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Financing the Cannabis Industry Part 2: A Q&A with Pelorus Equity Group Managing Partner, Travis Goad

By Aaron Green
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Businesses often require outside capital to finance operating activities and to enable scaling and growth. Financing in the cannabis industry is notoriously challenging with regulatory obstacles at the local, state and federal levels. Recent market dynamics pose additional challenges for both financiers and cannabis operators.

We sat down with Travis Goad, Managing Partner of Pelorus Equity Group to learn more about Pelorus and to get his perspective on recent market trends.

Aaron Green: In a nutshell, what is your investment/lending philosophy?

Travis Goad: Our investment and lending philosophy is focused on being honest, upfront and doing what we say we’re going to do for both our borrowers and our investors. At Pelorus, we lend against cannabis-use real estate assets.

Every lender in this space is a hybrid between real estate and corporate lending. However, if you think about it as a political spectrum, with one side being pure real estate lending and the other pure corporate lending, Pelorus is as close as you can be to pure real estate lending in this sector while also being properly collateralized. What sets us apart from our recently launched lending peers is that we lend against the real estate asset value only, even though we’re collateralized by the real estate and license.

We lend between 60% to 75% of the value of the real estate, which means sponsors need to raise equity for the 25% to 40% remainder of the project cost. This allows us to be covenant-lite for our borrowers while giving them the flexibility to grow their business as they see fit.

Travis Goad, Managing Partner at Pelorus Equity Group

The other lending options in the space are much different. While our lending peers may call themselves mortgage REITs, they really are based on a business development company (BDC) lending model. While they may lend borrowers as much as 150% to 180% of the real estate value, they will require significant financial covenants, require control of major decisions and most often want a board seat. We’ve seen this model severely hamstring growth of companies.

The third option available to sponsors is a sale-leaseback. In this structure, lenders will buy your real estate for 100% of the value, but require you to enter into a 15-to-20-year lease that increases 3% each year. There is a temporary benefit to this model from a federal tax perspective, but that will go away when 280E is addressed, either by descheduling cannabis or amending the tax code.

While this structure means you don’t have to raise equity, it gives up the most valuable asset cannabis companies have in the early stages of the industry. Once you sell this asset, it hampers optionality for sponsors – and in a fast-growing industry like cannabis – optionality is the most critical thing a company has. Pelorus’ structure allows maximum optionality, as well as the ability to lower your cost of capital as the industry matures.

From an investor standpoint, they should know that the BDC and sale-leaseback models are a lot riskier than our model. While we’ve seen those models work well in mature industries, we think the cannabis industry is too early-stage and too volatile to go that far out on the risk spectrum. We have the longest history in the space of deploying capital successfully and seeing it returned. Prior to making any loans, we spend a lot of time underwriting the company we’re working with, the real estate and the projections. We look for strong sponsors, great projects and attractive markets.

Before we entered the cannabis lending space, our team at Pelorus had more than 5,000 transactions under our belt, worth $5B, and we leveraged our decades of underwriting experience when starting the Pelorus Fund. As the first dedicated lender in the cannabis space, we have more data and experience than anyone in terms of transactional volume – we’ve looked at more than 2,000 deals and have made 71 deals, worth $468M. We know the intricacies of every market, the particular ordinances, what the costs should be, and utilize the data to help our borrowers succeed. Through our deals and sustained success, we’ve made a name for ourselves as the most trusted and efficient lender in the cannabis space.

Green: What types of companies are you primarily financing? 

Goad: We finance construction and stabilized loans for a range of clients including MSOs, SSOs and ancillary companies. We don’t lend on outdoor cultivation, but are open to working with any cannabis-related business that has commercial real estate, strong financials and experience in the cannabis space. Today, our sweet spot is closing loans in the $10M to $30M per transaction range, but we can fund loans $100M+ and as low as $5M. Since 2016, we’ve financed 4.2M feet of cannabis-use properties for a total of $468M in loans – roughly 15% to 20% of the entire US market.

Green: What qualities do you look for in a cannabis industry operator or operating group?

Goad: We are meticulous in our underwriting process and underwrite the company, the real estate and the market. We’re one of the few lenders today that has capital to deploy, which has given us the opportunity to continue to take market share while also increasing the quality of our borrowers. Whether you’re an MSO, smaller state operator or ancillary business, we recognize quality across the sector. Brand affinity and shelf space are critical in this market, and we like working with companies that have a competitive edge in getting their branded product to customers. We try to target companies that offer a unique product, or have a unique position within the state they are located.

To qualify for our lending program, borrowers need to own their real estate. If the sponsors own the real estate or intend to own the real estate, we offer two main lending products: we provide construction loans that range between 60% to 75% of the project that are typically 18-month terms; and more recently implemented, we also lend on fully stabilized assets that are cash flowing and operational up to 75% of the value and up to a 5-year term.

By the time a borrower comes to us, they should already have a license (or be acquiring a license at closing), have their required equity raised to completely fund the project and have all local approvals to begin construction.

Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business? 

Goad: As far as how market dynamics have impacted our fund, we’ve been pretty insulated because we are a privately held company. From our inception, we’ve worked hard to create an innovative model, and have had many firsts. We were: the first dedicated lender in the cannabis sector; the first lender to become a private mortgage REIT; the first to be issued an FDIC warehouse line of credit; the first to get an investment grade rating; the first to issue an unsecured bond with institutional investors; the first to update our fund to a billion dollars. Amid all these firsts, we made a conscious decision not to go public. This has been one of the best decisions we’ve made and has shielded us from much of the market volatility we are seeing.

As for the broader market, we’ve seen our sponsors that are publicly traded impacted pretty significantly by the recent market dynamics. We’ve also seen flow-on effects for non-publicly traded firms. Our loan book is performing excellently, but we’re in a very challenging market for marijuana-related businesses to raise equity, making debt even more attractive. For most of our competitors, who chose to go public, they’ve been unable to raise much capital to deploy, whereas our market share is increasing and we continue to grow in this tough environment. We remain bullish on the sector in the medium/long term and are finding excellent opportunities to lend in this challenging environment.

Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?

