hemp grower licenses as of December 7. This is a noteworthy drop from 294 licenses in 2022, to say nothing of the 1,961 licenses issued in the heyday of 2019. In spite of it all, Oregon is still a hemp leader on the national stage, somehow, per the 2023 National Hemp Report.
Last year I wrote:
the continued downward trend can’t last forever. Congress is scheduled to renew the Farm Bill in 2023. Changes on the table include everything from raising the “hemp threshold” from 0.3% THC to 1.0% THC, to addressing regulation of intoxicating cannabinoids derived from hemp. Another big driver will be the continued adoption of hemp-based textiles and building materials. Even though Oregon hemp has slowed dramatically, expect the state to remain at the fore if and when the trend reverses.
All of that is probably still true, except that Congress missed its deadline and we may not see a renewal of the Farm Bill until late in 2024. In the meantime, I and many others have been asking, “What Happed to Hemp”?
We’ve seen some noteworthy activity around the edges, locally, which I’d be remiss to leave off:
Let me know in the comments if you think I missed anything worth mentioning, or shoot me an email. There is always something. In the meantime, here’s hoping for better times for Oregon cannabis in 2024.
For previous posts in this series, check out the following:
The post Oregon Cannabis: State of the State (2023) appeared first on Harris Sliwoski LLP.
It's up to you, New York, New York.
The post New York City weed visitor’s guide 2023 and 2024 appeared first on Leafly.
Here’s why 2023 became the year we saw beyond both THC and terpenes.
The post The nose knows: Time to free your mind from THC and terp scores appeared first on Leafly.
95-point OZ Kush from Wonderbrett and more.
The post Leafly Ratings 2023: 45 top-shelf and value buy flowers rated from 8 US states appeared first on Leafly.
Fast Buds backyard autoflowers are a great addition for home gardeners or cannabis growers just starting out on their growing journies.
The post Why autoflowering seeds are an excellent choice for backyard cannabis cultivation appeared first on Leafly.
Verilife is here to make your holiday season even better than the last. Offering huge discounts on brands like matter., P3, and Magnitude.
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With Blue Dream, Wedding Cake, and more undeniable bangers.
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Rare cannabinoid gummies from Rare Cannabinoid Company now include options both with and without delta-9 THC.
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An independent, expert review of premium New York cannabis flower.
The post Piff Haze—Ithaca Organics + Piff Coast Farms, NY, fall 2023 appeared first on Leafly.
Here's what we bought.
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Refined work on lemony strains, Gelato lines, and Zkittlez lines took trophies.
The post 2024 trends emerge from the haze of The Ego Clash Invitational 2023 appeared first on Leafly.
Nondisclosure agreements (sometimes abbreviated, “NDAs”) are some of the most important agreements a company can sign. At the same time, they can be some of the simplest agreements to get in place. Today I want to do a deeper dive into nondisclosure agreements, what they contain, and why they are important.
A nondisclosure agreement is an agreement where one or both sides agrees to keep something confidential. There are generally two types of NDAs: unilateral NDAs where only one side must keep something secret, or mutual NDAs, in which both sides must keep the thing secret.
The choice between a unilateral and mutual nondisclosure agreement usually depends on the kind of deal and disclosed information. In a business sale, for example, a seller typically makes most or all disclosures. So the seller will ask the buyer to sign a unilateral NDA. In a proposed manufacturing agreement, the manufacturer may provide information about its services while the contracting party may provide formulations. There, the parties will probably use a mutual nondisclosure agreement.
The average NDA is usually pretty short – maybe even just a few pages. If you’ve read a lot of them, you’ll see a number of things pop up over and over again. These are:
Nondisclosure agreements may contain additional or different terms from those mentioned above, but this is the bulk of what you’ll see in the average NDA.
Yes and no. NDAs can be very formulaic and simple, but a rookie mistake would be to use a unilateral NDA form when a deal calls for a mutual NDA form. This mistake could be devastating.
Moreover, there may be very specific things within an NDA that need to be changed or modified depending on the deal. For example, one of the NDA provisions I see changed most frequently is third-party disclosure limitations. Some NDAs may only allow disclosures to an employee of the receiving party, but the receiving party may need to disclose Confidential Information to its outside financial advisors or attorneys – or to cannabis regulators.
Additionally, some NDAs may also obligate the receiving party to simply make third-party recipients of such Confidential Information aware of the NDA, whereas the disclosing party may want the third party to sign an NDA of its own before reviewing the Confidential Information. These kinds of bespoke provisions may not make it into a form NDA someone pulled off a search engine.
