Well before cannabis businesses win a license application, they need to have traditional business plans outlining how they’ll run the company. While this obviously includes things like the property, the building, products and inventory, it also includes a lot of things that are often overlooked: things like payroll, human resources and employee management.
Before a cannabis company should even hire their first employee, they need to have a few thing squared away. The timeframe and order of operations will differ for every business and every state, but there are a number of things to consider like workers comp, employee training, handbooks and of course, everyone’s favorite topic: insurance. There’s crop insurance, general liability insurance, unemployment insurance, workers comp insurance and more. Working with the right brokers, not breaking the bank and understanding what you need and when can be crucial to keeping the doors open.
Ahead of the Cannabis Quality Conference, we sit down with Nick Murer, the founder of WECO, to ask him some questions about what businesses need to know and when. Nick will be available at the event in New Jersey this October 17 and 18 during our “Ask the Expert Roundtables” to answer these questions and much more.
Cannabis Industry Journal: Does a company need to have workers comp and unemployment insurance before they’re licensed?
Nick Murer: They don’t need to have it figured out before they’re licensed, but they should want to have a strategy in place as they’re going through the process, knowing what they need to accomplish. There are some cases where states may require insurance upfront in the licensing process, but not always. It is however required before a business opens their doors, and absolutely necessary to have insurance before staffing and their first employees comes on board.
CIJ: What types of insurance should companies look into as they’re submitting our license application?
Nick: As you’re submitting your license application, you should have it figured out or at least speak with a broker about your options. You probably don’t have it yet, since you’re not an entity, but you’ll need general liability insurance, and if you’re a grower, you should have crop insurance too. Prior to opening, you should have your workers comp insurance, unemployment insurance, FICA, SUTA and FUTA figured out with the state. Prior to licensing, you need to make sure you are working with the right insurance broker and managing the cost aspect. We can help with that; we work with a couple of great brokers that are industry-specific. As folks go through the licensing process, it’s important to work with people like us that have the right resources and the right tools to provide that necessary support.
Nick Murer will be available at the CQC in New Jersey, October 16-18 to answer questions and provide a resource for new and existing businessesDuring the application process, you need to be aware of insurance and the options that are available, as well as what’s required, but you might not need to have all of those in place. It’s different for every state.
CIJ: What important parts of human resources and employee management should companies have figured out before they get licensed?
Nick: I think the first area they need to start with is making sure they have their workers comp set up, their GL [general liability insurance] set up, I think they should have their employee handbook figured out, their onboarding procedures, their strategies for discontinuing employment figured out prior to bringing them on. Where we come in and assist with that is making sure that these businesses are properly set up with the state to handle workers comp, unemployment insurance, their FICA, FUTA and SUTA, social security taxes, healthcare benefits and being able to deploy all of that within thirty days properly. We work with a lot of clients making sure they have their onboarding programs fully figured out before they take that leap.
CIJ: As cannabis companies get licensed and begin operating, what are some often overlooked HR functions?
Nick: I think the number one area they need to understand in their hiring process prior to bringing people on is really having a thorough, compliant handbook that they’ve also participated in, and have worked towards creating a better document so when these employees come on they know the expectations and the standards that need to be met in order to be a successful member of the team. I think their employment onboarding practices need to be dialed in where they understand what is going on between the onboarding, timing, the documentation needed all before effective start date to stay in compliance. Understanding labor compliance and being able to understand how you properly onboard and offboard an employee is a really critical part. Where we like to come in and assist our clients is helping train managers and being their resource. Everyone works with humans and there are always unforeseen problems that arise We’re in the people business and there will be people problems and mitigating those should be everyone’s number one priority. The more we can help protect cannabis businesses, the less risk they bring to their own company, people and the industry.
Part 1 of this series discussed the lack of bankruptcy protections for cannabis companies, since bankruptcy in the U.S. is an exclusively federal procedure and cannabis remains illegal under federal law and proposed a number of alternative options for businesses struggling in the current environment. Part 2 of this series focused on state law receiverships for several states.
In this the third and final part of this series, we continue to review state law receiverships for several additional states and discuss the final non-bankruptcy option for cannabis companies, an assignment for the benefit of creditors.
Below is an overview of the laws and rules governing receiverships in several additional states which have legalized cannabis.
Massachusetts
In Massachusetts, receiverships are governed by statute, with numerous statutes for receivership in various industries and entity types but, in general, the appointment of a receiver is granted by a court after the filing of a complaint by third party, most frequently a secured creditor.
In keeping with its industry specific approach, the state cannabis regulator has enacted rules detailing the steps for a cannabis receivership. Most notable among these rules is a requirement to provide notice to the state regulator at least five days before filing a petition to appoint a receiver and, similar to the approach of Nevada, establishing minimum requirements for a person to serve as a receiver for a cannabis company (which generally require a person to pass a background check and have a crime-free past). In addition, because of the fairly restrictive local licensing in Massachusetts, coordination with the locality in which a cannabis company has operations is also required.
Michigan
Michigan has a broad receivership statute, in addition to both entity and industry specific statutes. The general receivership statute allows for the appointment of receivers as part of a court’s equitable powers so long as the appointment is permitted by law. In 2020, Michigan law was amended to specifically permit receivers to be appointed over cannabis companies. The state cannabis regulator’s rules require notice to such agency within 10 days following the appointment of a receiver, and Michigan law further provides that receivers may only operate a cannabis facility upon approval by the state regulator.
Anyone may seek the appointment of a receiver in Michigan, even if they have a connection to the property or business to be placed in the receivership. However, an action may not be brought solely to appoint a receiver but must instead be sought after an action for another claim has already been made. If a court determines it has cause to appoint a receiver, such receiver must have “sufficient competence, qualifications, and experience to administer the receivership estate”. Receivers in Michigan appointed under the general commercial receivership statute (including receivers over cannabis companies) are subject to the court’s equitable discretion but have broad powers, including the power to operate, restructure, liquidate, and sell the business.
Missouri
Like Michigan, Missouri has a general receivership statute as well as statutes for specific receivership situations, notably with respect to corporations. However, Missouri has not enacted any particular rules with respect to cannabis companies and as a result receiverships in Missouri have been conducted under the general receivership statute.
Receivers in Missouri are appointed by a court order following the application of a person with an interest in the assets over which the receivership is sought and an appointment may be made prior to any judgement having been rendered. In addition, the appointment of a receiver may be sought as an independent claim and not as an ancillary claim to another primary claim. Receivers may be granted powers as a general receiver (similar to “equity receivers” in other states) with powers over all of the assets of a debtor, or over specific property of a debtor.
Missouri’s cannabis regulations contain very few rules that specifically relate to a receivership, other than a requirement to provide notice to the state cannabis regulator within 5 days of a receivership filing. While some parties have cited a lack of cannabis specific rules as creating a lack of clarity regarding receivership in these states, Missouri courts and the state regulator appear to be applying the general receivership rules to the industry with at least one receivership in the state in the final stages of completion.