Goad: Increased access to debt capital markets is a sign of a maturing market. The U.S. cannabis sector has a great tailwind with growth of new markets, but it’s facing some significant headwinds tied to tax inefficiencies and inadequate state-level enforcement. All of these issues can be solved with political action, but so far that hasn’t happened and it’s causing pain in the industry. These industry dynamics are set against a broader macro backdrop of risk-asset repricing and increased volatility, which leads to outsized volatility in cannabis due to limited liquidity. That increased volatility has made it very challenging to raise equity in this market.

For companies that have strong assets on their balance sheet, they’re still able to access capital via the debt markets. This is creating clear winners and losers, as companies that choose to sell their real estate have significantly fewer capital raising options than those that choose to keep real estate assets on their balance sheets. Overall, this increased debt trend has been great for our business – our pipeline has increased rapidly and we’re able to lend to strong operators with solid assets at attractive rates for investors. Our fund continues to have inflows, and since we’re one of the few lenders with capital to deploy, we’re still open for business and deploying capital in this challenging environment.

Green: How does the lack of institutional investor participation in the cannabis industry affect your business? 

Goad: The current regulatory environment impacts the type of investor that comes into this space. Rather than being dominated by institutions, this sector has largely been funded by retail investors and family offices. This has created challenges in aggregating large amounts of capital, both on the operator and the debt-fund side of the business. It can lead to delays in loan closings, as it takes borrowers a longer amount of time to raise the required equity to close their transaction. As we’re seeing with our publicly traded peer group, it can also lead to lenders having trouble raising capital to deploy. As for Pelorus, we’ve been very fortunate that our length of time in the industry and track record of successfully making loans and having them repaid has set us apart in fundraising. Our decision to stay private has been a critical factor in our fundraising success as well. Overall, the lack of institutional investor participation is a double-edged sword: the lack of liquidity has caused challenges broadly, but since we’ve had significant capital to deploy, it’s created great opportunities for us to make loans with attractive risk/returns in this challenging market.

Green: What would you like to see in either state or federal legalization?

Goad: Given the stalemate in the Senate and the sharp bipartisan divide, I don’t think federal legalization will happen during this administration. That said, there are incremental actions that the government should take to strengthen the cannabis sector. First of all, the Cole Memo needs to be reinstated to add additional protections for cannabis and cannabis-related businesses. As 280E has clearly been detrimental to the overall health of the cannabis industry, we also believe the tax code should be amended, or better yet, we should address the conflict between state and federal policy. We also need to get SAFE Banking approved in order to open up the cannabis sector to credit cards and potentially open up banking to the sector in a more material way. Unfortunately, there’s a choke point in the Senate to get SAFE Banking approved, since there needs to be 60 votes to be filibuster proof. And while there is some talk of SAFE Banking passing during the lame duck session, we are not holding our breath.

Green: What trends are you following closely as we head towards the end of 2022?

Goad: The biggest trends we’re following are on the legislative front (both federally and at state level), which heavily impact revenue and net cash flow growth for the industry. We’re following emerging state markets, such as Alabama and Mississippi, as well as current medical markets poised to transition to adult use in the near term, such as Missouri. The more addressable the population, the faster the industry can grow.

We’d also like to see current legal states address the often-heavy tax burdens that have led to additional challenges for legal businesses and kept illicit markets thriving. No state got everything right at the beginning, but we’re starting to see states address some of the inequities and harmful policies now. California has made some progress in this area, however there are many issues that still need to be addressed.

Federally, 280E is the other major headwind that needs to be addressed as extremely high tax rates are one of the biggest problems for the industry. We’d really like to see that addressed, as cannabis is the only new industry, I’m aware of in the U.S. that has had such disadvantages out of the gate.

Political & Corporate Lobbying Influences Emerge in Cannabis

By Cannabis Industry Journal Staff
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In a press release sent out this morning, a new coalition announced their launch to “end the prohibition, criminalization, and overregulation of cannabis in the United States.” The Cannabis Freedom Alliance (CFA) says their core values include federal descheduling, criminal justice reform, “reentry and successful second chances,” promoting entrepreneurship in free markets and reasonable tax rates.

Who’s Behind the CFA?

The organizations that founded the CFA are Americans for Prosperity (AFP), Mission Green/The Weldon Project, the Reason Foundation, and the Global Alliance for Cannabis Commerce (GACC). Take a look at that list and see if you recognize the names. AFP is a well-known conservative and libertarian political lobbying group founded and funded by the Koch brothers. The Reason Foundation, another Libertarian think-tank and an advocate for prison privatization, also listed the Koch brothers as some of their largest donors in disclosures filed in 2012.

The Koch family business, Koch industries, makes hundreds of billions of dollars a year in the oil and gas industry and has held massive political influence for decades. They regularly donate hundreds of millions of dollars to Republican campaigns. Historically, they’ve played a major role in opposing climate change legislation. They’re widely known as conservative advocates for lower corporate taxes, less social services and deregulation.

Interestingly enough, prominent criminal justice reform advocate Weldon Angelos and rapper Snoop Dogg appear to have joined forces with the Koch-backed group, CFA, following a Zoom meeting where Charles Koch told them he thinks all drugs should be legalized, according to Politico. “We can’t cut with one scissor blade. We need Republicans in order to pass [a legalization bill],” Angelos told Politico. The tie between cannabis legalization and traditional Republican and Libertarian values is obvious: their free market, personal liberties and small government ideology fits well within the legalization movement.

Big Oil, Alcohol and Tobacco, Oh My!

The Coalition for Cannabis Policy, Education and Regulation (CPEAR) is a group that was founded in March 2021. Two of the founding members are Altria, the company that makes Marlboro cigarettes, and Molson Coors, a multinational alcohol company. The CPEAR website says that they want to work on responsible federal reform. “We represent a vast group of stakeholders — from public safety to social equity — focused on establishing a responsible and equitable federal regulatory framework for cannabis in the United States.”

Founding members of CPEAR also include: The Brink’s, a private security firm, the National Association of Convenience Stores, the Council of Insurance Agents & Brokers and the Convenience Distribution Association. In other words, the group is made up of large and powerful corporate interest groups that represent the alcohol, tobacco, insurance and security industries.

