It is over 20 years now since California permitted the use and sale of medical marijuana. During the 20 years, 30 more states have jumped into the bandwagon, and the use of medical marijuana has become generally accepted.
To take care of the rising demand, more marijuana businesses have been introduced in different parts of the country. As a result, the pot business has grown tremendously over the last few years, and associated products, including stocks, have caught the attention of investors across the globe.
While the marijuana industry is quite lucrative, a few businesses have failed in the past for a variety of reasons. But what happens when marijuana businesses are not successful? Do they have the option to file for bankruptcy, just like any other business?
Below we look at cannabis bankruptcies, as well as the options available for investors whose businesses fail to break even or succeed.
Current Cannabis Bankruptcy Laws
One of the several options available for businesses that fail is filing for bankruptcy protection. By filing for bankruptcy, these businesses are not only able to eliminate debt, but it also becomes easier for them to restructure with minimal financial pressure. Unfortunately, this option is not available for businesses in the marijuana industry.
Currently, marijuana businesses do not qualify for federal bankruptcy protection. This applies even in states where pot is legal. The consensus is that for as long as marijuana remains a controlled substance, businesses in this industry are not protected by the state when it comes to bankruptcy.
This is because all cases of bankruptcy are heard in the federal court. However, under the Controlled Substances Act, marijuana is still considered a schedule I drug, which means it is illegal to grow, distribute, or prescribe it.
Since federal law governs bankruptcy, it is not possible for the U.S. Bankruptcy Trustee to either administer or control assets that are considered illegal without breaking the law.
While this puts investors in the marijuana business at a disadvantage, all hope is not lost. There are several other options available for a cannabis business does not take off as expected. They include:
This option involves the conversion of business assets into cash, which can be used to offset debts by creditors. Liquidation is either voluntary or compulsory, and the steps involved in either of these forms of settlement are different.
In the case of compulsory liquidation, the court is involved. The creditors request the court to liquidate the company. This mostly happens when the creditors believe that the company in question is not capable of paying its debts.
For voluntary insolvency, the court is not involved. It is the directors of the company that initiate the liquidation process when it becomes apparent that the company will have a hard time paying its debts. In most cases, the company is able to settle all debts after liquidation.
As soon as liquidation is completed, the company will be dissolved. The duration of liquidation varies depending on the complexity of the business, among other factors. The process usually calls for the involvement of a specialist in insolvency, whose main job is to give guidance on what actions to take at different stages of the liquidation process.
The other option available for those in the pot business is receivership. Receivership is a process through which creditors become the owners of a debtor’s property.
A trusted person from the business is appointed to act as the receiver and sell marijuana products under judicial approval. This process usually happens after debtors and creditors agree on the best course of action to take when faced with bankruptcy
Though receivership is not as common, it can help debtors get out of financial debt faster. While the debtors lose their properties, the process makes it possible for creditors to recover their finances.
It is important to note that a receiver acts according to the interest of the lender. This does not mean that the business owner cannot offer their guidance, especially in such special cases as running a pot business. There are many ways a business owner can be used to increase the value of the property and ensure that all lenders are satisfied at the end of the process.
Risks for Marijuana Businesses
The fact that businesses in this industry do not qualify to file for federal bankruptcy means lenders are wary of advancing credit to them. Lending institutions know too well that in case the business goes under, the chance of getting their money back is minimal.
In fact, entrepreneurs who succeed in getting loans from lending institutions are usually charged higher interest rates when compared to other businesses.
The marijuana industry also faces other risks that investors should certainly be aware of. Laws governing the sale of marijuana keep evolving, and investors have to keep abreast with these changes. In case the law is broken in the course of doing business, it is very easy for them to lose their cannabis licenses.
As such, it is important for marijuana businesses to work hand in hand with experienced attorneys who can offer legal counsel when and where necessary.
The good news, however, is that the weed industry is booming, meaning those just getting into the industry are more likely to succeed and multiply their investments within a relatively short time.
We are a law firm based in Peoria, Illinois. My name is Attorney Thomas Howard. I specialize in cannabis industry legal issues and work with a team of competent lawyers to offer legal counsel to investors in the marijuana business.
If your cannabis business is facing possible financial sabotage, get in touch with us. We will not just offer advice but will also negotiate with your creditors to ensure that both parties take the best course of action.
We understand how distressing facing debtors can be, especially if you have limited options to save your business. We know that while things may seem complicated, there is always a way out. We have a team of experts who will go over your books and help you make an informed decision.
We are dedicated to making it easy for you to do business and solve the many challenges in the marijuana industry. Get in touch with our Illinois based law firm, and we will offer invaluable advice on how you can get yourself out of financial trouble with minimal pressure from your debtors.
Thomas Howard has been in business for years and can help yours navigate towards more profitable waters.
Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
Our cannabis business attorneys are also business owners. They can help you structure your business or help protect it from overly burdensome regulations.