Risk Considerations in the Current Cannabis Marketplace

The cannabis industry offers enormous opportunity. But it also operates with a unique combination of legal uncertainty, tax penalties, capital scarcity, and regulatory complexity that makes it unlike almost any other sector of the American economy.

Even though most states now allow medical or adult-use cannabis, marijuana remains illegal under federal law. This single fact shapes nearly every financing, structuring, and risk decision in the industry.

As Zachary R. Kobrin of Saul Ewing LLP observes, federal illegality doesn’t just add friction, it fundamentally reshapes deal structure which also has an impact on enforceability and the pricing of capital.

For lawyers, investors, lenders, and operators, understanding the influence of federal illegality on the cannabis industry and the financial risks involved is not optional. The goal is helping clients navigate the complex legal landscape of cannabis financing while avoiding avoidable financial landmines. The upside can be significant. The downside can be unforgiving.

Rescheduling: A Cure-All? Not Exactly.

The Department of Justice has recently begun the process of reclassifying marijuana from Schedule I to Schedule III under the Controlled Substances Act.

Even at Schedule III, cannabis would still be federally regulated and illegal outside authorized channels. DEA registration requirements could introduce new layers of compliance. Rescheduling alone would not automatically open stock exchanges or transform the industry overnight.

However, one major financial benefit would likely occur: relief from Internal Revenue Code Section 280E.

Section 280E prohibits cannabis businesses from deducting ordinary business expenses because marijuana is a Schedule I substance. That means operators often face effective tax rates that approach or exceed 70% of gross income.

Eliminating 280E would dramatically improve cash flow and reduce structural pressure on margins. But even then, capital markets may remain cautious until broader federal reforms occur.

Key Considerations

Capital Is Scarce & Expensive

Because of federal illegality, many traditional banks and institutional investors remain hesitant to participate. The investor universe is narrower than in other industries, and those willing to participate often demand significant protections including:

• High-interest senior secured debt
• Tight financial covenants
• Equity dilution through convertible instruments
• Preferred equity with enhanced control rights

In other words, capital providers frequently demand both higher returns and stronger governance control. Because capital is scarce, cannabis companies frequently accept these trade-off’s.

Collateral in Cannabis

When lenders take collateral in cannabis, things get complicated quickly.

Daniel E. Cohen of Pashman Stein Walder Hayden PC explains that some lenders secure loans against the crop itself: “You can get an agricultural lien, but because you’re dealing with something that’s perishable you have to track the proceeds.”

Under Article 9 of the Uniform Commercial Code, cannabis plants may initially qualify as farm products. Once processed, they become inventory. Lenders must carefully track transitions from crop to product to proceeds.

Additionally, state seed-to-sale tracking systems create regulatory overlay that lenders cannot ignore. Enforcement actions must account for licensing restrictions. In some jurisdictions, licenses cannot simply be sold. Ownership changes may require regulatory approval before a foreclosure is effective.

Insurance and Litigation

Insurance coverage in cannabis remains limited and often expensive. Policies may include:

• Crop insurance
• Directors & Officers (D&O) coverage
• Product liability coverage
• Pollution liability
• Cyber liability
• Crime coverage
• Product recall insurance

However, few carriers participate, and most policies are issued through surplus lines markets. Premiums can fluctuate sharply, particularly in mature markets with rising claims.

Litigation trends include product mislabeling claims, wrongful termination suits, premises liability, security-related injury claims, workers’ compensation disputes, and cybersecurity breaches.

Because cannabis remains federally illegal, insurers may scrutinize policy language closely, and exclusions can materially affect coverage outcomes.

Employment and Operations

Cannabis businesses must also manage traditional employment law risks within a regulatory overlay. Wage and hour compliance, hiring restrictions, background check requirements, employee safety training, and high turnover rates all contribute to operational complexity. Managing compliance documentation is critical. Regulatory fines are often not covered by insurance, and enforcement actions can threaten licensing status.

Due Diligence: Follow the Money & the People

From an investor’s standpoint, cannabis due diligence is not just financial,  it is personal and operational.

“You really do have to look at the personalities behind a proposed deal,” notes Seth R. Freeman of GlassRatner Advisory & Capital Group, LLC.

Many operators entered the regulated market without traditional corporate governance backgrounds. Some transitioned from legacy markets. Others are first-time entrepreneurs in a heavily regulated environment.

Investors must carefully review:
• Management agreements
• Ownership structures
• Regulatory compliance history
• Cash management systems
• Internal controls
• Valuation assumptions

Freeman also highlights the importance of understanding flow of funds. In cannabis, layered entities and regulatory restrictions can obscure where money moves and how value is preserved.

Valuation reports may assume stable licensing, predictable margins, and growth. But enforcement risk, tax burdens, and limited exit options can create a gap between theoretical valuation and real liquidation value.

