California Cannabis SeminarPlease join us this Thursday, September 28th for the California Cannabis Investment Forum in Downtown San Francisco!

Our San Francisco office is hosting this event with fiscal sponsorship from Templar Capital Management and GBDS and associate sponsorship from the NCIA. This Forum will bring together top investors and leading companies in California’s cannabis industry and provide you with the information you need for investing in California’s cannabis space.

Hilary Bricken, who heads up our Los Angeles office. will begin the event with a short talk on the many recent changes to California’s medical and adult use cannabis laws. Carlton Willey, who heads up our firm’s finance group out of San Francisco, will then moderate a panel comprised of early and late stage investors and debt and equity financers with experience in California’s cannabis industry. The following panelists will discuss cannabis industry investing, deal structures, cannabis business concerns in the context of investing, investor red flags in the cannabis industry, and various other matters of increasing importance in the California cannabis investment world:

Allen Gold, Principal at Templar Capital Management

Alejandro Di Tolla, CEO of GBDS

Sherri Haskell, CEO of CannaAngels

Tom DiGiovanni, CFO of Canndescent

Emily Paxhia, Managing Director of Poseidon Asset Management

The California Cannabis Investment Forum will be at Covo Event Space in Downtown San Francisco. Doors will open at 5:45 pm and Hilary’s keynote will begin at 6:15. Hors-d’oeuvres and drinks will be served and a cocktail networking session will take place following the panel discussion.

We look forward to seeing you there, but do NOT delay in buying your tickets. We must cap attendance at 250 and we are very rapidly nearing that number already.

California cannabis edible rules
Too cute for California cannabis edibles?

We’ve written before about California’s extremely onerous proposed advertising restrictions, but last week, California’s legislature gave its final approval to another restrictive piece of legislation, Assembly Bill 350, that would ban edibles that appeal to children.

These types of legislation are nothing new. In Washington State, for example, cannabis processors must obtain approval from the Washington State Liquor and Cannabis Board (LCB) for all marijuana-infused products, labeling, and packaging before offering these items for sale to licensed retailers. And specifically, the LCB rules prohibit any marijuana product from being “designed to be especially appealing to children.”

Every state that has legalized cannabis in some capacity has adopted rules aiming to keep cannabis out of the hands of children – a priority that states must consider regulating in accordance with the 2013 Cole Memo. But the question of how to accomplish this – how onerous edibles regulations must be – has been highly controversial. Maureen Dowd’s infamous New York Times piece recounting her traumatizing “overdose” on marijuana-infused chocolate was one of many that helped fuel the fire of fear surrounding cannabis edibles.

But in California, at least until now, cannabis edibles have been completely unregulated. Infused products that look exactly like the candies we all know so well – gummy bears, lollipops, etc. – have been a staple in California dispensaries, and form the basis of many businesses. But it was only a matter of time before the state cracked down on these types of products, which can arguably be easily confused with the candy our children love.

The purpose of AB 350 is to flesh out the requirements for edible cannabis products produced by Level 1 (nonvolatile) and Level 2 (volatile) manufacturers pursuant to the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA). The legislation provides that edible cannabis products shall be:

  1. Not designed to be appealing to children or easily confused with commercially sold candy or foods that do not contain cannabis. Cannabis products shall not be made in the shape of a person, animal, insect or fruit;
  2. Produced and sold with a standardized concentration of cannabinoids not to exceed ten (10) milligrams of THC per serving;
  3. Delineated or scored into standardized serving sizes if the cannabis product contains more than one serving and is an edible product in solid form;
  4. Homogenized to ensure uniform disbursement of cannabinoids throughout the product;
  5. Manufactured and sold under sanitation standards established by the State Department of Public Health, in consultation with the Bureau, that are similar to the standards for preparation, storage, handling, and sale of food products;
  6. Provided to customers with sufficient information to enable the informed consumption of the product, including the potential effects of the cannabis product and directions as to how to consume the cannabis product; and
  7. Marked with a universal symbol, as determined by the State Department of Public Health through regulation.

Although AB 350 will throw a wrench in the business plans of many currently operating cannabis manufacturers, we aren’t surprised in the least to see California adopting these types of restrictions aimed at keeping cannabis out of the hands of children. We’ll be keeping a close eye on whether Gov. Brown signs this bill, how broadly the state interprets these provisions, and what products ultimately will and will not be allowed.