Assignments for the Benefit of Creditors
To conclude this series, we want to revisit another option we discussed in Part 1 for dealing with a financially troubled firm: an assignment for the benefit of creditors (ABC). While voluntary negotiations with creditors is typically taken where the value of the underlying business clearly exceeds the liabilities of the business, and receivership is an avenue for creditors to seek a court to force a restructuring or liquidation of a business, even over the objections of the business itself, an ABC process can be appealing where the creditor and debtor maintain relatively amicable relations, but the value of the business is such that it is clear the equity holders have little to no value remaining in the business. A creditor may view the ABC process, which is generally a lower cost option as compared with a court-supervised receivership, as the superior proposition in these circumstances.
An ABC is a state common law or statutory remedy available to debtors that is roughly analogous to a Chapter 7 bankruptcy or liquidating Chapter 11 bankruptcy. Unlike a receivership, where a creditor applies to a court for the appointment of a receiver and such an appointment can be granted even over the objection of the debtor, an ABC is a step taken by the debtor itself to liquidate its assets in an orderly fashion with the proceeds paid to its creditors. While courts can be involved to resolve specific matters, and ABC process is principally undertaken without court involvement or direct supervision.
Unlike a receivership, an ABC is a step taken by the debtor itself to liquidate its assets in an orderly fashion with the proceeds paid to its creditorsTo initiate an ABC process, the debtor selects the assignee to take ownership of its assets and such assignee holds such assets in the functional equivalent of a trust for the benefit of the creditors of the debtor. As such, the assignee, while selected by the debtor, owes duties (typically fiduciary duties under state law) to the body of creditors.
Once the assignment has occurred, the assignee will engage in a relatively significant diligence effort in order to gain a clear understanding of the assets and liabilities of the debtor, to complete the assignment and to provide notice to third parties and creditors of the fact that the assignment has occurred. The assignee then generally oversees the operation of the business (if it is continuing) while moving to create a sale process for its assets, whether through some sort of public auction or a privately negotiated sale (which, as in bankruptcy proceedings, may include stalking horse bids).
One notable difference between the bankruptcy and receivership process and an ABC is that, in general, assets sold in an ABC are not sold free and clear of all underlying liens, meaning that senior secured creditors must consent to any sale, or their liens will travel with the assets.
While ABCs offer many advantages over receiverships, including a typically lower cost, flexibility in the selection of the assignee, and a generally easier and faster path to liquidation of assets, there are limitations, including the risk that a third party may seek to appoint a receiver after an ABC has been commenced or that the compensation package granted the assignee is disproportionately high, each of which could ultimately result in higher costs for all involved. Furthermore, sales of assets in an ABC are not automatically sold free and clear of all liens.
In the end, regardless of where a cannabis company may be operating, the lack of access to federal bankruptcy courts does not deprive the company or its creditors of viable avenues to restructure or liquidate a business. However, because these options are less familiar to those who typically operate in the bankruptcy-centric restructuring arena in other industries, companies and creditors in the cannabis space are well advised to consult with counsel familiar with the cannabis industry and the restructuring alternatives that remain available to them.
Cannabis sales in the United States are expected to hit $100 billion by 2030, and yet dispensary owners still face hurdles before getting up and running, namely obtaining the right insurance coverage. Unlike a coffee shop or clothing store, it can be difficult to secure the insurance coverage needed to satisfy the requirements prescribed by the state and/or commercial leasing agreements.
Yet a simple answer to the dilemma exists. Increasing demand for cannabis business owner policies has prompted some retail insurance brokers to provide convenient turnkey solutions via digital commercial insurance platforms. These platforms circumvent the traditional underwriting process that could trudge on for weeks, allowing cannabis businesses to ramp up operations sooner.
Currently about 30% of insurance customers interact with and purchase from their insurance provider digitally for their business needs. This can be a game changer for a fast-growing cannabis business operator.
What do you need to obtain insurance online?
Obtaining insurance online lets dispensaries secure a complete, holistic insurance policy in one quick pass to cover the industry’s unique risks.
Increasing demand for cannabis policies has prompted some insurance brokers to offer digital solutions
Like any other commercial business package policy, you’ll need to provide details about your business and its operations when harnessing a digital insurance platform.
The first piece of information needed will be proof of licensing with the applicable state or commonwealth where the business operates. This piece is critical since cannabis is still illegal at the federal level. In addition, businesses will need to have other basic data on hand before finding coverage online, including:
The legal name of the business
Tax identification number
Operating locations
Annual or monthly sales projections
Number of employees
A Closer Look at Cannabis Coverages
Crime, extreme wealth conditions and legal challenges count among the risks faced by cannabis dispensaries. Here are three essential coverages important for cannabis business owners and operators.
Commercial property insurance.Owned cannabis dispensary properties can face perils such as fire, storms, theft and vandalism. Buildings hold value and need to be repaired or replaced if any adverse events occur. Leased properties may contain equipment and fixtures owned by the business and subject to the very same hazards. Commercial property coverage can help cover the cost of replacing business contents and inventory if damaged through a peril covered by the policy.
General liability insurance. Cannabis retail outlets experience a high volume of foot traffic from customers, vendors and technicians, for example. As such, trips, slips and falls could occur and lead to lawsuits. General liability insurance helps cover legal defense costs should any of these parties seek to recover compensatory damages from accidents and mishaps on the property or occurring elsewhere in a business-related capacity.
Product liability coverage. Issues such as quality control with infused products and concentrates can be a concern for cannabis purveyors. Lawsuits arising from mislabeled or improperly tested products likewise need to be defended by cannabis businesses. Comprehensive product liability coverage can meet the needs of cannabis dispensaries promoting and selling a unique variety of product offerings.
Outside the standard commercial package offering, dispensaries can opt for coverage such as business interruption insurance, which helps pay overhead costs if the operation must temporarily cease due to a covered peril.
Cannabis businesses also often need to retain workers compensation insurance that helps pay for lost time and/or medical bills incurred by employees who become ill or injured on the job. Commercial crime policies help cover losses that may occur on premises or in transit in a cash-centric business.
If cannabis industry owners and managers use an online platform for their insurance needs, they could secure a certificate of insurance in as little as 24-48 hours. HUB’s digital commercial insurance platform, powered by Insureon, is one such direct-to-consumer solution. The platform is ideal for licensed retail cannabis dispensaries in all legal US states.
By Andrew Solow, David Kerschner, Alessandra Lopez No Comments
In 2022, product liability lawsuits in the cannabis/cannabidiol (CBD) industry continued to focus on levels of THC and the psychoactive ingredient in cannabis, while federal agencies continued issuing warning letters for CBD products (including CBD-infused food and dietary supplements) that made misleading medical claims. Against this backdrop of ongoing litigation and regulatory enforcement, 2022 showed that at the Federal level, there is more recognition that marijuana is becoming increasingly normalized. For example, President Biden pardoned federal offenses of simple marijuana possession and requested a reassessment of marijuana’s classification as a Schedule I drug under federal law. Additionally, Congress passed its first standalone piece of cannabis reform with the Medical Marijuana and Cannabidiol Research Expansion Act (MMCREA) which, among other things, will ease restrictions on cannabis research and allow for more clinical trials. And even though the Food and Drug Administration (FDA) declined to act on CBD products, the agency announced that it will work with Congress to create a new regulatory framework for CBD products (2023 FDA Announcement).