Both NORML and the Drug Policy Alliance (DPA) have spoken out against CPEAR. Erik Altieri, executive director of NORML, says it’s a matter of corporate interests coming in and working to change laws for their companies to capitalize on legalization. “We’ve seen how big corporate money and influence have corrupted and corroded many other industries,” says Altieri. “We can’t let the legal marijuana industry become their next payday.”

The DPA also released a statement opposing CPEAR. Kassandra Frederique, executive director of the DPA, says that she urges caution to elected officials in taking counsel from these corporate powers. “We have long been concerned about the entry of large commercial interests into the legal marijuana market,” says Frederique. “Big Alcohol and Tobacco have an abysmal track record of using predatory tactics to sell their products and build their brands – often targeting low-income communities of color and fighting public health regulations that would protect people.”

While their motives and desired outcomes remain unclear, it is apparent that we’re reaching a new age in the cannabis legalization movement, one where powerful corporations outside of the cannabis space want in. Whether its oil and gas, insurance, security, tobacco or alcohol, these groups are using their power and money to influence cannabis policy reform.

How Small Dispensaries Can Stay Competitive in Today’s Market

By Claudia Post
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Small cannabis dispensaries face different challenges than those seen with large, multi-state operators. To this end, massive companies like MedMen and Grassroots Cannabis need to accommodate multi-state operations’ compliance challenges. Conversely, small dispensaries must learn to compete with the big box retailers of the cannabis industry.

Small cannabis dispensaries must figure out how to make their size an advantage against larger business entities to stay competitive. To this end, they must critically assess the corporate structure of large cannabis companies like Green Thumb Industries to look for operations and m​arketing opportunities​ still “left on the table” for smaller operators.

Luckily, owning and operating a small cannabis dispensary affords creativity and innovation in the workplace. Namely, because small businesses can quickly implement change and pivot to the demands of the ever-changing cannabis landscape. Conversely, due to corporate structures’ difficult navigation, their larger counterparts must go through far more effort to implement operational changes. To better understand how small dispensaries can stay competitive in today’s market, we put together some criteria to examine.

Cross-Training Employee Teams

The fact that small cannabis dispensaries do not have many employees significantly reduces operating costs. However, to capitalize on the savings of a small employee team, you must cross-train your staff. Because if a small team can handle all the required tasks of a shift, you will never waste money on over-staffing your dispensary operation.

budtenderpic
A bud tender helping customers at a dispensary

Looking at the specific jobs of a small cannabis dispensary, business owners should ensure that budtenders are trained to handle nearly every business task. To illustrate, you should train budtenders to open and close the store, conduct inventory work, recommend products and operate seed-to-sale software. Not only does this cross-training keep you from overstaffing your dispensary when it is slow, but it also insulates your business during busy market fluctuations.

Please note, once you train budtenders to handle a variety of tasks, you should also pay them more than the industry average. In doing so, you insulate yourself from the high turnover rate that plagues the cannabis space.

Lean Operating Principles

Lean operating is a practice that has exploded in popularity across the business world. To help teach lean operating principles, specialty training companies offer Six Sigma certifications. These certifications help business owners and executives save money on operational efficiencies. Methods taken from Six Sigma can be incredibly impactful for small cannabis dispensary businesses.

According to the ASQ professional training w​ebsite​, “Lean Six Sigma … drives customer satisfaction and bottom-line results by reducing variation, waste, and cycle time, while promoting the use of standardization and flow, thereby creating a competitive advantage.”

Lean Six Sigma principles can be beneficial with inventory control in small cannabis dispensaries. To this end, these businesses should apply analytics to track consumer behavior within their stores. After that, they can use data to create precise sales forecasts and conduct highly accurate product procurement. The end goal being to increase liquidity by reducing money tied up in a bloated inventory of unsold cannabis products.

Personalized Experience

Due to their small size, single dispensaries have the luxury of customizing the retail shopping experience. As such, without the added pressures of corporate oversight, small operators have the creative freedom to make for highly memorable shopping experiences within their stores. In going the extra mile on things like interior design, small dispensaries can help ensure customer retention and benefit from word-of-mouth marketing.

The dab bar at Barbary Coast

For example, ​Barbary Coast Dispensary​ in San Francisco, CA, has the look and feel of a high-end speakeasy, making it the perfect match for the Bay Area’s aesthetic sensibilities. The dispensary interior is decorated with a 19th-century touch and features a dab bar, where clients can enjoy the surreal atmosphere while consuming some of California’s best cannabis. A visit to a small dispensary like this will likely leave a lasting impression.

Memorable retail shopping experiences often translate directly to customer loyalty. In turn, this dynamic directly impacts your bottom-line concerning marketing expenses. Notably, a steady base of loyal customers will sustain your business, significantly reducing your marketing costs. In the end, marketing can be directed at retaining clients through loyalty programs and customer engagement – both can be mainly handled “in house” and relatively inexpensively.

Product Differentiation

Small dispensaries can utilize ​product differentiation​ to stay competitive in today’s market. To this end, small operators are blessed with the ability to pivot quickly with new product offerings. Conversely, large dispensary chains with corporate structures must go through rigorous steps before launching new products at their stores.

Offering rare or unique cannabis strains is a great way to differentiate

Small cannabis dispensaries can immediately “get out ahead” on new product trends as they arise. For example, you can offer rare cannabis strains or boutique extracts that none of the larger dispensaries carry.

By the time the larger dispensaries in your area catch up on the current trends, you can move on to the next one. We recommend making alliances with some of the top craft growers in your area to make this possible.

Every year, the cannabis industry grows more competitive. As this business evolves from an underground affair to a multi-billion-dollar enterprise, the scope and sophistication of cannabis dispensary operations grows exponentially. Within this ever-changing dynamic, many small dispensaries fear the wayside will leave them.

Yet, if you approach the market with creativity and zeal, you can make the additional market pressure work to your benefit. By focusing on critical facets like cross-training employees, lean operating principles and product differentiation, you can build a profitable and sustainable cannabis dispensary by making small size a competitive advantage.