Los Angeles cannabis regulations
Los Angeles just came out with new cannabis regulations

California has lately been on its game with progressive changes to is cannabis laws. Last week, AB 133 passed, making needed technical fixes to the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94). And then last Thursday, California’s Bureau of Cannabis Control publicly revealed details behind its temporary licensing program (see here for the Bureau’s brochure on that process). And now the City of Los Angeles just released its 42-page revised draft regulations under Proposition M and they contain some interesting, comprehensive, and important changes from the original draft (if anyone forgets what Prop. M is, go here).

Here are some of the highlights from the revised ordinance if you’re looking to have a cannabis business in Los Angeles:

  1. Remember the controversial certificates of approval? Those have been eliminated in favor of a straight licensing program that includes provisional and permanent City licenses. This new licensing program will give applicants greater and better-protected rights to operate within the City’s borders. Upon initial approval, you will receive a provisional license and once you get your state license to operate, the City will issue you a permanent City of Los Angeles license.
  2. Under the original Prop. M draft regulations, certificates of approval were set to issue in four waves in this particular order: Prop. D-compliant existing medical marijuana dispensaries (EMMDs), non-retail registrants (i.e., growers and manufacturers), the social equity program, and then the general public. Formerly, non-retail registrants were only eligible for a certificate of approval in that second wave if they could show they were operating in the City before January 1, 2016. That’s all changed as there is no longer any non-retail registry priority.
  3. The City of Los Angeles Department of Cannabis Regulation will still give first priority in processing EMMD applications that “demonstrate to the Department the EMMD has operated in compliance with the provisions of the limited immunity and tax provisions of Proposition D.” Note that in the previous draft rules, the City required “substantial compliance” with Prop. D. Once applications become available, these EMMD applicants will have only 60 days to get their applications in and, after that, that application window closes indefinitely. And, just like in the original rules for EMMDs, “any mitigating circumstances due to gaps in operations, location change or involuntary closure, ownership, tax payments, etc. must be described in detail for the Department to consider eligibility.”
  4. EMMDs will only be allowed to apply for Retailer Commercial Cannabis Activity (including delivery), which may include on-site cultivation as allowable under Prop. D. On-site cultivation in this scenario may not exceed the size of the EMMD’s existing canopy or square footage of building space as documented by a lease or Certificate of Occupancy prior to January 1, 2017. A maximum of three Licenses per EMMD with a valid Business Tax Registration Certificate will be allowed–the example the City gives is: One Type 10 (retailer), One Type 10 (retailer with delivery) AND one Type 2A OR Type 3A (on-site cultivation if applicable).
  5. One of the biggest boons for EMMDs (and for any cannabis applicant in the city of L.A.) is that “changes in ownership status from non-profit status to for-profit status are allowable.” Now is the time for all LA operators to get away from their precarious non-profit mutual benefit corporations and other bizarre corporate setups and convert to a legal, for-profit business entity that lines up with the California Corporations Code.
  6.  The City of Los Angeles is still working on its social equity program. It is expected that will be finalized and made part of the Prop. M rules sometime in October.
  7.  The general public will be allowed to apply for licenses at the same time as the social equity program opens up. The most positive change for the general public is that they are no longer limited to the number of licenses that will issue in the social equity program. Without a doubt, the general public now has a much better chance to participate in L.A.’s cannabis scene.
  8. Here’s the deal on license caps in the City: all retailers and microbusinesses in the City will be limited to three licenses at the most. There are no license caps for cultivators so long as a given business does not have more than 1.5 acres of plant canopy within the City. Type 7 volatile manufacturing is now allowed (previously it wasn’t), and there are no set caps on manufacturing licenses within the City. There also is no licensing cap for distributors.
  9. As part of the application process, applicants must provide a site diagram to the City. The premises must be a contiguous area and may only be occupied by one business. However, multiple businesses may be located on the same property (as established by an assessor’s parcel number) if each premises has “a unique entrance and immovable physical barriers between unique premises.” Our cannabis lawyers have dealt with these sorts of restrictions in other states and they are usually not a problem and should be dealt with in your lease.
  10.  Applicants must provide a detailed description and plan for hiring “local residents, including making an ongoing good-faith effort to ensure that at least 30 percent of hours of their respective workforce be performed by residents of the City of Los Angeles, of which at least 10 percent of their respective workforce shall be performed by Transitional Workers whose primary place of residence is within a 3-mile radius of the proposed Business.”
  11. An applicant with ten or more full-time equivalent employees must enter into a labor peace agreement.
  12. On the M & A front, neither the City licenses nor the businesses are transferable once a provisional or permanent license issues, but you can still apply to the City to change the business structure, which does allow for you to sell the business so long as the City of Los Angeles approves the sale. See here for more on buying cannabis businesses in Los Angeles.
  13. No licensed retailer of alcoholic beverages or tobacco products can apply for a City of Los Angeles cannabis license.
  14. Foreign companies from outside the U.S. are not allowed in the City, but the City specifically states that this prohibition “does not preclude out-of-state investment in a Business proposing to conduct Commercial Cannabis Activity.” If you are thinking about investing in a California cannabis businesses, you should be sure to join us at our September 28th California Cannabis Investment Forum in San Francisco. But do NOT wait because we must limit the number attendees to 250 and we are getting dangerously close to that already.
  15. The City is still discussing what to do about zoning for cannabis businesses and changes to that proposed ordinance are sure to affect your ability to secure an eligible property.