People and businesses generally do not have any obligation of secrecy unless they sign an NDA or similar confidentiality agreement. Without an NDA or other confidentiality agreement, anything one party provides to another party in a transaction or potential transaction can lose confidentiality. A very common issue we’ve seen over and over is businesses that ask for an NDA after holding preliminary discussions and exchanging information. While this is certainly helpful, it’s far too late. Companies that get it right ask for NDAs before even starting talks.
Let’s say John is the sole owner of ABC Manufacturing and wants to sell it to Steve. Steve will do “diligence” and ask for ABC’s financial information and customer list. If John provides this without an NDA in place, Steve may simply take the customer list for himself and walk away from the deal. Nobody in John’s place wants to be in that position.
It’s important to note here that NDAs are not the only sources of confidentiality protections. Sometimes you’ll see confidentiality provisions in letters of intent or in the ultimate definitive agreement (like a purchase agreement). The problem with this is that by the time the parties sign a letter of intent, they likely will have exchanged confidential information. And this definitively will have happened before signing the definitive agreement. Moreover, the average LOI’s confidentiality section may be a short paragraph and will not be anywhere near as robust as an NDA. It’s key to lock the other side into confidentiality as early as possible – and in a comprehensive manner.
NDAs are not the only way that companies can protect their confidential information or trade secrets, and it’s possible to sign an NDA with provisions that actually put trade secrets at risk. But in general, without an NDA in place, parties have no reasonable expectation that what they say or hand over will actually remain theirs.
NDAs also do not need to cost an arm and a leg. Good corporate counsel can generate NDAs quickly and cost-effectively, while avoiding issues with AI-generated forms or forms circulating on search engines.
The post Why Nondisclosure Agreements are So Important appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
Permanent Marker is poised for a huge influx in demand—ready your wallets. But if you can't find our Strain of the Year 2023 winner, we have a ready list of alternative strains that deserve their own laurels.
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Cannabis real estate transactions can be notoriously complicated – much more so than your average real estate deal. On January 9, 2024, I’ll be speaking on a panel called “Navigating Real Estate Issues Impacting the Cannabis Industry” for the Los Angeles County Bar Association, where my co-panelists and I plan on touching on many of the most precarious issues in these sorts of transactions. Today, I want to preview some of the key issues we see in these kinds of deals.
The most important factor in any cannabis real estate transaction is location. Licensing authorities impose all sorts of requirements or restrictions on real estate locations, including:
Each of the issues above can be automatic disqualifiers for a parcel of real estate. Things like buffer zone locations can be difficult to figure out and change over time. For example, a school might open up in an area before a cannabis business submits a license application, and it may lose out on its chance to do so. All of this is to say that performing diligence on a property and its location is absolutely critical prior to entering into a lease or committing to purchase a piece of real estate.
When a cannabis company finds a good piece of property in a good location, the next most important decision it needs to make is whether to buy it or lease it. There are some key exceptions here, like large farms or processing facilities in industrial or agricultural areas. But in general, most cannabis companies tend to lease. There are a lot of reasons why cannabis companies opt to lease real estate instead of buying. I discussed that in detail here. But generally speaking:
Securing financing has long been a challenge for cannabis companies. In fact, my last post analyzed key issues that cannabis companies can expect when trying to secure financing. Few startup cannabis companies are sufficiently capitalized to purchase real estate without financing, and because traditional financing is almost never available, buyers usually end up with much higher interest rates and more lender-friendly terms.
But buyers are not the only ones that have to deal with financing-related issues. If a cannabis company wants to lease a piece of property that is subject to a mortgage, it will probably not happen. Big banks do not usually bank cannabis money, and usually will have the ability to default their borrower (the landlord) for leasing to a cannabis company. I’ve seen a lot of potential real estate leases fail for this reason alone.
Another difficulty here is getting escrow companies or title insurance companies to work on cannabis real estate transactions. Like bigger banks, many of them simply won’t do touch cannabis transaction. This is especially so in jurisdictions when they commence licensing.
There is no way a cannabis company can guarantee that it will secure a license. Even in non-competitive jurisdictions, there are a host of potential property- or location-specific issues that could bar a license application. The chance of losing out is much, much higher in a city with 3 licenses up for grabs and 30 different applicants. I recently wrote about some key issues for competitive licensing jurisdictions and real estate leases here.
Of course, there are ways to hedge against these kinds of uncertainty. Here are a few I’ve seen:
It’s key to point out that licensing authorities may have strict requirements on what a tenant needs to show in order to apply. Some cities will not allow a document unless it is binding (i.e., an option or a full-fledged lease). This is yet another reason why early diligence is so key.