The Bankruptcy Problem

Perhaps the single biggest financial handicap for cannabis businesses is the inability to access federal bankruptcy protection.

Traditional Chapter 11 restructuring is generally unavailable to plant-touching cannabis companies. Instead, distressed cannabis businesses rely on state court receiverships or assignments for the benefit of creditors.

Freeman notes that receiverships can function similarly to structured sales, but they lack the predictability and nationwide framework of federal bankruptcy.

The absence of bankruptcy access means:
• Increased lender risk
• Increased interest rates
• Limited restructuring flexibility
• Reduced investor confidence

Lower-Risk Participation Strategies

Not every investor wants to own a grow facility, operate dispensaries, or navigate seed-to-sale tracking systems. Given the regulatory complexity and capital intensity of plant-touching operations, many investors look for ways to participate in the cannabis economy while reducing direct exposure.

Intellectual Property and Brand Licensing

Because cannabis remains regulated state-by-state, national operators cannot simply ship product across state lines. But brands can travel.

An IP holding company can:

• Own trademarks (where permissible)
• Develop proprietary formulations
• Create standardized packaging and quality controls
• License those assets to state-licensed operators

In this model, the IP company earns royalty payments while licensed manufacturers and retailers handle cultivation, processing, and compliance.

The advantages include:

• Reduced regulatory burden
• No direct plant-touching exposure
• Diversified revenue streams across states
• Lower capital expenditure requirements

Of course, brand licensing is not risk-free. Quality control failures by licensees can damage brand value. State advertising restrictions can limit marketing impact. And federal trademark protection remains complicated. But from a capital-at-risk standpoint, IP can be structurally less volatile than cultivation.

Real Estate and Sale-Leaseback Structures

Another common strategy involves real estate ownership.

Cannabis operators often cannot obtain traditional bank financing. As a result, real estate investors may:

• Purchase cultivation or retail facilities
• Lease them back to operators under long-term agreements
• Structure triple-net leases with strong covenants

These arrangements can generate stable yield if the tenant remains solvent.

However, investors must price in the fact that cannabis leases are often above market rate. If a tenant defaults, replacing a cannabis tenant with a non-cannabis business may require rent concessions or zoning adjustments.

Real estate can be attractive collateral, but only if investors understand the regulatory overlay attached to cannabis use.

Ancillary Services

Many investors choose to avoid plant-touching exposure altogether by investing in ancillary businesses.

These may include:

• Technology platforms (seed-to-sale software, compliance tools)
• Security companies
• Payment processing solutions
• Packaging and labeling providers
• Logistics and transportation firms
• Professional services (legal, accounting, consulting)

Ancillary companies often face fewer regulatory barriers and can scale nationally without violating federal law.

In many ways, these businesses resemble traditional SaaS or service models, but with cannabis-specific expertise layered in.

The key question becomes: is the company dependent on cannabis revenue exclusively, or does it serve multiple regulated industries? Diversification can reduce volatility.

Diversified Funds

Rather than betting on a single operator, investors may participate through diversified funds focused on:

• Multi-state operators
• Distressed cannabis assets
• Real estate portfolios
• Brand roll-ups

Professional fund management can provide:

• Deal flow access
• Structured due diligence
• Risk diversification
• Institutional governance

But investors must carefully review fund terms, management fees, liquidity restrictions, and valuation methodologies, especially in a sector where exit options remain constrained.

Risk Mitigation Still Matters

Even ‘lower-risk’ strategies require careful diligence.

Investors should evaluate:

• Contract enforceability
• Regulatory compliance history
• Insurance coverage gaps
• Cash controls
• Tax exposure
• Governance structures

No participation strategy eliminates risk entirely. But aligning capital structure with regulatory reality can significantly reduce volatility.

In short, cannabis investing does not have to mean cultivation: it can mean brands, buildings, software, services, or structured capital. The key is understanding where the legal risk truly sits and where it does not.

Final Thoughts

The cannabis marketplace is not simply regulated; it is structurally constrained. Federal illegality continues to shape capital formation, tax burdens, insurance availability, and restructuring options. Even with potential rescheduling, cannabis will not suddenly function like a traditional consumer or agricultural industry. Capital is likely to remain expensive. Exit options may stay limited. Bankruptcy protections cannot be assumed. For operators, disciplined governance and rigorous compliance are essential. For investors and lenders, expectations must be recalibrated around regulatory friction and enforcement complexity. Nevertheless, the opportunities in cannabis are real. Demand remains strong. Markets continue to open. But success in this space requires a structurally informed approach to finance, governance, and risk allocation.

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To learn more about this topic, view Financial Risks in the Cannabis Marketplace. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about Alternative Investments.

This article was originally published on March 5, 2026.

©2026. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.