These events of the past year provide a glimpse into what the future may hold for cannabis and CBD companies when it comes to product liability risks. This article looks at the types of product liability actions that the cannabis and CBD industry faced in 2022 and may encounter in the future, and provides some basic guidance on how to best mitigate, and if necessary, defend these potentially costly litigations.
Focus on Cannabis and CBD Risks
A central part of any product liability lawsuit—regardless of whether brought under a design defect and/or adequate warning theory—is that a product caused or was a substantial contributing factor to a Plaintiff’s injury or illness. Thus, any potential safety concerns over cannabis/CBD could end up as the subject of litigation in the future. In the 2023 FDA Announcement, the FDA recognized that “the use of CBD raises various safety concerns, especially with long-term use,” including potential harm to the liver and negative interactions with certain medications. The agency also noted that questions still exist on how much CBD can be consumed, and for how long, before causing harm. Furthermore, on December 2, 2022, President Biden signed the MMCREA into law, which is intended to advance research on the potential risks and medical benefits of cannabis and cannabis products.1 This additional funding will not only help researchers learn more about possible safety risks that may lead to future product liability claims, but will also allow for better exploration of the benefits of these products to possibly expand product indications and help reach new customers.
Given the FDA’s statements and the increased funding for new research, CBD and cannabis companies should ensure that they are properly monitoring both regulatory communications and new research regarding risks that may be associated with their products. As new information is released, companies should evaluate how their product labels and marketing messages should be altered. Announcements like this one by the FDA can be seen as providing industry participants with knowledge about certain risks, and how companies react could be analyzed, post hoc, in any litigation down the road.
2022 Product Liability Actions
Over the last year, misbranding/mislabeling issues presented some of the most prevalent litigation risks for industry participants.
An example of a warning letter the FDA sent to a CBD products company making health claims
For example, at the Federal level in 2022, the FDA issued thirty-three warning letters to CBD companies, a nearly 400% increase from 2021. These letters generally focused on CBD products that made medical claims. Some of these warning letters addressed misbranding, where the product labels provided inadequate directions for consumer use. In one letter, the FDA noted that because the CBD products were “offered for conditions that are not amendable to self-diagnosis and treatment by individuals who are not medical practitioners,” ranging from cancer to diabetes, labeling compliance was only possible if the product was an FDA-approved prescription drug with FDA-approved labeling. Other companies receivedwarning letters in March of 2022 for making misleading representations that their CBD products were safe and/or effective to prevent or treat COVID-19. Many of these representations were made via companies’ websites and social media platforms. The warning letters—often triggers for product liability actions, as well as consumer protection/fraud actions—serve as a reminder that companies cannot make medical claims on non-FDA approved drug products and must otherwise present accurate information to consumers not only on product packaging, but any form of marketing or advertising, including company websites and social media platforms.
Turning to state-level regulatory actions, Oregon’s Liquor and Cannabis Commission fined a cannabis company $130,000 and suspended the company’s license for 23 days over an alleged label mix-up between its CBD and THC products. According to the state’s investigative report, a company employee allegedly confused two product buckets with similar identification numbers, one that contained THC and the other CBD, and accidentally switched the labels of the two products. In addition to the fine and license-suspension, the state agency also issued a mandatory recall on the CBD drops based on the alleged undisclosed levels of THC.
This same incident also spurred a string of civil lawsuits, resulting in several settlements by the company in 2022.2 Numerous customers reported experiencing “paranoia,” “mind fog,” and feeling “extremely high,” with at least five people going to the emergency room with serious health issues due to use of the CBD drops. One lawsuit, which was publicly settled for $50,000 in January of 2022, alleged that the company failed to warn the plaintiff that the CBD drops contained THC or that the product may have been contaminated with foreign substances like THC, and that the company failed to exercise quality control standards that would have detected the THC.3 Nine other lawsuits made similar failure to warn allegations based on the same batch of CBD drops and were settled by January of 2022, although those settlements were not disclosed.4 In October of 2022, the company agreed to pay a settlement of $100,000 in a class action suit, which alleged that the company failed to disclose that the CBD product contained substantial amounts of THC.5 The class action focused on unlawful trade practices claims, including that the company falsely represented that the product had the characteristics, uses, and benefits of a CBD product that did not contain THC.6 Also in October 2022, the company settled a wrongful death lawsuit—alleging that the company failed to warn the plaintiff that the drops contained THC and had negligent quality control standards—stemming from the same CBD drops,7 where the plaintiff suffered stroke-like-symptoms, allegedly due to the tainted CBD product, and ultimately died.8
Other recent lawsuits have also focused on mislabeled cannabis products, alleging that companies failed to inform customers that products contained THC. For example, in Kentucky, a man who drove into a bus after using a CBD vape sued both the CBD manufacturer and retailer on December 14, 2022, claiming that he was not warned that the vape contained a substance that would make him intoxicated.9 According to the complaint, the store employees told the man that the vape was “all natural” but made no mention that the product contained THC.10 The man alleged that the vape actually contained Delta-8 THC and brought negligence, failure to warn, and state consumer protection law claims.11
As noted above, in addition to traditional product liability actions, companies are likely to face increased consumer fraud and false advertising actions in the absence of personal injuries. Two class actions brought in December of 2020 against a hemp tea maker alleged that the company’s website and the product’s packaging fraudulently stated that a tea contained zero THC.12 Plaintiffs claimed that they tested positive for THC after drinking the tea and that product testing similarly revealed that the tea contained some THC.13
Potency inflation marketing communications from a laboratory
Last year also saw a rise in cases focused on potency inflation, alleging that cannabis companies knowingly overstated the amount of THC in their products to charge higher prices.14 Again, while these actions focused on consumer fraud allegations rather than product liability claims, these cases underscore the importance of accurate labeling. Due to potency inflation concerns, states have started investigatinglicensedcannabis testing labs within their respective jurisdictions, resulting in product recalls and fines. Some states have also updated their regulations, requiring cannabis companies to test their products through two separate labs.
Finally, contamination and the existence of impurities and other byproducts has been a recent focus of several product liability lawsuits across the life sciences space, and this trend is something that cannabis and CBD companies should be aware of and take steps to mitigate.
For example, a Canadian cannabis producer reached a $2.31 million settlement over a class action brought in March of 2017 regarding pesticide-contaminated medical marijuana. The marijuana was recalled due to the presence of myclobutanil and bifenazate pesticides, neither of which were authorized for use on cannabis plants in Canada. The lead plaintiff experienced nausea and vomiting, allegedly from consuming the medical cannabis, and brought numerous claims on behalf of the class, including negligent design, development, testing, manufacturing, distribution, marketing, and sales.15 In the United States, California’s Department of Cannabis Control issued a mandatory recall on January 26, 2022 for a batch of cannabis flower that was contaminated with mold. On March 25, 2022, the New Mexico Cannabis Control Division recalled cannabis products sold by a local medical cannabis company because the product contained impermissibly high levels of mold. New Mexico’s Cannabis Control Division also required the company to immediately cease and desist operations at its production and manufacturing site.