All in all, Los Angeles is finally starting to embrace comprehensive cannabis control and oversight with a regulatory system that should catapult it into its rightful place as a cannabis powerhouse with serious operators.

Cannabis lawUtah Republican Senator Orrin Hatch proves again that seeing value in cannabis regulation is not a partisan issue. As he points out, the federal government’s lack of support for states’ rights and cannabis regulation hangs the states out to dry and leaves cannabis users without proper information on safety, dosing, and quality. Instead, the federal government continues to carry out practices that are out of date and, as Hatch says, do more harm than good.

It’s time for the federal government to step out of the way and let the states lead.

California Cannabis LawyersYesterday, at the California Cannabis Business Conference in Anaheim (attended by our Southern California cannabis attorneys), the California Bureau of Cannabis Control (the “Bureau”) released information regarding temporary license applications under the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA”), which we now know will start to issue on January 1, 2018–see the Bureau’s brochure on temporary licensing details here, and note that the other agencies have not yet released any information on temporary licenses for manufacturers and/or cultivators.

The Bureau will likely begin accepting applications prior to that date, but no temporary license application will be effective before January 1, 2018. Additionally, the Bureau expects that the next round of draft (temporary) rules pursuant to MAUCRSA will issue sometime in mid to late November, coinciding with the release of the temporary license application.

A temporary license is a conditional license that will allow a business to engage in commercial cannabis activity for a period of up to 120 days (i.e., 4 months). Within that 120 day period, the business with a temporary license must apply for their full state license. If the operator is unable to finalize their state license within that period (through no fault of their own), the state will grant extensions to the temporary licensee until the full license is issued.

The requirements for obtaining a temporary license to engage in commercial cannabis activity are as follows:

  1. Local jurisdiction authorization. Applicants must provide a copy of a valid license, permit, or other authorization to operate issued by the applicable local jurisdiction that allows the applicant to conduct commercial cannabis activity at their proposed location.
  2. Name. Applicants must indicate the name of the individual(s) or business entity applying.
  3. License type requested. Applicants must specify which of the license types (Distributor, Retailer, Microbusiness, Etc.) they are applying for.
  4. License designation. Applicants must indicate whether they are applying for an adult use (A-license) or medicinal (M-license) license.
  5. Contact information. Applicants must provide a designated primary contact including first and last name, title, address, phone number(s) and email address(es).
  6. Owners. Applicants must provide the name, mailing address, and email address of each “owner” that meets the criteria of Business and Professions Code Section 26001 (i.e., you own 20% or more of the company, you’re the CEO, you’re a director on the board of a non-profit, or you exercise any direction, control, or management of the company).
  7. Physical address. Applicants must provide the physical address of the location at which they intend to operate.
  8. Authorization to use location. Applicants must provide a copy of the title or deed to the land where the proposed premises is located, or a document from the landowner, such as a lease agreement, stating that the applicant has the right to occupy the property and may use the property for commercial cannabis activity.
  9. Premises diagram. Applicants must provide a diagram of the business’s layout at the proposed location.