Dank Until Gone Dark: The State of Corporate Insolvency for Cannabis Businesses

By Aaron L. Hammer, David S. Ruskin, Nathan E. Delman
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Two thirds of all states and the District of Columbia have, to varying degrees, legalized cannabis. With the recent addition of Illinois, eleven states now allow adult recreational use. But cannabis entrepreneurs’ rush of excitement and dreams of cashing in is met with fierce competition and economic risks that makes the dreams, which look so dank at first, end up going dark, or in other words, out of business.

This article discusses the available options for a cannabis business that finds itself on hard times and in need of reorganizing its debts or liquidating altogether. With the federal status of cannabis remaining illegal, cannabis businesses must clear significant hurdles to achieve success. Among the many other pitfalls traditional business owners experience, a cannabis business must navigate limited access to financial institutions and its related security concerns of keeping large amounts of cash on location. Also, they cannot deduct ordinary and necessary business expenses for federal income tax purposes. Turning a profit in legal cannabis can be a big challenge.

The first thought for a business facing insolvency is bankruptcy. However, bankruptcy courts have not been welcoming to cannabis businesses. Bankruptcy courts are courts of federal jurisdiction, and the federal government is represented by the United States Trustee Program (UST), which is the division of the Department of Justice responsible for oversight of Bankruptcy Courts. Since cannabis remains illegal under the Controlled Substances Act of 1970 (CSA) as a Schedule I controlled substance, it is unsurprising that the UST creates roadblocks for those seeking relief. In fact, the UST currently and steadfastly seeks dismissal of cases against cannabis businesses, cannabis employees and landlords of cannabis businesses.

But all hope is not lost. First, a change at the head of the DOJ could have a significant effect on how these cases are handled, even without a reclassification of cannabis. Second, recent caselaw shows a willingness by the courts to forge a path allowing cannabis cases to survive. Finally, if federal bankruptcy protection is not an option, other state remedies may be available to unsuccessful cannabis ventures.

The UST’s prosecutorial discretion has a strong influence in how a bankruptcy case can develop. While still very difficult to predict, a compelling analogy for cannabis cases can be seen in how the UST dealt with same-sex marriages in 2011. Nine years ago, the Defense of Marriage Act (DOMA) governed, and Section 3 of DOMA1 defined marriage as “a legal union between one man and one woman as husband and wife.” In In re Gene Douglas Balas and Carlos A. Morales, a same sex couple filed a Chapter 13 petition in California, and the UST filed a motion to have the case dismissed. The UST sought dismissal of the joint bankruptcy case, arguing the couple did not qualify for a joint petition under 11 USC § 302(a) because they were in a same-sex marriage. The bankruptcy court denied the UST’s motion. The bankruptcy court in Balas based its opinion partially on a letter from then United States Attorney General Eric Holder, with President Obama’s support, reasoning that Section 3 was unconstitutional as it applied to legally married same-sex couples. The UST appealed the case to the Ninth Circuit Court of Appeals, however, the UST did an abrupt about-face and dismissed its appeal. In fact, the UST took a further step by publicly stating it would not seek dismissal of any joint bankruptcy filed by a legally married same-sex couple. Similarly, if today’s executive branch decides not to enforce the CSA in bankruptcy court, cannabis businesses in compliance with state law would have access to bankruptcy courts.

Many businesses have pushed the bankruptcy courts to use a similar public policy approach to allowing cannabis businesses to seek debt relief, but it is proving to be a far stickier issue. Bankruptcy Courts have routinely dismissed cases with both direct and indirect relationships to the cannabis industry. The UST has taken a stance firmly against affording relief with any type of connection to cannabis. In an April 2017 letter to Chapter 7 and Chapter 13 trustees, the Director of the UST put it bluntly: “[i]t is the policy of the United States Trustee Program that United States Trustees shall move to dismiss or object in all cases involving marijuana assets on grounds that such assets may not be administered under the Bankruptcy Code even if trustees or other parties object on the same or different grounds.”

Indeed, one can fairly point out a significant difference between allowing a same-sex couple to file a joint bankruptcy. The practical significance of allowing same-sex couples to file jointly is the loss of a filing fee to the bankruptcy court, whereas a cannabis company’s liquidation creates a situation where a Chapter 7 trustee would have a fiduciary duty to liquidate a controlled substance, effectively violating federal law.

However, the UST shows equal hostility to cases involving downstream cannabis businesses such as landlords and even certain gardening suppliers, where there is no risk of cannabis itself becoming property of a bankruptcy estate. A Colorado District Court affirmed a bankruptcy court’s dismissal of a holding company for purported CSA violations.2 The Court reasoned that since the company owned stock for a large hydroponic gardening company, it willfully aided and abetted criminal activities.

San Francisco’s United States Court of Appeals for the Ninth Circuit
Photo: Ken Lund, Flickr

While the federal executive branch is decidedly opposed to the cannabis debtor, one hope for reform lies with the judicial branch. To this end, the Ninth Circuit handed the biggest victory to date to a downstream cannabis business in Garvin v. Cook. Based on a microscopically close reading of the Bankruptcy Code, the Ninth Circuit held that a reorganization plan which relies partially on money from cannabis does not equate to a plan being “proposed by means forbidden by law” because the statutory text of one section cannot mean “all applicable law” or else the language in a closely related section that “the plan complies with the applicable provisions of this title” would be surplusage.

But this victory has not created much daylight for cannabis ventures seeking to utilize bankruptcy courts. Notably, Garvin could have gone a different direction if the UST had revived a motion to dismiss for gross mismanagement of the estate, which is how most Chapter 11 cannabis cases are dismissed. Indeed, in the weeks following the Garvin decision, two lower courts declined to blaze a new trail, and instead distinguished its cases from Garvin, dismissing debtors with equally indirect ties to cannabis.

Bankruptcy courts have shown significantly more latitude for legal hemp companies. In a promising decision, In re Royalty Properties, LLC, a Northern District of Illinois Bankruptcy Court took no issue with the legality of a debtor growing hemp seeds. The court took pains to distinguish hemp from its psychoactive relative marijuana and based its ruling on the 2018 Farm Bill which effectively legalized hemp. The court even denied as unnecessary an order to approve contracts to grow hemp, stating its approval was not necessary. Ultimately, the reorganization failed for reasons unrelated to growing hemp.  Nevertheless, the case does show a step toward tolerance. Now that CBD giant GenCanna Global has filed a Chapter 11 in Kentucky, the UST’s tolerance will be put on full display.

