Two Days in Annapolis with Cannabis Regulators

Transparency, access to data and an industry-wide credit rating system will benefit the entire cannabis sector

By Scot Rutledge

This summer I participated in the 2023 Cannabis Regulators Association (CANNRA) External Stakeholder Meeting in Annapolis, Maryland. In attendance were dozens of representatives from state regulatory and federal agencies, as well as invited stakeholders from across the industry. One of the issues discussed is the number of distressed businesses resulting from financial, legal and regulatory disputes. Over the course of two days I spoke with regulators, policy experts, data analysts, and attorneys about the benefits of how a credit rating and monitoring system for legal cannabis businesses across North America could potentially help solve some of those problems.

 

Increase Transparency and Data Access
One of the major themes from a couple of panel discussions was improving access to industry data to better develop policy and regulations. Determining the best course for regulatory changes to address structural and emerging problems in the market would be improved with more data and industry stakeholder input. Challenges with oversupply, inaccurate testing, issuance of new licenses, taxation and fee structures, and even product diversion could be more easily addressed with better data.

One important area where regulators are using data can be found in efforts to better understand the sustained influence of illegal operators on the regulated market. By working with data analysts to understand how much cannabis is being consumed in their state, and then determining how much of that cannabis comes from the regulated market based on cannabis sales data, regulators can calculate the size of the illegal market. This data allows regulators the opportunity to look beyond a singular issue like high taxes on legal cannabis to determine why consumers continue to purchase from the unlicensed market, and perhaps understand why many legacy operators remain reluctant to join the legal market.

Another instance of providing more data to regulators to help shape policy comes from a 2022 internal market study performed by our team. The study confirmed that the industry could benefit from more transparency around debt financing terms by lowering the cost of capital for companies, while also ensuring regulations are not so prohibitive as to impede access. Simply stated, the opportunity to access lower priced capital would greatly assist businesses, and more transparency into where that capital is coming from would give regulators more confidence.

 

Access to Banking and Capital Markets
The lack of transparency into financing across the cannabis industry is alarming. Regulatory agencies are not currently looking into debt financing deals or structure. When asked why, the response is clear: they have not been given statutory direction to do so as their charge is to investigate equity ownership of licenses. We have seen the majority of cannabis capital move from equity financing to debt financing and there does not appear to not be any regulatory action around that massive—and often opaque—change.

At the conference, several regulators voiced concerns about consolidation across the industry, leading to less diversity in ownership, which is a stated priority for many of the state cannabis regulatory agencies. One of the leading factors that supports more diversity in cannabis markets is ensuring access to capital, especially for social equity licensees. In both mature and emerging markets, there’s a bright spotlight on diversity, equity and inclusion (DEI)—and the struggles of social equity initiatives are well documented.

New York’s social equity fund is an interesting example of how one state is trying to tackle the issue. It is a public fund but has substantial private equity backing, and I wonder if the regulators would find value in working with companies like CTrust that can provide credit rating and monitoring systems to demonstrate potential value to future debt financing. It would certainly help New York regulators have a better idea of the stability and overall health of the businesses receiving loans, and attract private lenders who would have a far better understanding of any potential risks.
There needs to be more conversation with state regulatory bodies to solve issues like access to capital – or we will continue to see the number of court-managed receiverships grow.

 

Interstate Commerce for Cannabis
There were also conversations about interstate commerce and whether or not states could—or should—move forward with transactions or wait for changes to federal law. Oregon, Washington and California have already passed laws giving their governors or state attorneys general permission to enter into compacts and participate in interstate commerce, primarily because that type of commerce already exists in the unlicensed market. And as Matt Lee, general counsel of California Department of Cannabis Control (DCC) noted at the conference, restricting marijuana markets within state lines is economically untenable. With regulators such as Lee already discussing the possibilities, the need to sync state regulatory agencies becomes more pressing.

Supporting SMBs in Cannabis
Small- and medium-sized businesses (SMBs) are the bedrock of the cannabis industry, and we need to do what we can to support them. Discussions at the conference surrounding SMBs focused on what regulatory changes could be made to their benefit and, subsequently, the industry as a whole. There were the inevitable comparisons to the craft beer industry and how regulations changed to facilitate its growth, along with talk about federal de-scheduling and other potential updates to federal policy.

Again, the lack of capital remains a key stumbling block. Regulators do not look at the health of businesses, so there is no way for potential lenders to know what business might be a good recipient of a loan. Regulators care about who has control over a license. There might be audits on a quarterly basis, but overall, regulators have little insight on the health of cannabis companies, and this is a direct cause for why we are seeing businesses fail. Conference attendees noted that state regulators do have access to credit card payments and loans. They could begin to provide data to financial institutions in order to determine the credit worthiness of a business to provide them financing. If they do, a credit rating system that provides a score to judge company health would be key to proving that the business knows how to operate
properly.

Much of the discussion at the conference was forward thinking. While there is certainly nothing wrong with that, I was concerned that not enough time was spent trying to find solutions to address the problems currently affecting the industry. The industry is suffering. And our regulators need to be able to support the current industry so new entrants have a healthy and robust industry to join.