It is important to note that local approval still reigns supreme–without the necessary city or county permits and/or licenses, applicants will not be able to obtain temporary or actual state licenses.

Cannabis patentsOur previous post in this series discussed the legal sources for cannabis patent rights. This post and later posts will address some questions about what patents could mean for the cannabis industry.

Today’s question is: Do cannabis patents create monopolies?

Today’s short answer is: Yes and No, but probably less than you might think.

A patent is a government-created monopoly, giving the patent holder an exclusive right to make, use and sell the patented invention. A patentee doesn’t have to let anyone else use her patent (there is no mandatory licensing in the United States), or even use the patent herself. Once the patent expires, it belongs to the public forever. Though the law abhors a monopoly, patents are an exception. The theory is that granting inventors a few years of exclusivity encourages the creation of products beneficial to society.

A patent is not an unlimited monopoly, however. To start, a patent is only good for a limited time, usually about 20 years from the patent filing date. Since it can take three or more years to get a patent granted, that often means a patent lasts 17 years or less in the real world. Patents cannot be renewed; once the patent expires, anyone can practice it at no cost.  Compared with trademarks, which could have indefinite terms, or copyrights, some of which can last as long as a century, the patent term is short.

Also, only inventions that are new and not obvious can be patented. If something has been publicly used or on sale for at least a year, it’s probably unpatentable by anyone. The legal meaning of “obvious” is different and more complicated than the dictionary definition. For our purposes, if a claimed invention could be readily made by a skilled person who was familiar with the prior art, it is obvious. These two requirements of novelty and nonobviousness are intended to ensure that the patent system narrowly rewards creators, not merely collectors or aggregators of products to which the public already has access.

Perhaps most importantly, a patent’s coverage is often much narrower than it appears. You can consider a patent to be like a real estate deed. The deed for your house may refer to the property at “1st and Main,” but that doesn’t mean you own everything at that address. Your actual property lines are set out in the deed’s legal description, e.g., by detailed surveying designations. Similarly, the scope of a patent is limited by the claim or claims, which are found in the last part of the patent following the words “I claim” or “What is claimed.” Here is a hypothetical cannabis utility patent claim, based on an issued patent:

What is claimed is:

1) A cannabis plant that produces a flower comprising:

[a] a terpene profile where myrcene is not the dominant terpene;
{b] a terpene profile defined as terpinolene, alpha phelladrene, and myrcene;
[c] a terpene oil content greater than 1.5%; and
[d] a CDB content of less than 3%.

Properly interpreting a patent claim is a notoriously squirrely activity. Even if you understand the technical features of the claim, there is an entire body of often-conflicting law on claim interpretation. But one principle is paramount in determining the scope of a claim: the patent covers only inventions that have each characteristic, known in patent law as an “element,” set out in the claim. If a plant had elements [a], [c] and [d], but did not have terpinolene in its terpene profile as required by element [d], it would not infringe that patent.

Our next post will consider more issues about patents and their effects in the cannabis industry.

Unlike other states with recreational cannabis, Washington does not allow for home cultivation of recreational cannabis. However, that could change soon as SB 5131 requires the Washington State Liquor and Cannabis Board (LCB) to study the viability of home cultivation. The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana.  Written public comments may be submitted through October 11 at rules@lcb.wa.gov or hard copy at PO Box 43080, Olympia, WA 98504.

The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana.  Written public comments may be submitted through October 11 at rules@lcb.wa.gov or hard copy at PO Box 43080, Olympia, WA 98504.

The LCB must consider home cultivation in light of the Cole Memorandum, the Obama-era policy statement from the Department of Justice that tacitly permits states to legalize marijuana so long as those states enact strong and effective regulations. The Cole Memo outlines eight enforcement priorities:

  1. Preventing the distribution of marijuana to minors;
  2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
  3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
  4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
  5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
  6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
  7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
  8. Preventing marijuana possession or use on federal property.

The LCB has opposed home cultivation in the past. In 2015, Washington lawmakers considered a bill that would have allowed cultivation of up to six cannabis plants. In response, the LCB sent a letter outlining the Board’s concern that unregulated home grows would increase the occurrence of all eight enforcement priorities outlined in the Cole Memo.

