A solid regulatory framework for cannabis receivership is essential for regulated state cannabis markets

Scot Rutledge, Partner, Argentum Partners, Government and Regulatory Affairs Specialist

Given that federal prohibition of cannabis means there is no bankruptcy protection for licensed businesses in state-regulated markets, a receivership is often the best—and only—alternative to reorganize or restructure a distressed business. However, this process can be a challenge because most states do not have cannabis receivership laws or regulations guiding the process.

As more businesses begin to look at this option in legal cannabis markets across the country, new laws or statutes are needed. I wanted to share an insider’s view on the business and regulatory implications, because my years helping develop Nevada’s adult-use policies have been eye-opening. In my work spanning government affairs and cannabis policymaking, I’ve observed firsthand the many pitfalls that can befall business owners, creditors and other stakeholders. I can also say with confidence that Nevada offers a receivership model other states should follow.

Nevada Cannabis Receivership

Nevada’s first cannabis receivership occurred in 2019, when CWNevada was ordered into receivership by the state court to address one of the nation’s largest financial collapses of a licensed cannabis business. 

With no regulatory framework in place at that time, the legal team overseeing the receivership estate was forced to begin the process of designing and developing a playbook for cannabis receivership. It just so happens the receivership team was headed by United CMC’s President and Co-Founder, Dotan Y. Melech. 

This first-of-its-kind Nevada cannabis receivership involved multiple consultations with what was then the Nevada Department of Taxation as well as intense dialog with the state attorney general’s office. Not only that, the state launched a new regulatory agency in the midst of the CWNevada receivership proceedings. The Cannabis Compliance Board (CCB) went into effect July 1, 2020, adding another level of complexity to the situation but also creating opportunity for receiverships to advance under the new regulatory authority.

Several important components of receivership, including asset liquidation, had to be addressed without any statutory or regulatory guidance. This was—and remains—instructive because it is quite likely that if a court ordered a receivership in a state lacking appropriate statutes or regulations, the following become critical issues:

• There was no statutory authority for the receiver to control or otherwise custodian the business’s licenses during the receivership, and special permissions had to be granted similar to receivership laws for other business sectors in Nevada. This authority allows the receiver to act on behalf of licensees regarding regulatory compliance, paying taxes and fees, and maintaining business operations. 
  
• The authority extends to running the facilities and ultimately provides the receivership estate the ability to make decisions on behalf of the licenses on all aspects of the business.

Fast forward to 2021. Nevada’s Legislative Assembly Bill 326 passed and with it came a receivership law that gave new regulatory authority to the CCB and provided receivers the authority to act and to custodian licenses. Since the summer of 2021, the CCB has been working with a broad group of stakeholders to promulgate regulations for receivership and hopes to complete the process by the end of 2022.

This is again informative for other cannabis regulatory authorities across the country because in the years since 2019, several receiverships were enacted in Nevada without regulatory guidance.

Keys to Robust Cannabis Receivership Regulations 

A proper regulatory receivership framework will ideally include the ability for the receivership estate to take control of the cannabis licenses with the authority of a receiver agent card. Nevada issues agent cards that give individuals the ability (as a consultant, operator, owner or employee) to participate in the state’s cannabis industry; under AB326, the state created a new class of agent card that is specific to receivers. This unique agent registration card is only granted through a process of background checks and suitability investigations. A receiver holding a registration card can then act on behalf of the estate to pay taxes and fees, ensure regulatory compliance and also comply with all legal directives from the court.

If it was determined the business had been operating out of compliance, cannabis receivers should also be required to provide an operations plan to bring the business back into compliance and also create value for the estate in order to remit payments to the state and creditors. In the case of a required liquidation event, the added value will ensure more recovery for creditors.

There are other scenarios where a receivership may be required: For example, the death of a principal within the company (as of July 2022, this has happened twice in Nevada since the passage of AB326). Another instance where receivership may be required is in a dispute between owners where settlement cannot be reached and a receiver is brought in to run the business and create a path forward for resolution.

Cannabis Receivership Frameworks for the Future

Given the work being undertaken by cannabis regulators across the country and understanding the spirit of cooperation between these various agencies, it is quite likely that Nevada will serve as a model for cannabis receivership across the country. In addition to the regulatory agencies tasked with overseeing the industry, it is important to note the role of state attorneys general and their offices in ensuring proper legal protections and guidance are in place for creditors, licensees and regulatory authorities. 

As we continue to see the cannabis industry expand and mature, it is imperative that states create laws and promulgate regulations to provide for cannabis receiverships until the federal government lifts its prohibition, potentially allowing for bankruptcy protections in the future.

To learn more about risk mitigation options in the cannabis industry, contact United CMC today.