Some other key issues that I’ve seen come up more than once include the following:
I could keep going here for a long time. The point is that real estate deals in the cannabis space are difficult and are riddled with potential pitfalls. Using a form lease from a normal commercial transaction is almost always a bad idea, and failing to properly diligence real estate can lead to repercussions.
The post What to Expect in Cannabis Real Estate Deals appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
I stumbled upon this recent post by Jason Paltrowitz titled “Lawful but Awful: The Small Cap IPO Cycle.” It contains some interesting findings and I like everything about it for cannabis companies, except the conclusion. The conclusion is that OTCQX and OTCQB markets are a good bet for small companies, because these markets “offer a simplified path with financial, corporate governance, and disclosure requirements tailored to smaller companies.”
Plant-touching U.S. cannabis companies cannot list on the senior U.S. exchanges, meaning the NYSE or Nasdaq. Still, many U.S. cannabis companies that want to raise significant capital choose to “go public.” The well-worn path is either to: 1) list in Canada or overseas, via reverse merger, or 2) head to the abovementioned OTC markets, again via reverse merger, and pursue a Regulation A offering. However, in my experience, the OTCQX and OTCQB are not good places for cannabis companies.
Don’t take my word for it: here’s an SEC bulletin updated earlier this year and another in the specific context of cannabis stocks– going back to 2014. Here too is a FINRA warning, a sample DOJ microcap cannabis prosecution, and an FBI case study. As you might infer, sad stories related to OTC scams abound. This is because the OTC sandbox is a huckster’s paradise, due to the susceptibility of OTC stocks to dramatic price swings and the low level of required disclosures.
Now, one could argue that none of this is necessarily bad for OTC cannabis companies: instead, it’s bad for the people who invest in them. That’s not exactly right. An OTC cannabis company, along with its management, has fiduciary and governance-related obligations to investors. Public companies are no different than private firms in that respect. In all, the level of exposure for a cannabis company grows commensurate to the amount of capital it raises, as well as how it goes about the raise.
I have been in and around a sizable number of OTC cannabis company listings at this point. They’re weird. In many cases, a cannabis company will be approached by an M&A advisor and/or investment banker affiliated with an OTC company. These individuals may propose a reverse merger, whereby the cannabis company delivers all of its shares (sometimes through a newly created entity) to the OTC shell, in exchange for shares in that shell. At closing, the cannabis company owners receive some combination of common and preferred shares, and maybe even warrants, in the OTC company.
In many cases, cursory diligence on the OTC company throws off obvious red flags. I’ve seen proposals where the shares offered to the uplisting owners exceed the issuable securities shown for the OTC firm. I’ve seen many OTC company shells with EDGAR information severely at odds with private disclosures. Some of these matters are deferred maintenance, to be addressed with counsel in service of a proposed transaction. Others are landmines and may be intractable.
More discomfiting than any of this, however, is the common situation where an OTC promoter approaches a cannabis business with no idea – or interest, apparently – in whether the cannabis company is even viable. The promoter will want to agree to binding terms having done no diligence on the target. Friends, if the most considered aspect of a proposed deal is the warrants a promoter gets on signing, you’re probably looking at a pump-and-dump scheme.
In an OTC listing the cannabis company “trades up” for an opportunity to be listed on a public exchange and to raise money through that vehicle. Ownership must weigh the probability of successful fundraising against the control yielded to other parties. Those parties may include legacy preferred shareholders, in addition to newly appointed directors and officers, and promoters bringing the deal.
Sometimes (not always), yielding control is required for cannabis company growth. Assuming obstacles like residency requirements are navigable in the new structure, it’s important for the uplisting owners to consider what it would mean to own a smaller piece of a potentially larger pie. This is not just a question of economics, but also decision-making. If the owners lose the ability to direct the company in any sense beyond daily operations, they may determine the prospect of additional capital isn’t so attractive.
This may feel frustratingly obvious after the closing of an uplist transaction. A standard scenario sees the OTC stock spike, dive and inevitably flatline. At that point, uplisting owners will be left wondering why they went to all the trouble. If you lose control of your company only to make some money for stock promoters, then you’ve really lost.
The post Cannabis Companies and the OTC Markets appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
Twenty strains across 20 states win Leafly's first Budtenders' Choice Awards; from Devil Driver in Maine, to Holy Moly! in California.
