Navigating California’s Cannabis Debt Crisis

LOS ANGELES– As California’s cannabis market grapples with a mounting debt crisis, the fate of the industry hangs in the balance, centering around a controversial piece of legislation known as Assembly Bill 766, also referred to as “The Cannabis Credit Protection Act.” This bill seeks to address the industry’s financial challenges by implementing stricter credit terms, although it has sparked heated debate among industry insiders who argue it may be susceptible to abuse.

Major cannabis operators, including Kiva, Lowell Farms, Nabis, and Sunderstorm, have joined forces under the banner of Financial Stability for California Cannabis (FSCC), advocating for the adoption of AB 766. Their objective is to curb irresponsible credit practices and safeguard the future of the market, which constitutes nearly half of cannabis sales in the state.

Under the bill’s provisions, licensees would be required to make full payment for goods or services purchased from another licensee within two weeks of the invoice’s due date. Failure to comply would result in the selling party reporting the default to the Department of Cannabis Control (DCC), triggering disciplinary action. Defaulters would be prohibited from making further credit purchases until outstanding dues were settled. The DCC would also impose penalties, taking into account the severity and frequency of previous invoice defaults.

In their advocacy letter supporting AB 766, the FSCC highlights a prevalent culture of non-payment that poses a significant risk of financial collapse in California’s cannabis market. They emphasize that mounting debt could severely disrupt the supply chain and lead to a substantial reduction in state revenue.

However, opponents of the bill offer a different perspective, expressing concerns that AB 766’s strict measures may be susceptible to misuse. Cannabis attorney Griffen Thorne, in a blog post for the legal firm Harris Bricken, criticizes the lack of due process for those reported to the DCC. He fears that the bill could potentially be weaponized against market players, stifling fair competition—a concern echoed by some within the industry.

This legislation emerges in response to the increasing number of unpaid cannabis product invoices, driven partly by high taxes and the presence of tax-free illegal operations. Illicit dealings currently account for over 60% of all cannabis sales in California, prompting regulated vendors to take drastic measures.

Regarding the current status of AB 766, Assembly member Phil Ting (D-San Francisco), a co-sponsor of the bill, and his Legislative Director Tania Dikho confirm that the bill did not pass and has been tabled before the Assembly Appropriations Committee. As a two-year bill, it will not see further action or modifications until the next legislative year.

If the bill fails to gain approval in the Assembly and reach the Senate by the end of January 2024, it will face legislative demise. Businesses wishing to influence the future of this bill are encouraged to engage with their respective state legislative representatives.

As the cannabis industry grapples with the challenges posed by mounting debt, the fate of California’s market remains uncertain. The outcome of the debate surrounding AB 766 will undoubtedly have far-reaching implications for the state’s cannabis operators and the future of the industry.