The United States Trustee Program is a part of the United States Department of Justice

Also, it is worth noting that the unwillingness of bankruptcy courts to take on cannabis cases cuts both ways. Creditors of cannabis businesses, already taking on a certain amount of risk for dealing with borrowers who cannot use depository institutions in a traditional way, also have been prevented from banding together and filing an involuntary bankruptcy against cannabis businesses.

Fortunately, legal cannabis businesses facing insolvency have options aside from federal bankruptcy to deal with debt issues.

An assignment for the benefit of creditors proceeding (ABC) presents one very workable option. In an ABC, a distressed company selects an “assignee” to liquidate the debtor’s assets via state law and distribute the proceeds to the creditor’s benefit. Depending on whether the assets include cannabis, the assignee will likely have to comply with applicable state law to be able to legally liquidate the asset. Nevertheless, an ABC might be the best solution currently available for cannabis companies seeking debt relief.

Another option is a corporate receivership where a disinterested third party, typically an attorney, is appointed to take control of an ailing business. The receiver takes over management of the company and can liquidate the company’s assets. Receiverships present certain advantages over bankruptcy proceedings. They allow for greater flexibility in decision making because the receiver is not bound by the confines of the Bankruptcy Code. Receiverships can be more cost effective, due to less court involvement and administrative expenses. For creditors, there is the advantage of potentially deciding on the receiver. Also, the receiver, unlike a Chapter 7 trustee, does not bear the imprimatur of any government, and is not a public officer within the meaning of a constitutional or statutory provision relating to public officers. Oregon and Washington have both amended their receivership statutes to ensure that cannabis businesses can effectively manage debt without receivers running the risk of violating the law. Ideally, other legal states will follow suit to ensure this remedy is available to cannabis businesses.

Finally, another bankruptcy alternative would be a friendly foreclosure under Article 9 of the Uniform Commercial Code (UCC). Unlike the Bankruptcy Code, the UCC is not federal law, but is adopted individually by each state. Again, considering the secured lender is required to comply with state law, this is another instance where amending state statutes could provide great assistance to a struggling cannabis business and its secured creditors.

Legal options for insolvent cannabis businesses is a new challenge. Society is trending in the direction of a more permissive attitude toward cannabis, so it should follow that the legislatures and courts accept this shift and afford distressed cannabis businesses the same opportunities to reorganize or orderly liquidate just like other legal business entities.


References

  1. DOMA was ruled unconstitutional in 2013 US v. Windsor, 133 S. Ct. 2675 (2013).
  2. See In re Way to Grow, Civil Action No. 18-cv-3245-WJM, 2019 U.S. Dist. LEXIS 207846 (D. Colo. Sep. 18, 2019)

The Women in Cannabis Study: A Q&A with Jennifer Whetzel

By Aaron G. Biros
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Ladyjane Branding and Wolfe Research & Consulting are leading an ambitious study to explore and document the experiences of women working in the cannabis market. Women in Cannabis: A Living History officially kicks off on December 10th at the National Women of Cannabis Conference.

Jennifer Whetzel, founder of LadyJane Branding and founder of the Women in Cannabis Study

Jennifer Whetzel, founder of Ladyjane Branding, says this is an opportunity for women to tell their stories about their experience working in the cannabis industry. Women can participate in the study by going to womenincannabis.study and sign up to take the survey. You can also sign up to be a sponsor or partner of the study at that website. Sponsors will get access to content like press releases and the opportunity to incorporate the study’s findings in their messaging. We invite our readers to participate, sponsor, partner, share and encourage friends to take the survey.

With beta testing starting the week of November 18th, we caught up with Jennifer Whetzel to talk about why she decided to start this project, what they expect to learn from it and what the future may hold for professional women in the cannabis industry.

Cannabis Industry Journal: Can you tell us a bit about your background and how you came into the cannabis industry? 

Jennifer Whetzel: My entrance into the cannabis industry was certainly a culmination of my personal experience and professional journey.

After moving to Maine, I became a medical user to ease symptoms of an immune and an auto-immune disorder. When I sought out treatment for PTSD, I found that a combination of cannabis, therapy, meditation and brain retraining was the most helpful and healthy solution.

This course of treatment for PTSD was life-changing as it allowed me to resolve symptoms from all of my medical issues, and I wanted to find a way to give back to the community that supported me. I had been working in marketing for over 25 years and realized I had quite the diverse professional background. My experience included retail merchandising and operations, public relations on a military base, research design and strategy for ad agencies, new product development and launch for animal health companies, and experiential marketing strategy and design. I’ve been lucky enough to work with small companies and Fortune 500’s which has led to finding solutions in unexpected places.

When pairing my knowledge and skills with the cannabis community, I realized I could make an impact by advising new entrepreneurs who needed help making their brands stand out. That’s how Ladyjane Branding was born.

CIJ: Can you give us an overview of the Women in Cannabis Study?

Jennifer: The Women in Cannabis study aims to understand how women are faring in the cannabis industry and whether we are doing enough to support women, their careers and their professional goals. It’s well documented that women in corporate America do not have the same opportunities for career advancement as men, holding fewer executive or board positions, having fewer opportunities for mentorship, sponsorship and career progression.

The study is comprehensive, with more than 80 quantitative questions along with qualitative telephone and video interviews of female-identifying professionals working in the cannabis industry – whether they are involved with cannabis, CBD or hemp. Through monthly infographics, video summaries, quarterly in-depth themed reports and a comprehensive year-end report, we will be telling the stories of women’s professional experiences in cannabis with the goal of transforming the industry into one where women can succeed and thrive.

Painting a picture of the women in cannabis, and understanding them as a group, we look at demographics to explore their diversity and reveal whether personality differences may affect their experiences, as well as experience with stigmas regarding cannabis use and working in the industry.

To understand professional trajectories and roadblocks on a path to success, we dive into work history, reasons for entering the cannabis space and the barriers they have faced on their journey. We explore opportunities for mentorship, support and leadership, the types of harassment, discrimination and disrespect they’ve experienced and how that may have impeded their careers.