A Look at the Future and What Companies Can do to Mitigate Product Liability Risks
The FDA’s 2023 announcement means that the industry will have to wait for Congressional action for the development of a regulatory scheme that can help standardize requirements and provide industry players additional defenses when facing product liability actions. Many of the proposed risk management tools in the FDA Announcement could help companies mitigate future litigation risks if implemented. These risk management tools may include “clear labels, prevention of contaminants, CBD content limits, and measures, such as minimum purchase age, to mitigate the risk of ingestion by children.” Although the FDA has had regulatory oversight over CBD and other hemp-derived products for nearly four years, the agency has not developed a regulatory framework for these products aside from issuing warning letters, leaving manufacturers and distributors without much guidance. The FDA has also left the states to fill the void, resulting in a patchwork of differing—and sometimes conflicting—state laws. Additional guidance and regulation on labeling at the federal level for cannabis and cannabis-derived products will make compliance a more straightforward proposition and may provide avenues for industry participants to explore preemption defenses in the face of future mislabeling claims.
Just some of the many CBD products on the market today
In addition to following the changing regulatory landscape and understanding how regulatory changes can impact litigation defenses, cannabis and CBD companies can continue to take various steps to help mitigate future litigation risks.
Quality Control: Adequate testing procedures and effective quality control procedures can help avoid contamination issues and situations where products are mixed up during the manufacturing process. For example, the company whose license was suspended in Oregon due to the alleged mix up between CBD and THC subsequently implemented new ingredient tracking protocols, adopted a policy to retain samples from each batch of product, and now sends additional samples to an independent lab to ensure product compliance before anything is sold.
Proper documentation of testing and quality control procedures, as well as maintaining records of compliance checks, can also help companies put together a defense to state regulatory actions or lawsuits relating to contamination or manufacturing defects. Indeed, in February of 2022, an Arizona marijuana testing lab was fined $500,000 for various incomplete records and documentation as well as improperly calibrated machines for contamination testing, with an inspector also noting that one of the employees was trained to use a technique that produced inflated potency results.
Ongoing Safety & Regulatory Review: Keeping up to date with regulations and science will play a key role in making sure labels are accurate and defendable. Working directly with regulators and seeking guidance from regulators on labeling can help potential defendants present a clear and compelling labeling defense. Moreover, the 2023 FDA Announcement made clear that the agency will not pursue rulemaking on CBD’s potential use in foods and dietary substances. Thus, industry players should monitor agency announcements and engage with the FDA’s Cannabis Product Committee (CPC) and Congress to better understand the potential structure of this new regulatory pathway.
Stay on Top of the Science: A boost in cannabis research is on the horizon, as the Medical Marijuana and Cannabidiol Research Expansion Act (MMCREA) will advance research on the potential risks and benefits of cannabis products and promote the development of FDA-approved drugs derived from marijuana and CBD. On the litigation front, causation is an essential element in most causes of action, and plaintiffs will have to prove that the cannabis caused their injury. Thus, industry players should be aware of the current science, including potential side effects.
Litigation Monitoring: Finally, companies will also be well served by following court decisions involving CBD and cannabis products. For example, courts in 2022 were split over the legality of Delta-8 THC, a substance typically manufactured from hemp-derived CBD. The Ninth Circuit held in AK Futures v. Boyd Street Distro that Delta-8 THC found in e-cigarettes and vape products is legal under the 2018 Farm Act, at least in the intellectual property context.16 But in Kansas, a federal judge ruled that the 2018 Farm Act does not make selling hemp-derived products such as Delta-8 THC legal.17 In Texas, litigation initiated in 2021 is ongoing over the legality of Delta-8 THC.18 There, a hemp company sued the Texas Department of State Health Services for its classification of Delta-8 THC as a Schedule I drug, making the sale of this substance a felony offense. A temporary injunction was granted on November 8, 2021—temporarily lifting the ban on sales of Delta-8 THC products—but the plaintiff’s request for a permanent injunction remains pending.19 As these lawsuits show, the legality of different products may vary by jurisdiction, whether by regulation or a judicial decision.
References
Medical Marijuana and Cannabidiol Research Expansion Act, Pub. L. 117–215, 136 Stat. 2257 (2022).
Agbonkhese v. Curaleaf Inc., No. 3:21-cv-01675, (D. Or. Jan. 5, 2022).
Agbonkhese v. Curaleaf Inc., No. 3:21-cv-01675, ECF 1, 6 (D. Or.).
See Crawforth v. Curaleaf, Inc., No. 3:21-cv-1432 (D. Or. Sept. 29, 2021); Lopez v. Curaleaf, Inc., No. 3:21-cv-1465 (D. Or. Oct. 6, 2021);
Williamson v. Curaleaf, Inc., No. 3:22-cv-782, ECF 1, 8 (D. Or.).
Williamson v. Curaleaf, Inc., No. 3:22-cv-782 (D. Or. May 30, 2022).
Estate of Earl Jacobe v. Curaleaf, Inc., No. 3:22-cv-00001, 19 (D. Or. Oct. 18, 2022).
Estate of Earl Jacobe v. Curaleaf, Inc., No. 3:22-cv-00001 1 (D. Or. Jan. 1, 2022).
Howard v. GCHNC3 LLC et al., No. 5:22-cv-00326 (E.D. Ky. Dec. 14, 2022).
Complaint at ¶ 11, Howard v. GCHNC3 LLC et al., No. 5:22-cv-00326 (E.D. Ky. Dec. 14, 2022).
Complaint at ¶¶ 15-33, Howard v. GCHNC3 LLC et al., No. 5:22-cv-00326 (E.D. Ky. Dec. 14, 2022).
Williams v. Total Life Changes, LLC, No. 0:20-cv-02463 (D. Minn. Dec. 3, 2020); Santiago v. Total Life Changes LLC, No. 2:20-cv-18581 (D.N.J. Dec. 9, 2020).
Complaint at ¶¶ 54-59, Williams v. Total Life Changes, LLC, No. 0:20-cv-02463 (D. Minn. Dec. 3, 2020); Complaint at ¶¶ 21-25, Santiago v. Total Life Changes LLC, No. 2:20-cv-18581 (D.N.J. Dec. 9, 2020).
See Centeno v. Dreamfields Brands Inc., No. 22STCV33980 (Cal. Superior Ct. L.A. Cnty. Oct. 20, 2022); Shanti Gallard v. Ironworks Collective Inc., No. 22STCV38021 (Cal. Superior Ct. L.A. Cnty. Dec. 6, 2022).
Downton v. Organigram Holdings Inc., Hfx No. 460984 (Sup. Ct. Nova Scotia Mar. 3, 2017).
AK Futures LLC v. Boyd St. Distro, LLC, 35 F.4th 682 (9th Cir. 2022).
Dines v. Kelly, No. 2:22-cv-02248, 2022 WL 16762903 (D. Kan. Nov. 8, 2022).
Hometown Hero v. Tex. Dep’t of State Health Services, No. D-1-GN-21-006174 (Travis Cnty., Tex. Oct. 20, 2021).
Hometown Hero v. Tex. Dep’t of State Health Services, No. D-1-GN-21-006174 (Travis Cnty., Tex. Nov. 8, 2021).
As a business owner, insurance is always a must. If you are interested in entering into the cannabis industry or you already have, it’s important to know what to expect when it comes to insuring your cannabis-related business.
That’s why we’ll be exploring what dispensary insurance is, different options for business owners and general advice regarding dispensary and other CRB insurance.