The LCB worries that home cultivation will lead to diversion. Washington producer, processors, transporters, researchers, and retailers must all use “seed-to-sale” traceability software. As the name suggests, a cannabis plant is monitored throughout its life to prevent cannabis from being diverted to other states, to minors, or to the black market.

The LCB is seeking public input on three proposed options:

  1. Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis.  The LCB would impose requirements to ensure security, preventing youth access, and preventing diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
  2. Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the home grown program.
  3. Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.

The LCB must report its findings to Washington’s legislature by December 1, 2017. Lawmakers provided the LCB with no additional funds, meaning the Board must conduct its study without expanding its budget. There is no guarantee that anything changes but this is could be the beginning of recreational home cultivation in Washington.

cannabis asset forfeituresThe current U.S. House of Representatives has made its share of poor decisions regarding drug policy and crime policy, especially when those policies align with the political dreams of Jeff Sessions. Easy example — they continue to stand in the way of legislation that would make us all safer, including legislation that would protect banks that want to serve marijuana businesses. But every now and then, the House doesn’t stand in the way of clearly reasonable policy. Last week, during its ongoing budgeting and spending process, the House approved an amendment to its appropriations bill that would stop the Department of Justice from expanding its civil asset forfeiture program. Amendment 126 would stop Jeff Sessions from rolling back Obama-era asset forfeiture reforms that barred the DOJ from adopting local civil asset forfeiture cases.

Civil asset forfeiture generally is the law that allows law enforcement to take assets used in conjunction with certain crimes. On one hand, it makes a lot of sense. Police are not courting controversy when they charge someone with a crime and take their meth lab. Where asset forfeiture becomes pernicious is when it isn’t used as an after-the-fact penalty in a criminal case. Asset forfeiture actions do not require anyone actually be charged with a crime, and law enforcement can gain significant leverage by seizing real property, cash, and other assets in situations where it isn’t clear that a crime has been committed. The value of a forfeited asset does not automatically go into the general public treasury either — it often goes straight to the police department seizing it, creating financial incentives for law enforcement to expand the reach of asset forfeiture.

In 2015, Attorney General Eric Holder announced a new policy regarding federal asset forfeiture. In short, there are both state laws and federal laws governing civil asset forfeiture. When state laws were too restrictive, state and local law enforcement agencies relied on a federal “Equitable Sharing Program” in which local law enforcement would identify something it wanted to be seized and would then transfer the matter to the Federal DOJ who would adopt it. The DOJ would then have jurisdiction and would move forward with the seizure that local law enforcement either did not have the resources to pursue or could not pursue under its state laws. Then, the DOJ would take its 20% commission and give 80% of the seized property to local law enforcement. Even if state law mandates seized assets go to the general fund, Equitable Sharing allowed the DOJ to make the payments directly to the local departments. The 2015 Holder policy ended that unless there was a clear public safety threat supported by warrants and criminal charges.

In July, Jeff Sessions announced that the Department of Justice would roll back these reforms and reinstate Equitable Sharing, further encouraging local law enforcement to engage in asset forfeitures.

Equitable Sharing poses a real threat to cannabis businesses. In states where marijuana is not yet legal, it continues to incentivize law enforcement to stand on the side of illegality, blurring the lines between public safety advocacy and advocacy for their own pecuniary gain. Even if we only look at states where marijuana is legal, Equitable Sharing is by its nature an incentive structure to get local police departments to play a role in federal law enforcement. As we have described in the past. The DEA does not have enough human resources to directly enforce marijuana laws in any major way. But under an Equitable Sharing policy, a police department in a rural part of a state could conceivably identify a number of local marijuana businesses and use Equitable Sharing to have the federal government conduct the seizures. That may not comport with current federal enforcement policy as described in the Cole Memo, but Jeff Sessions has often shown an eagerness to read the Cole Memo narrowly.

So it was great to hear that Amendment 126 passed in the House of Representatives. It is not law yet. After the House and the Senate pass their own appropriations bills, they go to conference and negotiate a single bill. If Amendment 126 survives conference, it will go back to the House and the Senate before being put in front of President Trump to sign. Even if the President doesn’t like the amendment, he is not going to veto an appropriations bill because of it, so what comes out of conference will almost certainly end up being law. Conference presents especially high stakes this year, as the Senate version also contains a restriction on federal enforcement of medical marijuana laws that have been in place since 2014 that the House blocked. Call your members of Congress and advocate on both of these issues — they’re important.