We’d like to understand how (or whether) women find balance in their personal and professional lives, what sacrifices they’ve had to make for a career in cannabis, as well as best practices for women to foster success.

CIJ: Why did you decide to take on this endeavor and lead the work on this study? 

Jennifer: While there are numerous studies looking at how women fare in corporate America, we found that there’s a lack of a recent and comprehensive deep dive into this topic specifically for cannabis. As an emerging industry, we have a unique opportunity to make valuable recommendations to potentially increase inclusivity for women in this early stage of industry culture before it becomes too entrenched. Our goal is to ensure we have the hard numbers to document a baseline now, then follow-up over time to understand how the industry changes.

By surveying and speaking to women in the industry, and understanding where strengths and weaknesses in the industry lie, we can make recommendations to improve the lived experience for women working in this industry.

The only way to make improvements to a system is to understand it.

CIJ: How do you think we can create a more inclusive industry?

Jennifer: I think it begins with an understanding of where we are starting – we don’t know what we don’t know. Being in the cannabis industry, we often hear the argument that anecdotes are not data. Just like we need the scientific data to prove efficacy for medicine, we need the data that shows the hard numbers about diversity and inclusion, the stigma and shame of cannabis use or working in this industry, about sexual harassment, disrespect and bullying.

This study is about generating information and creating knowledge on this issue so we can determine the education, policies, procedures and actionable recommendations that can help make the industry a welcoming space for everyone.

One of the best ways to create a more inclusive industry is through education.

CIJ: What hurdles do women face in the cannabis industry? How is that different from other, more established industries?

Jennifer: As we review research results from more established industries, it seems clear that women face similar hurdles in cannabis. Various studies have shown that working women are faced with unequal pay, fewer opportunities for mentorship or sponsorship, as well as discrimination and disrespect. The issues for female entrepreneurs are even greater as women are significantly less likely to receive venture capital funding, which certainly speaks to experience in the cannabis industry.

Because there’s little data specifically focused on the cannabis industry, we are just guessing. This study will provide us those answers.

CIJ: Looking ahead, how do you think women will fare in the evolution of the cannabis market?

Jennifer: I’d like to think that if we are all purposeful and intentional about creating an equitable, inclusive, and representational industry, that women will fare significantly better than they have in other industries typically dominated by men. If that can happen, everyone will feel welcome and respected, and it will no longer be surprising news when a woman is promoted to CEO or becomes a successful founder.

Jennifer Whetzel

Branding for Cannabis Companies 101: Part 3

By Jennifer Whetzel
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Jennifer Whetzel

Editor’s Note: In Part 1, Jennifer Whetzel introduced the concepts of branding, marketing and advertising for cannabis companies. Part 2 took a closer look at the benefits of branding. Part 3, published below, illustrates the different archetypes to use in branding.


People talk a lot about consistency when it comes to branding; after all, it’s a feature of the world’s most lucrative consumer brands (just ask Apple, Nike and Starbucks). As a result, companies will spend buckets of money on ensuring that their look and sensibility are uniform when marketing materials are out in the wild.

This consistency makes it easier for customers to recognize your brand. But the most important effect of consistent branding isn’t just that customers will recognize you– it’s that they’ll trust you.

 Trust is the product of familiarity and consistency, and it’s far easier to be consistent across platforms when you have a strong sense of who you are as a brand. Strong branding helps you stick out in a crowd, and repeated viewing reinforces who you are to consumers. By extension, a consumer’s ability to quickly recognize you means that when they see your brand in public, they’re more focused on your message than picking you out of the crowd. And one way for consumers to recognize you is through archetypes.

What a Character!

Branding: Who
Marketing: What & Why
Advertising: Where & When

Archetypes are typical examples of a person or concept that appear across different fields of literature, art and behavior; in other words, archetypes are familiar concepts that appear in storytelling. An outlaw is an example of an archetype. If an outlaw appears in a story, you may find yourself immediately drawing conclusions about that character’s motivations and sensibility and imagining how the outlaw fits into the story.

This demonstrates how archetypes can serve as a kind of shorthand when you’re telling your own brand story. We’ve created 16 archetypes–brand characters, if you will–for the cannabis industry, such as the Activist, the Doctor and the Stoner, among others. These archetypes all have a specific look and tone that you can use in your communications to keep your messaging consistent and effective so that people are focusing on your message rather than sussing out who you are and what you stand for.

For one thing, this makes your marketing efforts easier on you because you’ll be able to tell what makes sense in the context of your archetype. For example, the Doctor Archetype wouldn’t be sharing a 4/20 playlist, and an Activist Archetype wouldn’t be arguing the merits of different CBD bath bombs. You don’t want consumers scratching their heads, and having an archetype helps to determine what kind of behavior is appropriate for your brand.

Moreover, it helps to establish consistent behavior that your consumers see. Consistency helps to build trust because it helps customers build expectations. When you build expectations and you act in a way that immediately feels familiar to them, they’ll feel more comfortable with you. Imagine your closest friends; you have a strong sense of who they are. You know that your friend will refuse to order their own fries and then pick at your own. But there’s some comfort in this because when a person acts exactly as you expect, it makes you feel as though you know them deeply. And when there aren’t any mysteries, you can focus on what lies ahead in your friendship.

You know that Apple stands for sleek design and innovation.

Brands operate the same way. When you see an Apple ad, you don’t have to rack your brains for context before you absorb their message. You know that Apple stands for sleek design and innovation, so when you see an Apple ad, Apple doesn’t have to keep reintroducing those values. Instead, you can focus on the new product or idea being featured, knowing that the sleek design and innovation are already baked in– and it’s because Apple has done decades of legwork making sure that that’s the case.

Archetypes make that legwork even more efficient by giving you those values as part of a character. If you think of your brand as a character, it immediately makes your communication more human. For instance, like Apple, the Scientist Archetype also values innovation. But when you write social posts as a Scientist Archetype rather than a brand, it makes it easier to connect with folks because you’re writing from a particular person’s perspective rather than a bulleted list of company values.

It also grants you more structure in your brand strategy because it allows you to envision a whole person. When you’re writing a post, for example, you can ask yourself, “Would the Scientist say this?” You can envision this Archetype’s mannerisms and sensibility, and being able to do that makes it far easier to know what will feel real to consumers– and by extension, trustworthy.