What is Dispensary Insurance?
Insurance for cannabis-related businesses refers to policies that protect the business against risk. This can include dispensaries, cultivation centers and testing labs – all of which require different levels of coverage and liability.
We spoke to Alexander Marenco, an insurance broker from Marenco Insurance, who explained what dispensary owners should know before seeking out insurance. Marenco says it’s similar to shopping for insurance for other businesess. “You need to have full details of the business and location to receive a quote.” He adds. “The applications will ask questions such as location, renovations, or improvements to the location, ownership information, payroll details, and sales or projected annual sales.”
How is Dispensary Insurance Different From Other Forms of Business Insurance?
Because non-hemp-derived cannabis is still considered a schedule one controlled substance under the Controlled Substance Act, cannabis insurance can be more expensive than regular insurance for non-cannabis businesses. Because of the risks associated with being considered a potential retailer of a controlled substance, liability policies and other options can cost a pretty penny.
The cash-only nature of the business makes insuring dispensaries more costly
Additionally, when asking Marenco about how dispensary insurance differs from other brick-and-mortar retail insurance, he says: “With more states increasingly legalizing medicinal and recreational marijuana, insurance carriers have started to open risk acceptability. However, since marijuana is still federally illegal, businesses will find it difficult to find multiple quotes from different carriers.”
Types of Insurance Available for Cannabis-Related Businesses
What kind of insurance is available for cannabis-related businesses? Let’s find out.
First off, it’s important to keep in mind that CRBs are at risk for a lot of things: workplace accidents, damage to property, theft, general liability and product liability. Plus, the fact that most dispensaries work on a cash-only business model until the Secure and Fair Enforcement (SAFE) Banking Act is approved by Congress, CRBs tend to handle big amounts of cash, further putting them at risk of theft and liability. CRB insurance can be as low as $350 and as high as $7,500 depending on the type of business and policy.
Here are some of the most common types of insurance for CRBs and what they cover:
General liability: third-party claims for bodily injury, property damage and reputational harm.
Commercial property: damage to a business-owned property.
Professional liability: third-party accusations of negligence and mistakes.
Workers’ compensation: employees’ medical bills and lost wages due to injury or illness.
Inland marine: damage or theft of business-owned property in transit.
Crop: costs from damage to seeds and plants.
With so many things to watch out for, insurance for cannabis businesses and dispensaries isn’t cheap. Here, Marenco says what CRB owners can do to keep their premiums as low as possible:
A smart safe like this one can help secure cash handling
“Premiums are primarily based on sales (actual or projected). After the term expires, the insurance carrier will conduct an audit for the prior term to confirm the information from the application. The audited discrepancy will adjust the next term’s sales figures. Dispensary insurance will typically be placed through an excess & surplus market which do not provide traditional discounts.”
So, in essence, the best thing a dispensary owner can do is be honest about their projections.
Navigating premiums can be a detailed process, as we learned when speaking to Jesse Giffith, an owner of Smokeless CBD and Vape: a chain of retail shops across the twin cities Minneapolis–Saint Paul, Minnesota:
“Our shops carry insurance that has been offered with a modified rate for vape retailers. This route was not as straightforward as some traditional retail insurance options, but may offer benefits, and a better fit for coverage than other dispensary insurance options.”
A Growing Number of Dispensaries Across America
With the growing legalization and normalization of adult use, medical and hemp-derived cannabis across the nation, it should come as no surprise that the number of dispensaries across the country grows exponentially.
In 2021, the cannabis market in the U.S. was valued at 10.8 billion dollars, with an expected annual growth of 14.9% annually. This is a sign of what’s to come. Cannabis may be an industry that’s been considered taboo for decades, but the growth shows the growing acceptance of the plant for medical and adult use reasons.
Insurance providers remain cautious as cannabis laws are still in flux.
With that growth comes a greater need for insurance providers, opening the door to the possibility that these two industries will grow in tandem. The future may bring a greater variety of options for coverage at cheaper prices. But for the time being, insurance providers remain cautious as the fate of federal and local cannabis laws are still in flux.
Are There Limited Carriers that Issue Dispensary Insurance?
Every CRB needs insurance, just like any other type of establishment, business or company. The issue within the cannabis industry is that there is still a limited insurance market, with insurers willing to provide insurance constantly exiting and entering the market. Plus, the overall capacity and variety of policies that cover different types of risks are limited. Lastly, it can be difficult to use CRB insurance when you read between the lines of the policy. Because cannabis with THC is still federally illegal (excluding hemp-derived cannabis products containing less than 0.3% THC), insurers can negate coverage when a loss or claim occurs.
Because of the complications that may arise even if you do have insurance, Marenco offers some advice for dispensary owners that are searching for the right insurance option for them: “Before shopping for insurance make sure you have all your licenses and are in full compliance with all regulations. Insurance carrier’s requirements from the state. Additionally, consider different coverage options.” He continues. “At a minimum, a business needs general liability insurance. Insurance companies can also consider covering business property including inventory, betterments, and improvements to a rented space, among others. When shopping for insurance make sure your agent reviews different coverage options.”
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 Matt Hawkins, Founder and Managing Partner of Entourage Effect Capital (EEC) to learn more about EEC and to get his perspective on recent market trends.
Aaron Green: In a nutshell, what is your investment/lending philosophy?
Matt Hawkins, Founder & Managing Partner at Entourage Effect Capital
Matt Hawkins: Entourage Effect Capital’s long history and experienced leadership allow us to access and construct high potential later-stage growth investments with sought-after industry leaders. We want to get ahead of what is happening on the regulatory and federal level to build scale with our investments.
Green: What types of companies are you primarily financing? What qualities do you look for in a cannabis industry operator or operating group?
Hawkins: Essentially, we are focused on investing in companies that will benefit the most when legalization occurs. We are currently working on multiple such deals, and separately, we are excited by how our newly minted, early-stage focused Arcview Ventures Seed Fund will provide a pipeline to the next generation of leading growth opportunities. When evaluating opportunities, we always look for the potential for scale and a strong management team.
Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business?
Hawkins: As an industry, we all want companies to be valued for what they are worth, and right now, there are a lot of companies where that’s not the case due to the downturn in valuation. For us, it works the other way, because we are now able to invest at lower valuations with the hope of more upside when valuations reset.
Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?
Hawkins: Debt is at its highest in industry. Operators don’t want to take equity capital at this point because valuations have come way down. However, we are lucky to have been in this business for a long time so that we can create our own deals. Our reputation precedes us — as a result, combined with the strength of our portfolio, people want us in their capital stack.
Green: How does the lack of institutional investor participation in the cannabis industry affect your business?
Hawkins: The lack of institutional capital in the industry makes it difficult for a large chunk of companies to grow and scale. For the industry to grow, there needs to be a different type of investor, investors who are not scared to go through the peaks and valleys we go through as an industry, whereas retail investors take their losses and move on. Everybody’s competing for the same small pool of money; managing cash is the most important factor for operators, whether private or public, big or small.
Green: What would you like to see in either state or federal legalization?
Hawkins: The illicit market still has a strong presence, and until we get regulatory reform, it’s going to continue. Reducing the tax burden on legalized markets would bring more revenue to both operators and the government because they’d reduce the market share of the illicit market, with the price offset trickling down to the retail customer.