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The race is on—Leafly Strain of the Year 2023 Permanent Marker has become a searing hot commodity. Supplies will not last. How do you get your mitts on it? First off, Seed Junky Genetics grows Permanent Marker and its crosses for the legal markets in California, Michigan, and New Mexico—so start there. In California, Seed […]
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A mix of human and machine—here to terminate the boof.
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Cannabis companies that need more money than they can generate through sales generally have two options: borrow money (debt) or solicit investments (equity). Over the years as the industry has constricted, equity finance became less of an option. I recently predicted that equity investment will reignite when cannabis is rescheduled. But that hasn’t happened yet, which means that cash-hungry cannabis companies need to borrow money. And because of high taxation, overregulation, the illegal market, and so on, many if not most cannabis companies need cash.
Not surprisingly, over the years I’ve seen massive increase in debt transactions as investments decreased – both original financings and refinancing. Today, I want to look at some of the things that cannabis companies should expect when looking for cannabis loans.
Cannabis companies can’t just walk into a big bank and draw a commercial cannabis loan. Many banks (especially the big ones) and institutional lenders are still too skittish to do business with cannabis companies. You can read about that here. This may change if cannabis is rescheduled, but probably not too much. Unless federal law changes to unequivocally treat cannabis as a federally legal commodity, the bigger banks will hesitate.
Because of this, expect to see private lenders, hard money lenders, and all kinds of servicing agreements with companies that loan specifically to cannabis companies.
Cannabis companies that borrow money can expect to see high interest rates – often higher than “normal” businesses would be required to pay. Lenders justify higher interest on cannabis loans because of the increased risks they incur while (a) lending to an illegal business, and (b) lending into a highly volatile industry where businesses seem to go under left and right.
Except for very small loans or loans with related parties, I can only think of a handful of times where I’ve seen completely unsecured debt in cannabis loans. A security interest is a right that the borrower or an affiliate of the borrower grants to a lender to secure payment and performance of loan. It gives a lender recourse in the event the borrower stops paying or goes under, by allowing the lender to swoop in and take the asset that is collateralized. Think of a car loan – if you stop paying the bills, the car will get repossessed. It’s the same thing with cannabis, though on a much larger scale.
The types of security interests I see most in cannabis deals are:
Keep in mind that cannabis regulations play a huge role in determining the scope of security and pledge agreements. Some assets can’t be pledged under state law (depending on the state), such as cannabis licenses or cannabis inventory. Cannabis companies need to be fully aware of what they can and can’t collateralize so they don’t risk their licenses.
Lastly, security interests in general are complicated and can be subject to myriad requirements under Article 9 of the Uniform Commercial Code (UCC) in each state. Security interests in real estate are often doubly more complicated. So it’s key that cannabis businesses understand the law of security interests before seeking out cannabis loans.
Lenders also frequently ask for guarantors on a cannabis loan. A guaranty is an agreement by someone other than the borrower of the borrower’s obligations. Guarantees by natural persons (usually officers or major stockholders) are often called personal guarantees, and guarantees by entities (usually parents or affiliates of the borrower) are often called corporate guarantees. They can also have multiple guarantors and be hybrid personal/corporate guarantees.
Guarantees can be a tall ask because a guarantor will be forced to step into the shoes of the borrower. If the borrower fails to make payment, the lender can simply demand that the guarantor make the payment in its place. And guarantors usually waive a host of defenses to performing on behalf of a borrower.
Personal guarantees are obviously much riskier than corporate ones, because a person risks their own personal assets (cars, houses, art, etc.) if the borrower entity doesn’t perform. Expect a lot of negotiation by cannabis companies concerning who must serve as a guarantor, the term of any guaranty, and related issues.
A common misconception is that loans are purely between a borrower and lender. But that’s rarely the case. Expect to see one or more of the following in most commercial cannabis loans:
The above is a summary of some high-level things that cannabis companies can expect when trying to borrow money. As you can see, lenders really do have the upper hand in these transactions. That said, there are always grounds for borrowers to negotiate for better (or at least more palatable) terms in cannabis financings. We’ll be sure to keep writing about these topics, so stay tuned for more updates.
The post What Cannabis Companies Can Expect When Borrowing Money appeared first on Harris Sliwoski LLP (Formerly Harris Bricken).
LCG was a crowd-favorite in 2023.
The post Win the holidays with Lemon Cherry Gelato—December’s Leafly’s Highlight appeared first on Leafly.
2023 is coming to a close—but don't fret, Leafly nation. We've curated the cannabis best strain for each star sign to carry them through the transition to the new year and make the most of the last month in personal and professional spheres.
The post Star signs and cannabis strains: December 2023 horoscopes appeared first on Leafly.