That ability to build trust is what will ultimately decide how successful your brand is in this burgeoning industry. You’ll be facing more competition than ever and you may eventually find yourself facing companies selling near-identical products. The brands that will win out will be the ones that know how to build trust with consumers with a cohesive brand strategy. With the right strategy, that could be you.

Laura Bianchi
Soapbox

Jeff Sessions’ Latest Moves Should be a Wake-Up Call for the Cannabis Industry

By Laura A. Bianchi
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Laura Bianchi

The legal cannabis industry was recently rocked to its core by the announcement that Attorney General Jeff Sessions would be rescinding the so-called “Cole memo” and several other Obama-era legal directives suggesting the federal government would leave state-by-state cannabis reforms more or less alone. Suddenly, it seemed the entire cannabis movement was in jeopardy. Laws legalizing medical and recreational cannabis could be at risk. A booming industry predicted to be worth $50 billion annually by 2026 could instead be going down in flames.

Here’s the good news: As a business transactions attorney who’s been working in the cannabis industry for eight years, I don’t see any cause for panic. The Cole memo and the other directives the Justice Department are rescinding were not laws, orders or even legal precedents – they were simply legal guidance, and murky at that. The memos provided guidance to federal prosecutors regarding cannabis enforcement under federal law, suggesting that federal prosecutors not focus resources on state-legal cannabis operations that weren’t interfering with other federal priorities, such as preventing the distribution of cannabis to minors and preventing revenue from the sales from going to criminal enterprises, gangs and cartels. Yes, federal prosecutors could take Sessions’ recent moves to mean it’s open season on medical and recreational cannabis businesses. But with medical cannabis programs of one form or another up and running in 29 states and Washington D.C., and recreational cannabis now legal in eight states and Washington D.C., dismantling the entire legal cannabis industry would require a Herculean federal effort that would come at the expense of a cornerstone of the Republican Party now in power: The vital importance of states’ rights.The best way to stay on top of those rules? Form relationships with your state program regulators

In other words, I don’t see the termination of the Cole memos as the end of the nascent cannabis industry. But I do think the development should be a wake-up call for all those people in the cannabis industry who have been playing fast and loose with their business operations. After all, if federal prosecutors do decide to make examples of certain cannabis operations, they’re going start with those who are not operating within the confines of the applicable state rules and regulations.  Any business that smells even slightly of tax evasion, interstate trafficking or the allocation of cannabis-derived revenue to benefit a criminal enterprise will end up at the top of that target list.

So how should well-meaning cannabis operators stay off the feds’ radar? Simple: Follow all the rules.

Unless you want orange to be your new black, you can’t afford to be sloppy with your business structure and financial records.For starters, you need a CPA who’s not just at the top of their game, but who also understands the very specific – and potentially debilitating – nuances of cannabis-specific tax liabilities. That’s because thanks to a quirk in the tax code called IRS section 280E, cannabis companies are utterly unique in that they are not allowed to deduct expenses from their business income, save for the costs of goods sold. You want an accountant who thoroughly grasps this issue, so they can help you plan for and (to the extent possible) minimize your tax liability. And you want to address such matters before you start to realize positive revenue, so you’re ready to handle an effective tax rate that can be upwards of 70 percent. Last I checked, the IRS doesn’t consider “But I can’t afford to pay my taxes!” a valid excuse.

Along the same lines, you need a business corporate attorney who’s well-versed in the world of cannabis. That’s because while it might seem exciting to jump headlong into the cannabis green rush, you’re not going to get very far if you don’t deal with the boring stuff first. I’m talking about start-up financing strategies, business contracts and agreements, profit and loss forecasts, cash-flow analysis, and long-term financial plans. Properly structuring your business from the get-go isn’t just important if you ever plan to seek capital or sell your business. It’s also necessary if you want to keep the feds happy. In other industries, regulators might cut first-time business owners some slack. Not so in cannabis. Unless you want orange to be your new black, you can’t afford to be sloppy with your business structure and financial records.

Jeff Sessions and Eric Holder
AG Jeff Sessions (left), the man responsible for the recent uptick in worries

Finally, make sure you’re playing by all the cannabis rules, regulations and requirements of your state and jurisdiction. While this suggestion might seem like a no-brainer, far too often cannabis brands hire hotshots from Fortune 500 companies who don’t know anything about cannabis regulations and how they apply to their business.

The best way to stay on top of those rules? Form relationships with your state program regulators. Here in Arizona, I am in constant contact with our regulators discussing nuances and new business concepts for which the rules are unclear, convoluted or simply silent. Working with the enforcers might not come naturally to many folks in the cannabis business, but we’re dealing with a new and evolving industry where there’s little or no business, regulatory or judicial precedent. We’re all in this together.

It’s exciting to be at the bleeding edge of a bold and booming new industry like cannabis, but to do so safely and legally, cannabis industry pioneers need to make sure they’re striking the right balance between daring innovation and sensible business security.

We shouldn’t expect Jeff Sessions to launch a new army of prohibition agents around the country to kick down doors of cannabis businesses. But it wouldn’t be a bad idea for cannabis entrepreneurs to start acting like he might.

Cannabis M&A: Practice Pointers and Pitfalls When Buying or Selling a Cannabis Business

By Soren Lindstrom
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The Stage is Set

According to the Marijuana Policy Group, the U.S. cannabis industry is expected to reach more than $13 billion in sales by 2020 and create more jobs than the U.S. manufacturing industry. According to Viridian Capital’s Cannabis Deal Tracker, there were close to 100 M&A transactions in the U.S. cannabis industry in 2016 and approximately $1.2 billion was raised in equity and debt. As the cannabis industry has grown more mature and businesses begin to have more capital available, the M&A activity within the industry is poised to grow significantly over the next years to assist businesses gain necessary scale and take advantage of synergies and diversification.

