A dispute making its way through Canadian courts shows how cannabis companies in the United States are facing serious challenges raising funds to expand their operations, even as states begin to regulate cannabis markets across the country. country in an industry that is expected to exceed $40 billion by 2025.
Many experts have said that while cannabis borrowers are desperate for money to expand, they often agree to terms that strongly favor the lender and often result in the transfer of ownership to those providing the capital. This is considered a form of predatory lending that plagues many cannabis industry entities – and it’s something cannabis startups looking to operate in New York should be aware of when making licensing decisions. New York are taken.
The dispute in question is Gotham Green Partners vs. iAnthus Capital Holdings, Inc. The saga begins in June 2018, when iAnthus Capital Holdings Inc. (“iAnthus”), which is a cannabis cultivation, processing and retail company, had operations in six (6) US states.
iAnthus wanted to become a national player in the cannabis industry, but lacked the capital to expand into other markets. Due to the fact that cannabis is still federally illegal, iAnthus had few traditional options to obtain the necessary funding. This eventually led iAnthus to contact Gotham Green Partners, which had become one of the cannabis industry’s largest lenders, to help with its cash flow problem.
Gotham Green first provided iAnthus with a $40 million loan in 2018. Then, in September 2018, Gotham Green agreed to an additional $100 million financing plan (the “Plan”). After the execution of the plan, Gotham Green provided iAnthus with a total of $56 million in two (2) separate installments. Under the terms of the plan with iAnthus, Gotham Green had no legal obligation to provide the remaining $44 million of the $100 million in funding.
Early in the COVID-19 pandemic, iAnthus representatives requested documentation regarding the deferral of interest payments to be made on the loan. iAnthus CEO Hadley Ford alleges Gotham Green told them not to worry about paying the interest.
While it seemed like a financial lifeline at the time, the series of deals could ultimately prove disastrous for iAnthus shareholders, potentially wiping out hundreds of millions of dollars from investors and giving Gotham Green the property, according to investors and court documents.
According to the investors, once iAnthus missed its March 2020 payment, Gotham Green took steps to gain control of iAnthus by filing a lawsuit in Ontario courts, proposing a restructuring agreement. Canadian courts have overwhelmingly ruled in favor of Gotham Green, approving the restructuring deal that would wipe out shareholder value and extending the deadline for regulatory approvals.
There is a growing trend of established, US-based cannabis companies tapping into Canadian financial markets. This is largely due to the fact that Canada offers bankruptcy protection, known as “insolvency proceedings,” to cannabis companies. It also allows them to publicly list cannabis-related stocks on the Canadian Securities Exchange.
Many investors also blame iAnthus executives for what happened. Lawsuits in US federal courts accuse iAnthus executives of conspiring with Gotham Green to defraud investors, who question why iAnthus failed to pay interest when it was bound by the terms of the first loan to maintain an escrow fund for it. This allegation has surfaced in investor lawsuits, which have so far been dismissed by the courts.
These funding conflicts can have significant and unpredictable consequences. The Florida litigation arising from the iAnthus case focuses on the actions of Florida regulators in approving corporate recapitalizations. We will likely see similar proceedings initiated in other states as well.