Will the (former) Senator yield?

The Oregonian, Willamette Week, and KGW, to name a few, are reporting that US Attorney General Jeffrey Sessions is visiting Portland today to meet with federal and local law enforcement. These reports suggest Mr. Sessions is in town primarily to discuss immigration, sanctuary cities, and his unconscionable position on the Deferred Action for Childhood Arrivals program (“DACA”).

Given the recent exchange of letters between Oregon Governor Brown and the Attorney General, it seems likely Mr. Sessions has also come to Oregon to discuss and criticize Oregon’s medical and recreational cannabis programs. We’ve recently discussed how this exchange of letters demonstrates how Oregon sits uncomfortably within Mr. Sessions’ crosshairs. Governor Brown eviscerated Mr. Sessions’ reliance on a leaked, incomplete, and misleading draft of a report prepared by the Oregon State Police on cannabis in Oregon. Our money says Mr. Sessions is also here on a fact-finding mission, to see if he can drum up some better (or any?) sources for his claims that Oregon has so far failed to comply with Cole Memorandum guidelines.

Anyone in the cannabis industry here in Oregon knows Oregon treats these guidelines with the utmost respect and importance. Heck, if they didn’t, our Oregon cannabis business lawyers would not all be putting in 12 hour days! The Governor, the legislature, and Oregon’s relevant regulatory agencies, including the Oregon Liquor Control Commission and Oregon Health Authority, have been working tirelessly to improve their policies and procedures to ensure that Oregon’s recreational and medical cannabis programs protect public safety and prevent illegal activity.

Hopefully, Mr. Sessions’ visit will change his heart, but I wouldn’t count on it.

Receiver time?

Back in 2014, we wrote that bankruptcy is not an option for marijuana businesses. That issue has been litigated here and there since then, but as of today, cannabis businesses are no better off than before. The hard reality is this: all bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code. Those courts have held that it would be impossible for a U.S. Trustee to control and administer a debtor’s assets (cannabis) without violating the federal Controlled Substances Act.

Bankruptcy laws are designed to afford a fresh start to honest but unfortunate debtors, while providing equal treatment to creditors. Without recourse to bankruptcy, parties can only: (1) liquidate without court supervision, or (2) explore state court receivership. Liquidating without court supervision offers no protection to pot business creditors. State court receivership does afford protections, but adds complexity because states closely regulate who is allowed to possess and sell marijuana (through licenses). For a while, it was an open question as to whether a state court receivership would actually work in the cannabis context. Recently, one actually did.

In the case at issue, a landlord (creditor) had leased space to a licensed marijuana business tenant (debtor). The tenant failed to pay rent, and the landlord evicted the tenant and acquired a judgment for unpaid rent. Because RCW 7.60.010 et seq. provides that a Washington state court may appoint a receiver over a marijuana business, the landlord convinced the court to issue an order appointing a receiver to sell the tenant’s cannabis and satisfy the judgment. The landlord then successfully navigated the licensure issue with the Washington State Liquor and Cannabis Board, sold the pot, and collected on its judgment.

Washington is not the only pro-cannabis state with statutes and administrative rules that seek to bridge the bankruptcy gap by allowing creditors to seize and sell cannabis. In Oregon, OAR 845-025-1260 provides “Standards for Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” Our Oregon and Washington cannabis lawyers have assisted numerous clients in acquiring and perfecting security interests under the relevant rules. We expect California to adopt a similar regime.

One of the reasons creditors get such high rates of interest for loans to cannabis businesses—in addition to the fact that banks won’t lend to them—is because many pot businesses lack lienable collateral. For many of them, the net worth of the business is mostly tied up in the cannabis itself. It is now clear that, at least in Washington, the cannabis can be liquidated by a third party, whether or not the pot was initially proferred by the debtor as collateral for a loan. In that way, cannabis businesses are being treated by progressive states much like non-pot concerns.

That we finally have had one successful state court receivership probably won’t nudge circumspect lenders to reach out to the cannabis industry. However, cannabis businesses can feel encouraged that their number one asset (their cannabis) may have marketable value when looking for loans; and lenders can feel hopeful that if everything falls apart, there may be liquidation value in the cannabis crop. None of this “solves” the bankruptcy issue, but it’s a step in the right direction.