Cannabis businesses need money – and lots of it – to operate. Being mainly startups, operational profits are not enough to sustain their business. Thus, cannabis companies typically acquire outside capital in one of two ways: taking on debt with cannabis lenders or bringing in equity investors. Due to industry volatility and falling flower prices, many people who would otherwise have purchased a cannabis business may want to limit the risk of owning a potentially struggling business and lend money to the place. But these potential lenders should be aware that California imposes licensing requirements on many types of commercial lenders, including cannabis lenders.
California law requires financial lenders to obtain financial lenders licenses (which I define below). This is a general legal requirement that does not only apply to cannabis lenders. Licenses are issued by the California Department of Financial Protection and Innovation (DFPI). The DFPI licensing process is complicated and requires a background check. In other words, it’s not a simple process. And violate these laws can lead to fines or even imprisonment.
A “financial lender” is defined include any person who carries out a consumer credit or commercial credit activity. The activity of making consumer or business loans may include lending money and taking, in the name of the lender or any other name, in whole or in part, as security for a loan, any contract or obligation resulting in the forfeiture of rights in or to personal property, the use and possession of which is retained by a person other than the mortgagee or the lender, or any lien, assignment or power of attorney relating to wages, salaries, earnings, income or commissions”. A business loan is in turn defined as “a loan in the principal amount of five thousand dollars ($5,000) or more, or any loan under an indefinite credit program, whether secured by real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for purposes other than personal, family or household. Consumer loans are generally defined in the form of loans for household or personal purposes.
For the purposes of this article, we focus only on commercial loans granted to cannabis businesses. Cannabis lenders making these loans will generally be required to obtain licenses in the absence of an exemption.
California’s financial code, however, provides for a number of exceptions. The listing is too long to be copied in full here, but some key elements are:
- A person who makes only one business loan in a 12 month period;
- A person who has made five or fewer business loans in a 12 month period if the loans are incidental to the business of the person claiming the exemption; Where
- Any loan made or arranged by a person licensed as a state real estate broker and secured by a lien on real property, or to any licensed real estate broker when making such a loan. A licensed real estate broker may grant a loan secured by a lien on an immovable intended for sale to a financial lender or cause a loan secured by a lien on an immovable to be granted to a financial lender without obtaining a license under this section;
- Certain bridge loans or venture capital investments.
Again, this list is not exhaustive and some of them have been paraphrased, but these may be relevant to many cannabis lenders.
The key to remember is that there is may be license exemptions for certain cannabis lenders, but they will need to ensure that the exception as drafted actually applies to them. It may not be such an easy task. For some examples, does a single line of credit count as a single loan even though there may be multiple drawdowns within a one-year period? What exactly does “business incidental” mean for a specific business that can make between one and five loans over a one-year period?
These are very difficult legal questions that are often very fact specific and have no single answer. A smart cannabis lender would be wise to consult with a California financial attorney to ensure compliance before committing to a loan.