A 'Green Rush' For Debt Financing?

Canadian cannabis policy announcements over the past year have spurred investment in licensed cannabis producers and dealers ("Licensed Producers"), resulting in one of Canada's newest growth industries. Deloitte projects the potential size of a legal, recreational retail cannabis market at $9 billion.2 Equity investors have responded with what is becoming known as the "green rush," with medical marijuana companies raising more than $466 million in Canadian capital markets in 2016.3

While it is high times for equity financing, there is far less buzz for debt financing of Licensed Producers. Indeed, the Chief Executive Officer of one leading Toronto Stock Exchange-listed Licensed Producer has gone on record to say that "debt financing is the principal absent business instrument for the [regulated cannabis] sector."4

What is holding lenders back from a "green rush" of debt financing?

Setting aside potential reputational risk associated with cannabis, there are other risks involved with lending to Licensed Producers:

Risks of Lending to Non-Compliant Borrowers: Since cannabis is currently a controlled substance,5 a borrower's non-compliance with the Access to Cannabis for Medical Purposes Regulations6 could create major risks for a lender. Under the Regulations, in order for a Licensed Producer to be legally permitted to cultivate, produce and/or sell marijuana, it must have received the requisite licence(s) from Health Canada. Noncompliance with such regulations can result in the revocation of a licence and has the potential to attract criminal liability/charges for the Licensed Producer. Actual or suspected non-compliance could therefore lead to a Licensed Producer's assets being forfeited to the Crown under civil forfeiture legislation;7 potentially resulting in a significant loss of a lender's collateral. Difficulties Ascertaining Compliance: Production, shipping, packaging, record-keeping, client eligibility, product security and export of marijuana are all extensively regulated on an ongoing basis by Health Canada under complex rules. Lenders should carefully scrutinize the business operations and practices of a potential Licenced Producer. If credit facilities are provided, the lender should ensure that the borrower provides the appropriate monitoring compliance certificates (perhaps on a more frequent basis than in other industries) and that the lender is immediately provided with full details of any Health Canada concerns with respect...