State governments are worried about cannabis companies.
Will they follow regulations?
Are they abiding state laws — and if not, how can the state regain losses from fees or fines caused by the company’s failures?
This is where surety bonds come in.
Most states require cannabis companies to carry a surety bond to secure their operating license.
It acts as a contract between three parties: the business owner, the bond provider, and the state.
What is a Surety Bond?
A surety bond agreement is a financial guarantee that the company will follow regulations.
If the company makes a mistake that costs the state money, the state can make a claim to the bond provider.
Once the money is paid, the business owner must repay the bond provider.
This all seems straightforward, except this is cannabis — where nothing is as easy as it seems.
Cannabis is federally illegal.
So, despite the state’s requirement to carry a bond, most financial services don’t work with cannabis operators for fear of federal penalties.
Find a Carrier Surety One President and Chief Underwriter Constantin Poindexter explains, “There has been enough controversy surrounding legal cannabis that offering insurance vehicles has been severely limited. One of the first surety companies to enter the space was hit with a lawsuit alleging, among other things, that the surety conspired with other parties to violate a federal statute.”
This lawsuit set a negative precedent for the rest of the industry.
“One of the world’s largest reinsurance facilities immediately announced its complete withdrawal from anything cannabis — which pretty much nixed quick growth of insurance programs,” noted Poindexter.
Rise Above the Risks
Despite these early hurdles, some operators are able to see cannabis for the opportunity it is.
Surety One is one of a handful of companies that have found a way to work with these forward-looking carriers to provide bonds to the industry.
But, even if a surety is willing to work with cannabis companies, they’re often not willing to work with “risky” clients.
“Start-ups without an operating history, parties with damaged credit, and other challenges are able to receive a fair review from Surety One, Inc.’s underwriters, where they are simply turned away by others.”
He feels in order to be successful in the insurance business, you have to go where there’s risk.
“Anyone can [underwrite] all of the easy, low risk stuff, but that doesn’t help the little guy that may not fit neatly into a carrier’s standard underwriting box.”
Ask the Experts
In the state of Michigan, some municipalities have instituted surety bond requirements that are costly or cumbersome to the extent that few surety companies will work with them.
In these instances, the cannabis company may choose to offer collateral as an added incentive to bond providers.
Navigating the rules and regulations of the hemp and cannabis industries isn’t easy.
Working with certified professionals is often the best recourse.
As Poindexter noted, “My team takes whatever time is necessary to help clients understand what they need, how to apply for it, and ensure delivery of the appropriate surety bond. We turn our backs to no one.”