Cannabis businesses need money – and lots of it – to operate. Being mostly startups, operational profits are not enough to sustain their business. So cannabis businesses take on outside capital generally in one of two ways: taking on debt from cannabis lenders or bringing in equity investors. Due to industry volatility and a crash in the price of flower, many folks who would have otherwise bought into a cannabis company may want to limit risks of owning a potentially troubled company, and lend money instead. But these potential lenders must be aware that California imposes licensing requirements on many types of commercial lenders, including cannabis lenders.
California law requires finance lenders to obtain finance lenders licenses (which I define below). This is a general legal requirement and does not only apply to cannabis lenders. The licenses are issued by the California Department of Financial Protection and Innovation (DFPI). DFPI’s license process is complicated and requires background checking. In other words, it’s not a simple process. And violating these laws can lead to monetary fines or even imprisonment.
A “finance lender” is defined to “include any person who is engaged in the business of making consumer loans or making commercial loans. The business of making consumer loans or commercial loans may include lending money and taking, in the name of the lender, or in any other name, in whole or in part, as security for a loan, any contract or obligation involving the forfeiture of rights in or to personal property, the use and possession of which property is retained by other than the mortgagee or lender, or any lien on, assignment of, or power of attorney relative to wages, salary, earnings, income, or commission.” A commercial loan in turn is defined as “a loan of a principal amount of five thousand dollars ($5,000) or more, or any loan under an open-end credit program, whether secured by either real or personal property, or both, or unsecured, the proceeds of which are intended by the borrower for use primarily for other than personal, family, or household purposes.” Consumer loans are generally defined as loans for household or personal purposes.
For the purposes of this post, we’re really only focused on commercial loans made to cannabis businesses. Cannabis lenders making these loans generally will be required to get licenses absent an exemption.
The California Financial Code, however, provides a number of exceptions. The list is too long to copy in full here, but some key ones are:
- A person who makes just one commercial loan in a 12-month period;
- A person who five or fewer commercial loans in a 12-month period if the loans are incidental to the business of the person relying upon the exemption; or
- Any loan that is made or arranged by any person licensed as a real estate broker by the state and secured by a lien on real property, or to any licensed real estate broker when making such a loan. A licensed real estate broker may make a loan secured by a lien on real property for sale to a finance lender or arrange for a loan secured by a lien on real property to be made by a finance lender without obtaining a license under this division;
- Certain venture capital bridge loans or investments.
This list again is not exhaustive and some of it was paraphrased, but these are some that may be relevant to many cannabis lenders.
The key takeaway is that there may be license exemptions for certain cannabis lenders, but they will need to ensure that the exception as written actually applies to them. This may not be such an easy task. For just a few examples, does a single line of credit count as just one loan even though there may be multiple draws in a one-year period? What does “incidental to the business” mean exactly for a specific business that may be making between one and five loans in a one-year period?
These are very tough legal questions that are often highly fact specific and have no one-size-fits-all answer. A smart cannabis lender would be wise to consult a California finance attorney to ensure compliance before committing to a loan.