The recent spate of insolvencies among cannabis producers can be traced back to 2019 when Health Canada altered its cannabis licensing regime, says Chris Nyberg, a partner at MLT Aikins LLP.
In May of that year, Health Canada began requiring all new applicants for licenses under the Cannabis Act to cultivate, process, or sell cannabis to have fully built facilities meeting all requirements under the Cannabis regulations at the time they apply. Nyberg says this “fundamentally changed the fundraising mechanics for licensed producers.”
Nyberg is based in Calgary. His practice focuses on food and agriculture, distressed transactions, and restructuring. He teaches a course on cannabis law and regulation at the University of Toronto and is a sessional instructor at Osgoode Hall.
Under the previous licensing structure, cannabis companies could fundraise and progress through the licensing process while their site was under construction. Following the change, access to capital diminished, and Nyberg says this hardship was compounded by the high excise tax rate that applies to these companies. These businesses did a poor job of accounting for this cost, and in most of their insolvency proceedings, there are “massive amounts” of excise tax payable. Companies also saw their margins compressed as more and more players entered the market.
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