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US: New regulations affect lending to Maryland cannabis licensees

Like most companies, Maryland-licensed cannabis businesses generally rely on access to capital to purchase equipment and other capital assets, fund acquisitions and other forms of expansion and provide working capital to cover short-term expenses. Industry experts agree that venture capital is extremely difficult to obtain in the cannabis space and that most equity raises are limited to friends and family rounds. In addition, because the production, distribution, and sale of cannabis and products containing cannabis remain in violation of federal cannabis laws, cannabis businesses are unable to obtain loans from any financial institution that is regulated by a federal agency (which includes the vast majority of banks operating in Maryland).

As a result, Maryland-licensed cannabis businesses have had only two choices for obtaining debt capital – either one of the few state-regulated financial institutions willing to lend to cannabis companies or a non-bank lender that is not regulated. In either case, as is typical of secured transactions, the lender would expect to obtain a security interest in all of the assets of the borrower, including any cannabis license. Once a lender or other secured party obtains a security interest in the assets of a borrower and takes certain steps, such as filing a notice called a financing statement (referred to as a UCC-1 in the Uniform Commercial Code), the secured party expects to be able to foreclose on the assets of the borrower if the borrower does not repay the loan by its terms – this foreclosure typically is an out-of-court sale of the pledged assets to the highest bidder, with the proceeds of the sale used to repay (in order) the costs of sale, the debt owed to the secured party, and any additional sale proceeds paid the borrower.

But one unresolved question was whether the security interest in a Maryland-issued cannabis license was enforceable. In other words, it has never been clear whether a secured party ever obtains any rights in a cannabis license – arguably one of the most valuable assets of a cannabis company. If not, then a foreclosure sale following the default of a loan to a cannabis company would be much less likely to generate proceeds in an amount to repay the defaulted loan in full.

Read the complete article at www.mondaq.com

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