June 20, 2019 - On Wednesday, the LSTA hosted a webinar, “Cannabis: Banking  & Investing” presented by Matthew Kittay of Fox Rothschild.  With the majority of states permitting cannabis use for medical reasons and nearly a dozen others having legalised such use entirely (only three states continue to maintain a zero tolerance for such use), attention is now focused on when and how cannabis use will become legal on the federal level.  When considering legalization on that level, many different areas of federal legislation are in question: the tax code, banking legislation, the bankruptcy code, and CSA are all implicated.  It is likely that the different areas of federal law will be identified and then will be handled on a case by case basis.  Until that time, you cannot move cannabis from one state to another state even if it is legal in two states that share a border because you are crossing a state line, and parties may be prosecuted in those situations.  When looking to invest or lend to companies involved in the cannabis industry, there are several obstacles.  For example, the cannabis industry is in its early stage of development and thus lacks valuation data.  In addition, because of limited historical financials for new companies, it may be difficult to calculate how much to loan such new companies.  Consequently, the due diligence process is more robust in this area with regulatory compliance being central to the process. Furthermore, problems may arise with taking security over a company’s assets and then possibly needing to foreclose on those assets.   Because the manufacture and sale of cannabis is unlawful on a federal level under the CSA, companies engaged in state regulated and administered medical and/or adult use cannabis programs cannot avail themselves of the protection otherwise afforded by the bankruptcy code.  Even though the federal bankruptcy laws are not available to businesses in the state-regulated cannabis space, there may be state recourse to enforce the terms of the loan, including the sale of assets to satisfy the obligations.  Many lenders have overcome these obstacles, and there are numerous performing loans outstanding to cannabis companies but often they have steep rigid repayment schedules.  Thus far the industry is performing incredibly well.  Click here for the presentation and replay.

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