Passing the SAFE Banking Act would create consequential changes for the cannabis industry. There is also a small chance that the New York Stock Exchange and the Nasdaq could start listing legal plant-touching businesses. If that happens, more institutional capital would enter the market and flush the industry with cash, with market caps going way up. There is a lot of unease and uncertainty with retail investors that prop up the stocks in the space, and it will continue until there is regulatory movement, even on the private side.
Green: What trends are you following closely as we head towards the end of 2022?
Hawkins: I don’t see anything happening unless the SAFE Banking Act passes. Otherwise, things are status quo, especially with public companies. For private companies, we’re going to see a lot more consolidation, especially in California.
Mergers and acquisition activity in the cannabis space tripled from 2020 to 2021, and that pace is on track to continue in 2022. With big players entering the global cannabis market, we’re fielding more questions about mergers and acquisitions of cannabis businesses.
In this guide, we look at the evolution of the U.S. cannabis industry and some best practices and considerations for M&A deals in this environment.
The New Reality of Cannabis M&A Activity
The industry has evolved since adult use cannabis was first legalized in some U.S. states in 2012. More cannabis companies have a professional infrastructure—legal, financial and operational—with executive teams and board members ensuring the organization establishes proper governance procedures. Investors and private equity firms are showing more interest, and some cannabis companies have celebrated their first IPOs on the Canadian Securities Exchange (CSE).
At the same time, we are seeing a kind of “market grab” by multistate operators (MSOs) looking to acquire various licenses and expand their market share. MSOs tend to understand the current state of the market. For example, in California and some other states, there is a surplus of cannabis on the market for various reasons, partially due to so-called “burner distribution”—rogue distributors using licenses to buy vast amounts of legally grown cannabis at wholesale prices and selling the product on the black market, thereby undercutting retailers and other legal cannabis businesses. Another reason for the surplus is simply the entrance of many legal cultivators into the market over the past year.
Due to these trends, MSOs are interested in acquiring the outlets to be able to sell the surplus cannabis within California and other new markets.
Transferring Cannabis License Rights
One of the biggest challenges to M&A activity in the cannabis sector is the difficulty of transferring or selling a cannabis license.
Different types of cannabis licenses in California
Cannabis licenses are not expressly transferable or assignable under California law and many other states. However, the parties involved aren’t without options. For example, a business that is sold to a new owner may be able to retain its existing cannabis license while the new owner’s license application is pending, as long as at least one existing owner is staying on board. At the state license level, a change of up to 20% financial interest does not constitute a change in ownership, although the Bureau of Cannabis Control (BCC) must be notified and approve the change.
This process can take a while—often a year or more—since licensing involves overcoming hurdles at the local level as well as the state level with the BCC. It’s crucial to talk with legal counsel about the particulars of the license and location early in the process to best structure the terms of the agreement while complying with state and local requirements.
Seeking a Tax-Free Reorganization in the Cannabis Space
In many cannabis mergers and acquisitions, the goal is to accomplish a tax-free reorganization, where the parties involved acquire or dispose of the assets of a business without generating the income tax consequences that would result from a straight sale or purchase of those assets.
IRC Section 368(a) defines various types of tax-free reorganizations, including:
In a stock-for-stock reorganization, all of the target company’s stock is traded for a portion of the stock of the acquiring parent corporation, and target company shareholders become minority shareholders of the acquiring company.
Often, it’s tough to meet the requirements to qualify for this type of tax-free reorganization because at least 80% of the target stock must be paid for in voting stock of the acquirer.
Additionally, companies may be saddled with too much debt. If the acquirer assumes that debt, it may be classified as consideration paid to the seller and therefore disqualify the transaction as a tax-free reorganization.
In other M&A deals, the acquiring corporation may be unwilling to assume the debt of the target corporation—perhaps because showing these items on its balance sheet would impact its debt-to-equity and other financial ratios.
Rather than acquiring the target company’s stock, the acquirer may purchase its assets. In a stock-for assets exchange, the buyer must purchase “substantially all” of the target’s assets in exchange for voting stock of the acquiring corporation.
A stock-for-assets format offers the buyer the benefit of not having to assume the unknown or contingent liabilities of the target. However, it’s only feasible if the acquirer purchases at least 80% of the fair market value of the target’s assets AND all or virtually all of the deal consideration will be stock of the acquirer.
Tax Consequences Arising from Sale of Assets
If the sale price doesn’t consist primarily of the buyer’s stock, the transaction may be a standard asset sale. This leads to very different tax results.
If the seller is a C corporation, it will typically face double taxation—paying tax once on the sale of assets within the corporation and again when those profits are distributed to shareholders. If the target company has net operating losses (NOLs), it can use those NOLs to offset the tax hit.
If the seller is an S corporation, it won’t have to pay corporate tax on the transaction at the federal level. Instead, shareholders will pay tax on the gain on their individual returns.
For the buyer, the benefit of an asset sale is that the assets acquired get a “step-up basis” to their purchase price. This is beneficial from a tax perspective, as the buyer can depreciate the assets and may be able to claim accelerated or bonus depreciation to help offset acquisition costs.
The subsidiary merges into the target company before liquidating,
The target company then becomes a subsidiary of the acquirer, and
The target company’s shareholders receive cash.
Structuring the deal this way may work to overcome the hurdle of transferring the license but may not qualify as a tax-free reorganization.
Bottom Line
The circumstances and motivations for mergers and acquisitions in the cannabis industry are diverse. As a result, there is no one-size-fits-all approach to structuring the transaction. In any event, it’s crucial to start the process early and seek advice from legal counsel and tax advisors to minimize the tax burden and ensure that both parties to the transaction get the best deal possible. If you need assistance, contact your 420CPA strategic financial advisor.
Ancillary services are a hot topic in the cannabis industry, as they are in many niche industries turning to B2B marketplaces to connect with specialized expertise and products.
Platforms such as Amazon Business, Flexport, SupplyHog and others have emerged to connect mainstream business sectors with the vendors and services they need, but things look a lot different in the cannabis space. The many disparate aspects of launching, running and scaling a cannabis business—and vetting dozens of service providers clamoring for your business—can feel like playing whack-a-mole blindfolded.
While a business consultancy can do some of the heavy lifting, there are reasons why this traditional “one-size-fits-all” approach is problematic. However, the rise of legalization is creating new avenues for founders in both established and emerging markets to take charge of their destiny and secure the services that truly meet their needs.
Understanding what’s available can help founders avoid pitfalls, from inadequate insurance coverage and predatory lenders to inexperienced service providers seeking to cash in on the “green gold rush.”
The Importance of Regulatory Knowledge
One reason B2B services look so different in the cannabis industry is because the industry itself is still rapidly evolving, as new state markets for medical cannabis and recreational adult use come online and states constantly amend their regulations. There’s also the sprawling scope of compliance requirements facing a cannabis operator, from securing tightly zoned real estate to building a facility with adequate security, to integrating into the state’s seed-to-sale tracking system.
