04 August 2022
A dispute making its way through Canadian courts shows how cannabis companies in the United States face stiff challenges raising money to expand their operations, even as states begin regulating cannabis markets across the country in an industry projected to surpass $40 billion by 2025.
Many experts have stated that as cannabis borrowers desperately seek cash to grow, they often agree to terms that heavily favor the lender and often result in transferring ownership to those who provide the capital. This is considered a form of predatory lending that is plaguing many entities in the cannabis industry – and is something startup cannabis companies seeking to operate in New York need to be aware of as decisions on licenses in New York are made.
The dispute at issue is Gotham Green Partners v. 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) U.S. states.
iAnthus wanted to become a national player in the cannabis industry, but lacked the capital needed to expand into other Markets. Due to the fact that cannabis is still federally illegal, iAnthus had few traditional options available to securing the needed funding. This ultimately led to iAnthus reaching out to Gotham Green Partners, which had emerged as one of the biggest lenders in the cannabis industry, to help with its cash flow issue.
Gotham Green first provided iAnthus with a loan for $40 million in 2018. Then in September 2019, 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. According to the terms of the plan with iAnthus, Gotham Green was under no legal obligation to provide the remaining $44 million of the $100 million in financing.
During the start of the COVID-19 pandemic, representatives of iAnthus requested paperwork regarding the deferral of interest payments to be made on the loan. The CEO of iAnthus, Hadley Ford, alleges that Gotham Green told them to not worry about making any of the interest payments.
While it appeared to be a financial lifeline at the time, the series of deals could ultimately prove catastrophic for iAnthus shareholders, potentially wiping out hundreds of millions of dollars from investors and giving Gotham Green ownership, according to investors and court documents.
According to investors, once iAnthus missed its March 2020 payment, Gotham Green took steps to seize control of iAnthus by filing a lawsuit in the Ontario courts, proposing a restructuring agreement. Canadian courts have largely ruled in Gotham Green’s favor, approving the restructuring agreement that would wipe out shareholder value and extending the deadline for regulator approvals.
There is a growing trend of established cannabis companies, based in the United States, tapping the Canadian capital markets. This is largely due to the fact that Canada affords bankruptcy protection, referred to as an “insolvency proceeding,” to cannabis companies. It also allows them to list cannabis related shares publicly on the Canadian Securities Exchange.
Many investors also blame iAnthus executives for what happened. Lawsuits filed in U.S. federal courts accuse iAnthus executives of conspiring with Gotham Green to defraud investors, who question why iAnthus defaulted on the interest payment despite being required by the terms of the first loan to maintain an escrow fund for it. This allegation appeared in investor lawsuits, which thus far have been dismissed by the courts.
These disputes over funding can have significant and unpredictable consequences. Litigation in Florida stemming from the iAnthus case focuses on the actions of Florida regulators in approving the recapitalization of the companies. We will likely see similar proceedings commenced in other states too.
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