The Obvious Wrinkle

U.S federal law has prohibited the manufacture and distribution of cannabis since 1935. The U.S. regulates drugs through the Controlled Substances Act, which classifies cannabis as a Schedule I drug (i.e., drugs determined to have a high potential for abuse with no currently accepted medical use and a lack of accepted safety regarding their use). Yet, more than 25 states have by now legalized cannabis for medical and/or recreational purposes and, as a result, there is a clear conflict between such state laws and existing federal law. To possibly help bridge that conflict, the U.S. Attorney General’s office in 2013 issued guidance directing the federal government not to intervene with state cannabis laws except in specific, limited circumstances, but, contrarily, the DEA has shown no desire to re-classify cannabis. To add to the confusion, President Trump and the new U.S. Attorney General have provided mixed statements and signals about their positions.

All of this means that it continues to be risky to acquire cannabis businesses. The requirements to legally grow, distribute, prescribe, and use cannabis for either medical or recreational purposes vary widely by country, state, and local jurisdiction, making it tricky to determine whether such businesses can be legally combined, in particular, across state lines.

Pick the Right Team of Advisors

When preparing to sell or buy a cannabis business, it is important to pick the right team of advisors. Your regular legal counsel, accounting firm or CPA may not be the right advisors for a cannabis M&A transaction. Choose a legal counsel that not only has experience with cannabis laws and regulations, but also has cannabis M&A experience and can offer expert advice on areas like IP, employment, tax matters, etc. Similarly, verify that your accounting firm or CPA has real experience with financial and quality of earnings analysis and due diligence.

Conduct Gating Due Diligence Up Front

In any contemplated M&A transaction, it is wise to prioritize your due diligence investigations. There will always be some more prominent risks and business objectives in a particular industry or with respect to a specific target business. It will be more cost and time effective if those specific risks and business objectives are prioritized early in the due diligence process. These can dictate whether you even want to pursue the target further before you dig into a deeper and broader due diligence investigation. Conducting gating due diligence up front is even more important in an industry like cannabis that contain complex and thorny regulatory hurdles.

So, before you spend money and time on a broader legal, business and financial due diligence investigation, have your legal counsel analyze and confirm that the potential transaction is feasible from a regulatory perspective. This will include whether it is possible to obtain or transfer necessary local and/or state licenses and whether a combination or sale can occur across state lines if necessary. Early on in the process, It is also advisable to request that the target business complete a legal compliance questionnaire or discuss with the target its regulatory compliance program, policies and training. Such up front due diligence will either clear a path to negotiations and broader confirmatory due diligence or flush out “red flags” that may kill a possible deal or require the buyer to investigate further before proceeding.

Important Terms and Pitfalls in the M&A Agreement

Generally, a sale or purchase agreement for a cannabis business does not appear to vary much from a similar agreement in any other industry. However, the complex environment and the premature nature of the industry impacts certain deal terms and processes in different ways from most other developed industries.

Here are few examples to keep in mind when preparing and negotiating a sale or purchase agreement:

  • Third Party and Governmental Consents: Buyer’s legal due diligence must focus on the consents that may be required from seller’s suppliers, customers, landlords, licensors or other third parties under relevant contracts. Additionally, the due diligence should focus on consents and approvals required by local and state regulators as a result of the sale. The M&A agreement should contain solid seller representations and warranties about all such consents and approvals and any such material consents and approvals should, from a buyer’s perspective, be a condition precedent to closing of the transaction.
  • Legal Compliance: A buyer should not agree to a boilerplate seller representation about the target’s compliance with laws. Be specific and tailor seller’s legal compliance representation to relevant state and local cannabis laws, regulations and ordinances. From a seller perspective, be careful and thoughtful about any appropriate exceptions (including the federal prohibition) to be disclosed to buyer in the disclosure schedules underlying the sale or purchase agreement.
  • Financial statements: The cannabis industry is very fragmented and consists of many small businesses. Many of these small businesses do not have financial statements prepared in accordance with GAAP and may consist of only management prepared financials. In that scenario, a buyer should have its financial advisor do an analysis of the financials available and ask seller to provide a representation and warranty about the accuracy and good faith preparation of the provided financials.
  • Escrow: Typically, a buyer will request some part of the purchase price be placed with an independent financial institution for a period of time post-closing as a source of recovery for losses as a result of breaches by seller of any of the representations and warranties in the definitive sale or purchase agreement. Due to the federal cannabis and banking regulations, many of the larger commercial banks will not provide financial services to cannabis businesses, in particular if the business touches the plant. The parties must therefore consider alternatives, including local financial institutions with more relaxed compliance requirements or perhaps place the escrow in a trust account of a law firm or other independent party.
  • Working Capital Dispute Procedures: Similar to the escrow, larger accounting firms generally do not provide services to cannabis businesses. Due to the rapid evolution of cannabis related regulations, if the terms of the transaction include provisions for a post-closing working capital/purchase price adjustment and related dispute procedures, it is advisable to not name an arbiter in the agreement. Instead, parties should agree to mutually select the arbiter if and when a dispute should arise.
  • Indemnification: Because of the tricky legal environment of the cannabis industry, it may be prudent for a buyer to request, at the very least, that certain parts of seller’s legal compliance representation and warranty not be subject to the “regular” caps, deductibles and other indemnification limitations. Also, if a buyer has unearthed a significant issue in its due diligence investigation, it should consider asking seller for a special indemnity for such issue that would be indemnifiable regardless of buyer’s knowledge of the issue and not be subject to the general indemnification limitations.
  • R&W Insurance: If there’s a lot of competition for the purchase of a target, particularly in a bidding process, it is now common for buyer to offer to purchase a representation and warranty insurance policy (“R&W Insurance”) to possibly gain an advantage by limiting the seller’s post-closing indemnification exposure. The good news is that many of the R&W Insurance carriers do offer such insurance in connection with the sale and purchase of cannabis businesses. However, typically, R&W Insurance cannot be obtained for insured amounts of less than $5 million. Experienced M&A counsel can advise of the advantages and disadvantages of R&W Insurance and assist in the negotiation of the related terms.

The above are just some examples of what to expect in a cannabis M&A transaction. Every M&A transaction will have its unique issues that will need to be appropriately reflected in the sale or purchase agreements and good M&A practices will continue to evolve with the industry. If you are an owner of a successful cannabis business, buckle your seat belt and be prepared for an exciting ride as the industry gets closer to significant consolidation.