A plant tagged with a barcode and date for tracking
It’s critical to engage with experts who are knowledgeable on the regulatory variances of the state (or states) where the business will operate. Someone who has experience interpreting cannabis regulations will know, for example, if you should have a real estate lease locked in prior to applying or if a particular state would prefer you move through the pre-opening process in a different order.
Another reason ancillary services are so important is that cannabis regulations aren’t standardized on the federal level or even state to state, which requires an especially deep, granular level of understanding of market trends and compliance demands. That can make the difference not only between a successful business launch and a swift nose dive, but also between a business surviving a major disaster or setback and becoming past tense.
Insurance and Lending Issues
Every business owner knows they need insurance, for example, but not every insurance broker knows what specific coverages to lock in to ensure a payout if a dispensary is vandalized or if a wildfire burns a grow operation to the ground. While federal legislation like the Clarifying Law Around Insurance of Marijuana (CLAIM) Act could one day make it easier for national insurance companies to serve legal cannabis businesses, currently criminal conduct exclusions can be used to keep plant-touching business owners from getting their full payout.
Fires in Sonoma County devastated cannabis crops in Northern California back in 2017.
Not only does federal prohibition make it challenging for a cannabis business operator to find proper insurance coverage, access financial networks and establish employee benefits programs to keep industry jobs competitive, even seeking investment capital can leave cannabis companies exposed to unfavorable terms. Just look at the case of iAnthus, a multistate operator that claims to have been burned in a deal with Gotham Green Partners while looking for expansion funding.
So how can cannabis leadership locate and vet professional services, particularly in the critical startup stage when it feels like everything has to happen right away? That’s where the B2B marketplace trend comes in.
The Advent of Vendor-Agnostic B2B Marketplaces for Cannabis
While platforms such as Amazon Business have offerings for a variety of mainstream industries, they’re not tailored for cannabis. But there is a growing field of vendor-agnostic specialists helping cannabis founders make the right moves.
Vendor-agnostic consultancies are nimble and adaptable in a way that broad-scale platforms are not
Necessity absolutely produced this particular innovation, which upends the traditional single-funnel consultancy model to instead create a village that can raise a variety of cannabis businesses. Vendor-agnostic consultancies are nimble and adaptable in a way that broad-scale platforms are not. And rather than being tied to a particular suite of products and service providers the way traditional business consultancies often are, the vendor-agnostic approach gives both consultants and cannabis founders much-needed flexibility.
In a cannabis B2B marketplace, a pool of inventory-tracking software vendors, for example, can be sorted to allow for easy comparison shopping based on whether the operator is a single-state startup looking for basic integration with the state compliance system, or an MSO that needs a more robust platform. And the customization extends from there—vertically integrated businesses versus standalone wholesale producers, plant-touching businesses versus other professional service providers and beyond.
As more and more industries specialize, it’s no wonder ancillary services are having a renaissance and replacing the traditional one-size-fits-all model popularized decades ago. But it’s also no wonder that the cannabis industry needs an especially unique approach to professional support for niche fields. The more this industry expands, the more founders and their B2B partners need to roll with their own solutions.
Doing business in California’s legal cannabis industry remains a risky endeavor. The majority of the industry is still unlicensed, tax rates at the state and local levels are high (notwithstanding a recent reprieve from California’s cultivation tax) and there are not enough licenses to meet geographic demand throughout the state. Outside financing remains difficult to secure for equipment, tenant improvements, account receivables and working capital because, under the federal Controlled Substances Act (CSA), cannabis remains a Schedule I narcotic. Therefore, entrepreneurs, investors and lenders who have stakes in state-sanctioned cannabis enterprises expect to see returns that justify the higher level of risk, which places additional financial pressure on cannabis businesses. In addition to the industry specific challenges, the United States economy is on the verge of a recession that may further hamper the industry notwithstanding the industry’s resiliency during the pandemic when it was deemed to be an “essential” industry that benefited from consumer spending of stimulus monies.
These outside pressures increasingly lead to ownership disputes and creditor defaults that result in litigation and the need for restructuring. In some instances, business partners cannot agree about control and finances of the licensed businesses and in other instances unpaid creditors file suit to enforce their interest in a company’s assets. And sometimes a local municipality discovers wrongdoing by an operator and initiates a health and safety lawsuit to cease the illegal condition.
Bankruptcy reorganization is an option typically utilized by struggling businesses to shed or restructure debt. Cannabis businesses, however, cannot take advantage of bankruptcy remedies because bankruptcy is a product of federal law and federal law still prohibits the sale of cannabis.
As a result, stakeholders in legal California cannabis enterprises must consider alternatives to bankruptcy to collect what they can on their loans and investments in the event the enterprise becomes insolvent or requires restructuring. A well-established alternative to bankruptcy is a state court remedy – the appointment of a receiver over the assets of a business or over the entire business operations. Through the receivership process, stakeholders may obtain many of the same protections available to them through bankruptcy
A. Federal Illegality Bars Access to Bankruptcy Protection
Over the past ten years, bankruptcy courts have routinely prohibited licensed cannabis businesses from seeking bankruptcy protection because cannabis remains illegal at the federal level under the Controlled Substances Act (CSA). Bankruptcy trustees are typically charged with managing and operating property in the same manner that the owner would be bound to do if in possession thereof. Because cannabis remains illegal at the federal level, trustees are not able to manage and operate licensed cannabis businesses.
B. Receivership as an Alternative to Bankruptcy
Under California law, a receiver is a neutral agent of the court appointed to preserve, control, manage and ultimately dispose of property that is subject to the litigation before the court.1 The receiver, therefore, holds property for the court, not the parties to the litigation.
Appointment of a receiver is a statutory provisional remedy. Other than corporate dissolutions under Code of Civil Procedure section 565, the law does not have a specific cause of action to appoint a receiver. Thus, the proponent of a receiver must have a valid cause of action in an underlying lawsuit.
1. The Appointment of a Receiver
The appointment of a receiver rests within the trial court’s discretion. Code of Civil Procedure section 564 contains the broadest statutory authority to appoint a receiver. Subdivision (b), details twelve possible situations in which a receiver may be appointed, most of which are beyond the scope of this article. The most common of these is a lender’s request to appoint a receiver when a borrower defaults on a loan and the lender seeks the appointment of a receiver over its collateral. The statute, however, clarifies that the situations listed in the statute are not exclusive: a court may appoint a receiver “[i]n all other cases where necessary to preserve the property or rights of any party.”
The receiver’s powers are limited by the statute under which the court appointed the receiver and those conferred by the court. The appointment order should, therefore, detail the duties the receiver owes to the court, and actions that the court authorizes the receiver to take to perform those tasks. The order should also specify the property that will be part of the receivership estate.
2. The Receiver’s Powers
The receiver has general statutory powers.2 The statutory powers include (i) commencing or defending litigation; (ii) taking and possessing property of the receivership estate, (iii) receiving rent, collecting debts, and making transfers, and (iv) acting in accordance with the court’s instruction with respect to the property.3 But the court’s authorization is necessary to sue the receiver and for the receiver to commence litigation.4 In the foregoing scenarios, the receiver is immunized personally from tort liability, but not in his or her official capacity as receiver.5
In addition to taking possession of property, the receiver may dispose of receivership property with the court’s approval.6 If the receiver is an equity receiver, the receiver may take possession and satisfy creditors from all the debtor’s assets.7
The court may further authorize the receiver to issue “certificates of indebtedness” to raise money to administer the receivership estate.8 This device permits the receiver to provide liquidity to the estate and gives the certificate holder an interest-bearing priority claim against the receivership estate.
