Cannabis Rescheduling: Insights from Industry Leaders
As discussions around the rescheduling of cannabis to Schedule III gain momentum, industry insiders are weighing in on the potential implications for the market. During a recent panel titled "Credit Risk and Rescheduling: The Impact on Cannabis Company Borrowing," experts revealed their thoughts on what this change might mean for access to capital and borrowing costs.
Joseph Lustberg, CEO of Upwise Capital, emphasized that while rescheduling could aid access to credit, major financial institutions may remain hesitant to step into the cannabis lending space. Lustberg noted, "Rescheduling will help… but it’s not like Bank of America is going to step into lending to cannabis as soon as rescheduling happens." These comments highlight a cautious optimism that characterizes the current industry outlook.
Understanding the Broader Financial Landscape
The panel, moderated by Stacy Litke from Green Check Verified, delved into various dimensions of cannabis funding amidst looming regulatory changes. The discussions touched on significant points, particularly the borrowing costs that have been a consistent challenge for cannabis operators.
The Slow Change in Credit Risk and Capital Access
Litke shared insights regarding the industry's hope that rescheduling would alleviate borrowing costs and make capital more accessible. According to Lustberg, while the potential is there, the reality is different. He pointed out that the same lenders who've been involved previously will likely remain the same, which may limit the anticipated benefits.
Dan Neville, CEO of Advanced Flower Capital Inc., further echoed these sentiments, describing the rescheduling as "credit positive." However, he cautioned about the high leverage levels within the industry. He specified, "There's a decent amount of leverage, and while some companies can grow into it, it's still a federally illegal business with a decent amount of leverage in the system.” This situation suggests that despite positive changes, substantial risks remain.
Navigating Collateral Issues and Regulatory Hurdles
Shifting the focus toward loan procurement, Litke inquired about how rescheduling might influence collateral standards and bankruptcy safeguards. Sahar Ayinehsazian, an attorney at Vicente LLP, highlighted the ongoing challenges posed by state regulations, which would remain despite any changes in cannabis classification.
According to Sahar, cannabis companies face unique regulatory frameworks that complicate their ability to leverage assets as collateral. She stated, "You will have certain states that have unlimited licenses and certain states that have limited licenses," indicating that these variations will continue to influence the economics of licensing agreements.
Potential for Tax Relief and IRS Negotiations
Nick Richards of Greenspon Marder LLP weighed in on how the potential rescheduling could create avenues for cannabis businesses to negotiate tax relationships with the IRS. He framed this as a pivotal opportunity for cannabis companies burdened by tax debts to explore more manageable repayment options.
However, Richards was quick to advise operators not to expect immediate relief once rescheduling takes place. He urged that companies should focus on maintaining their tax compliance in the near term while refraining from relying on changes that might not yield immediate benefits.
The Shift in Competitive Landscape
As the panel discussion continued, the potential entry of larger entities into cannabis-sensitive markets became a focal point. Litke raised the question of how industries like Big Pharma or alcohol could affect cannabis dynamics post-rescheduling. Sahar responded by asserting that while large corporations may possess extensive financial resources, seasoned cannabis operators have valuable real-world experience navigating complex regulatory systems.
Neville stressed that larger companies might see cannabis as a natural extension of their product offerings due to shifting consumer preferences. He pointed out, "Consumption trends are shifting from alcohol to cannabis," suggesting that these established players might pursue acquisitions instead of starting from scratch.
In Conclusion: Progress Amidst Obstacles
In wrapping up the conversation, the panelists unanimously recognized that while rescheduling represents a beneficial development, it won't serve as a catch-all solution for the challenges currently faced by cannabis operators.
Lustberg reiterated that cannabis businesses must demonstrate growth and sustainability to attract new lending sources. He concluded with a caution that recognizes ongoing operational challenges, stating, "Rescheduling is not going to fix your operational issues that stem from you and from your company." As the cannabis industry continues to evolve, stakeholders will need to remain vigilant and proactive to navigate the changing financial landscape effectively.
Frequently Asked Questions
What is the significance of cannabis rescheduling?
Cannabis rescheduling could lower borrowing costs and enhance access to capital for cannabis companies.
How might larger companies influence the cannabis market?
Big Pharma and alcohol companies may potentially enter the market, leveraging their resources but facing seasoned competitors.
What challenges do cannabis operators face post-rescheduling?
Operators will still confront state regulations, collateral issues, and a competitive landscape that may not favor new entrants.
How does leveraging impact cannabis companies?
High levels of leverage in cannabis firms could pose risks, especially in a still federally regulated environment.
Can rescheduling resolve tax issues for cannabis firms?
While it may present negotiation opportunities, rescheduling won't solve all tax liabilities or ensure immediate bankruptcy protections.
