Building a relationship with regulators will facilitate the receivership process
By Dotan Y. Melech and Scot Rutledge.
We have said in the past that there are no guarantees in a receivership. Cannabis receivers can anticipate how things might proceed, but there are far too many unknowns in an industry with patchwork regulations and remains federally illegal. Anyone involved in a receivership should not be so optimistic as to plan for a specific outcome.
Receivers increase their chances of properly responding to and handling surprises by being equipped with knowledge and understanding of regulations as they apply to a cannabis business’s operations. Those regulations are best navigated by establishing a relationship with the local regulators and with the help of qualified consultants with regulatory expertise.
Cannabis Receivership: What Is the Plan?
Once the order from the court is signed and the receiver steps into their role, they should prioritize meeting with the appropriate regulators.
Receivers must be state-approved,not have any conflicts, such as being aware of technical or sensitive aspects of the business in question prior to being vetted by the state. The receiver in turn should work to ensure that regulators know the next steps for the receivership and how information will be reported.
While the receiver represents the rules of the court, the regulators represent the rules of the state, and they can explain the regulatory environment. Discussions between the two parties will help the receiver begin the due diligence of understanding how to best legally proceed, and will allow the regulators to have a better understanding of the goals of the receiver.
The regulators will most likely not know the receiver, so a level of trust must be established that will allow the receiver to do their work as smoothly and efficiently as possible. This is why a receiver should enlist the support of a consultant with cannabis regulatory expertise. Additionally, a receiver with no cannabis agent card who is attempting to operate a cannabis business would most likely face legal challenges to their ability to act on behalf of the distressed estate. While the court has given the receiver the authority to address the problems with the distressed cannabis business as they see fit, cannabis regulatory agencies will likely require a receiver to hold a registration card or license to operate.
Regulators are in the position to provide guidance to avoid legal issues for the receiver, or in the case of states where regulations surrounding cannabis receiverships exist, can detail the pertinent rules. Meeting with regulators early and often will streamline the process. Guidelines can be established, reporting schedules can be crafted and parameters of authority established.
Cannabis Regulators and Receiver Reporting
There is often no boilerplate for how receivers should file reports with regulators. Receivers should not hold anything back and should be completely transparent with their work to address all of the issues with the distressed cannabis business. The regulators, the receiver and the court make up the three parts of the relationship and the interests of all three must be satisfied for the receivership to go well. The more receivers know about what regulators expect, they can create reports that satisfy both the regulators and the court.
Receivership is ever changing and receivers will likely uncover issues during the process that regulators have not been previously informed. They open up the poor aspects of the cannabis business that led to the need for the receivership in the first place. Sometimes that includes regulatory violations and self-reporting those violations can open the door for punitive action. It is imperative that a transparent relationship with the regulators has been established to create an understanding that allows the receiver to continue their work in righting the ship without fear that the license could be automatically suspended.
To properly conduct a receivership in the cannabis industry, the receiver must have sufficient resources, the right people with expertise providing the correct advice, and the ability to communicate freely. The only way this will occur is if the receiver is working at a high standard within the regulatory environment. They must also have a solid relationship—based on transparency and trust—with the regulators, and an understanding of how they expect the receivership to operate within their parameters.