3. Liquidating Cannabis Assets Through a Court Appointed Receiver
After the court appoints the receiver, the receiver should have sufficient powers to, among other things: (i) take over the management of the company; (ii) open bank accounts; (iii) borrow money by issuing receivership certificates; (iv) manage all of the company’s property; (v) hire counsel and other professionals; and (vi) sell the receivership estate’s assets for the benefit of the creditors. To maximize repayment to the creditors, the receiver may hold an auction to sell the assets and assist in facilitating the cancellation of company’s state license while the buyer of the assets secures its state license after the local license is transferred.
State cannabis licenses may not be sold or transferred.9 Yet, to maximize recovery for the creditors, the receiver may need to participate in the regulatory process to maintain a license during the pendency of the receivership and to assist in the amendment of a license while a prospective buyer seeks to obtain its own license. To do so, the receiver will first need to qualify as a licensee under state law to join as a licensee on the license and further the licensee as a going concern. Next, the principals of the prospective buyer will themselves need to qualify as licensees under the license. Then, once the sale of the company’s assets (including any interest in the license) to the buyer closes, the receiver and the company’s original owners will terminate their capacities as licensees of the license, leaving only the new owners as licensees. Thus, the proposed order should be written with attention to ensure the receiver has powers to further the foregoing and not diminish the value of the receivership estate.
After the conclusion of the sale of all assets, the receiver will need to obtain a discharge from the court of his or her duties as receiver. The receiver may do so by the parties’ stipulation or by motion. Together with the request for a discharge, the receiver should seek approval to pay: (i) any lenders to the receivership estate; (ii) professionals that the receiver hired; and (iii) him or herself for his or her services. Upon the court’s approval, the receivership will be terminated.
The conflict between federal and California law regarding cannabis continues to be an impediment for stakeholders in California’s cannabis market. Because of this conflict, stakeholders in California’s legal cannabis market lack access to vital traditional institutions, such as bankruptcy remedies. As a result, stakeholders must be prepared to consider alternatives such as a court appointed receiver, which can be a useful alternative to both secured creditors and unsecured creditors. Stakeholders who pursue a court appointed receiver will benefit from a long-established body of law and experienced professionals.
Despite the US making cannabis regulations challenging to navigate, the industry is snowballing toward profitability. New Jersey legalized adult use cannabis on April 21 this year. One month earlier, The Garden State began accepting applications for Class 5: Retailers, Dispensing and Delivery.
Although New Jersey isn’t shy about its licensing requirements and standards, many people want to know how retailers can stay in the game for the long run. So, let’s talk about risk management considerations New Jersey retailers need to know.
Top Risks Cannabis Retailers Face in New Jersey
Regardless of what kind of retailer you operate —medical or adult use — it’s critical to know what you’re up against. The following are the most common risks we’ve watched cannabis retailers face daily in New Jersey, making a customized risk management strategy necessary.
Theft
Like other retailers, New Jersey cannabis retailers are vulnerable to theft. Unfortunately, theft can come from various angles, such as in-store, in-transit and insider crime. Besides cannabis retailers typically having a well-stocked inventory, it’s not uncommon for them to have more cash on hand than most other businesses.
Although the SAFE Banking Act could positively impact the cannabis industry, it’s in a notorious stall yet again. Briefly, the SAFE Banking Act would no longer allow financial institutions, such as banks and credit card companies, to refuse to do business with cannabis companies. However, cannabis retailers must operate in a cash-only environment, for now, forcing them to make bank runs multiple times a day. We probably don’t have to explain how enticing a significant inventory and fat bank bags look to criminals.
Cybersecurity
Since the onset of the global health crisis, the cyber liability landscape has nearly spun into a death spiral. In other words, cybercriminals sat on the edge of their seats during the pandemic, waiting to pounce on anything that looked slightly vulnerable. Remote workers, small businesses, and emerging industries were hard-hit.
It’s no surprise that New Jersey cannabis retailers face many cybersecurity risks through their point of sale (POS) systems. Additionally, retailers often gather and store personal information, such as email addresses, credit card numbers, shipping addresses, etc. Hackers and cybercriminals gravitate to this vital data rapidly.
Property Damage
In addition to the risk of theft, as mentioned above, cannabis retailers must protect their property from losses. Without adequate protection, damage to equipment or buildings could add up to high out-of-pocket costs. Consider the damage a weekend office fire or late-night vandalism would cause. If property damage occurs, retailers must figure out how to sustain business operations while recovering from the loss simultaneously. As a result, New Jersey retailers must protect their property and maintain business continuity.
How to Customize a Risk Management Strategy
Watch or listen to any news reports and there’s a decent chance that you’ll feel some slight sense of doom and gloom. And sure, a lot is going wrong in our world; however, that doesn’t need to impact how you perceive your businesses. Instead of casting a massive net over every possible risk that you can imagine, we recommend trying the following 5-step approach. Here’s the gist:
Identify: Pinpoint high-level risks that are specific to the cannabis industry. Then, let the process trickle down to focus on company-specific exposures.
Analyze: Determine how badly a particular risk could harm your retail company. How much will this hurt should the “what-ifs” play out?
Evaluate: Categorize risks according to how risk tolerant your company is. Will you avoid, transfer, mitigate or accept the risk?
Track: Use your history or the stats from a similar retailer to map out how you’ve handled the risk over time. Older retailers have an advantage over younger retailers, of course, but you can still get a feel for your risk management style.
Treat: Make good on your evaluation promises by avoiding, transferring, mitigating, or accepting the various risks you identified.
Recommended Insurance for New Jersey Retailers
Sales totals in the first month of New Jersey’s adult use market
The New Jersey Cannabis Regulatory Commission issued detailed requirements for new cannabis businesses. That said, part of the application requirements considered is the plan for companies to obtain liability insurance. Many new retailers opted for a “letter of commitment” as opposed to a certificate of insurance (COI), stating their plans for obtaining the following coverages:
Commercial general liability: Protects cannabis companies against basic business risks.
Product liability: Protects against claims alleging your product or service caused injury or damage.
Property: Reimburses cannabis companies for direct property losses.
Workers’ compensation: Covers employees if they are injured on the job and can no longer work.
In addition to the required insurance coverages, we recommend New Jersey retailers customize their risk management package with these policies:
Crime: Protects your cannabis company against specific money theft crimes.
Cyber: Protects your cannabis company against damages from specific electronic activities.
Directors & officers: Protects corporate directors’ and officers’ personal assets if they are sued.
Employment practices liability: Protects cannabis companies against employment-related lawsuits.
Professional liability: Protects cannabis companies against lawsuits of inferior work or service.
With more states in the US entering the marketplace soon, New Jersey is doing its fair share of the heavy lifting by spearheading the onboarding process. Remember, doing your due diligence at the start pays off in the long run — New Jersey retailers are proving that. Consider teaming with a commercial insurance broker calibrated to the cannabis industry, so you get the most out of your broker, marketplace and the cannabis industry as a whole.
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