Seller notes and security interests

Why collateral is the hard part of a cannabis seller note

Because the most valuable asset, the license, is the one a creditor cannot simply seize. Banks and the SBA do not lend against cannabis acquisitions, so sellers often carry part of the price. Pricing, term and amortization of the note are covered on seller financing in cannabis deals. This page is about what stands behind the promise to pay, and what a seller can actually do on default.

A lending lawyer writing in The Secured Lender in November 2023 put the position plainly: many states do not permit security interests in cannabis licenses or cannabis products, and a foreclosing lender will need to involve regulators, which rules out ordinary self-help.

Can a lien attach to a cannabis license?

Partly. UCC 9-408 makes a rule of law that restricts assignment of a license ineffective to the extent it would stop a security interest from being created or perfected. So a lien on “general intangibles, including licenses and permits” can attach. But subsection (d) removes the teeth where the restriction is otherwise valid. The security interest:

• is not enforceable against the licensor, here the state;
• imposes no duty on the state to recognize the secured party;
• gives the secured party no right to use or assign the license.

What such a lien can still do is reach the proceeds if the license, or the business holding it, is later sold with approval. That has value in a receivership or negotiated workout.

Some states speak directly to the question:

State	Rule	Effect on a seller note
Maryland	COMAR 14.17.17.01: a creditor may hold a security interest in a grower, processor or dispensary license after registering with the Administration. The agreement may not accelerate except on material breach or default, convert debt to equity, deprive the licensee of the right to operate, or restrict the licensee’s control	Register first. Remove conversion rights and control covenants from the standard loan form
Oregon	OAR 845-025-1260: a secured party may receive a certificate of authority to operate on proof of the security interest, the default, and legal access to the property; initially 60 days, extendable	A defined path to step in, at the Commission’s discretion
California	4 CCR 15004: a person who provides a loan to the business is a financial interest holder and must be disclosed	The seller remains on the record while the note is outstanding
Washington	WAC 314-55-035: a financier, other than a financial institution, is vetted and may not receive an ownership interest or profit share without Board approval	No equity kickers or profit-based interest without approval
New Jersey	N.J.A.C. 17:30-6.9: a management services agreement may not grant a security interest in the cannabis business	Keep the security package out of any services contract

How states classify lenders is explained on true party of interest and financial interest rules.

What collateral works in practice

Collateral	Strength	Limits
Pledge of 100% of the equity in the licensed entity	Closest thing to a lien on the license; one foreclosure transfers the whole business	Foreclosure is an ownership change needing approval; the operating agreement must permit the pledge and later transfer
Equipment, fixtures, furniture	Conventional UCC collateral	Specialized grow and extraction equipment resells at steep discounts
Real estate, by mortgage or deed of trust	Best recovery; enforceable without the cannabis regulator	Only if the buyer or an affiliate owns the property; special-purpose buildings
Leasehold: collateral assignment of lease with landlord consent	Controls the licensed premises, which the license is tied to	Landlord must agree; see landlord consent and cannabis lease clauses
Deposit accounts, by control agreement	Direct access to cash	Depends on the buyer’s bank cooperating
Brand and intellectual property	Useful for product companies	State trademarks only for most cannabis marks
Cannabis inventory	Listed in many security agreements	An unlicensed creditor generally cannot possess or sell it; value realized only through a licensed operator or receiver
Personal and parent guaranties	Reaches assets outside the industry	Only as good as the guarantor’s balance sheet

The ABA’s Business Law Today notes that for a pledge of LLC interests to be worth anything, the operating agreement should authorize not just the pledge but the secured party’s later transfer of full membership rights, not merely economic rights. In cannabis, add the regulator as a further consent.

Remedies on default and why they need approval

1. Notice and cure. Send the default notice the note requires. Maryland’s rule shows that regulators dislike hair-trigger acceleration.
2. Workout. Forbearance, a revised schedule, or a consensual sale of the business with the seller paid from proceeds. This is usually the best recovery.
3. Consensual return of equity. The buyer assigns the equity back in exchange for release. The seller files a change-of-ownership application as the incoming owner. If the seller’s approvals lapsed or its circumstances changed, approval is not automatic.
4. UCC foreclosure on the pledged equity. A public or private sale under Article 9. Any winning bidder, including the seller, must be approved before taking control, so the sale is conditioned on approval.
5. Receivership. A court appoints a receiver to operate and sell. Many states require the receiver to be approved or registered. See cannabis receivership sales explained.
6. Non-cannabis collateral. Foreclose on real estate or sue on guaranties without regulator involvement.

Federal bankruptcy is generally unavailable to plant-touching debtors, which removes both the automatic stay and the structured sale process ordinary lenders rely on; the background is on receiverships and the bankruptcy gap. Tax authorities may also rank ahead of you: see tax-lien priority in cannabis sales.

Protective terms for the seller

• Financial reporting: monthly statements, tax filings and proof of tax payments. Under 280E, unpaid federal tax builds quickly and silently.
• Compliance covenants: notice within days of any regulator inquiry, violation or renewal problem. Default if the license is suspended.
• No further debt, liens, equity transfers or sale of the business without consent.
• Insurance with the seller named as loss payee.
• Cross-default with the lease and with any earn-out or consulting agreement.
• Cooperation clause: on default the buyer must sign regulator forms needed to transfer the equity, with an escrowed signed assignment held by a third party where state rules allow.
• Set-off limits: the buyer may set off indemnity claims against the note only for amounts finally determined or within a stated cap. See reps, warranties, and compliance indemnities.

Illustrative collateral coverage

A seller carries a $1,000,000 note on a $2,500,000 dispensary sale. The building is leased.

Collateral	Estimated recovery on default
Equipment and fixtures, cost $300,000	$60,000
Bank account under control agreement	$50,000
Personal guaranty of the buyer’s principal	Uncertain
Pledged equity, realized only through an approved resale that may take 6 to 12 months	Depends on the business’s condition at default

Hard collateral covers about 11% of the note. The rest depends on the business still being worth something after a default and a long approval period. That is why sellers push for a larger down payment and a shorter term instead of relying on liens. The seller-note and sale-leaseback calculator shows how those two variables change exposure.

Disclose the package to the regulator

File the note, security agreement, pledge and guaranties with the change-of-ownership application where the state asks for financing documents. An undisclosed pledge that later surfaces in a default looks like a hidden interest. This page is general education, not legal advice; secured lending documents should be drafted by counsel who knows the state’s cannabis rules.