[CNC1-DROP] MIP6 Application: CapitalNow Cannabis DROP: Factoring and Equipment Financing Assets

[CNC1-DROP] MIP6 Application: CapitalNow Cannabis DROP: Factoring and Equipment Financing Assets

This MIP6 Proposal will finance a special purpose vehicle (“SPV”) established by CapitalNow Cannabis or affiliates thereof (the “Issuer”) to acquire cannabis-related Government secured and high quality invoices and Equipment Financing Assets. Upon acquiring each asset, the SPV will be the legal owner and hold the title to the asset.

1. Who is the interested party for this collateral application?

CapitalNow Cannabis (“CNC”), is represented by Pep Ruckpanich, CFO at CapitalNow Cannabis, primary contact (@pep_ruckpanich, [email protected].) The issuer will source and manage the assets, which will create and own non-fungible tokens (“NFTs”) representing individual or a pool of invoice(s) or equipment(s). It will lock its NFT’s into the Tinlake protocol to serve as collateral. The issuer will pool its assets and offer ERC-20 tokens to investors, specifically DROP Tokens & TIN Tokens. The Issuer aims to structure transactions to minimize downside risk by tracking real-time asset and borrower’s data, allowing it to continuously monitor asset performance.

Centrifuge provides the technology and framework for bringing real-world assets to MCD. The primary contact on Tinlake for the application is Colin Cunningham, Head of Business Development, Centrifuge ([email protected]).

2. Provide a brief high-level overview of the project, with a focus on the applying collateral token

CapitalNow Cannabis, will use Centrifuge’s model 11 and use MCD directly as a line of credit to originate new assets against factoring and equipment financing assets in the cannabis industry. Strong demand for an equipment financing program from our client base, will add significantly more assets into the pool within the next six months. We plan to start with a 20mln DAI debt ceiling and increase it to 35mln DAI once 75% of the debt ceiling is attained.

CapitalNow Cannabis:

CNC provides asset based financing to the cannabis industry; we specialize in account receivables financing/factoring and are adding equipment financing to our service offering. Traditional financial institutions and service providers have not offered their standard asset-based lending (ABL) services to the cannabis industry due to the inability of their current underwriting process to assess and mitigate risk. There is also a fear of being associated with a recently illegal sector. Particularly if that institution has any dealings in the US. Over the past 13 years, our team has built one of Canada’s reputable alternative financing companies. CapitalNow has underwritten over 85,000 transactions. CNC is uniquely qualified to succeed in the emerging cannabis industry due to our prior experience in funding oil and gas production. As CapitalNow’s previous core focus, it shares many similarities with the cannabis industry; both have a high barrier to entry, lack of available working capital, onerous safety and compliance as well as being highly taxed and highly regulated. CNC applies historically proven as well as newly developed and specialized processes to assess and mitigate risk in the cannabis industry.

CNC mainly buys invoices issued by Licensed Producers (LPs) to the Provincial Governments of Canada (B2G) at a discount. The provincial governments, which earn AA- to AA+ credit rating, and a few select larger and bank quality LPs have made it through underwriting and been approved as account debtors (B2B). New account debtors that have not received the same credit standing as the provincial boards and bank quality LPs have a credit limit placed on them as they work towards a more solid credit standing with CNC’s internal credit rating system.

For more information on the overall cannabis market and projections, please visit: Cannabis Market Overview

Invoice Factoring:

  • “The global factoring market was estimated to be at $3.5T in 2019. Based on the 4.47 % CAGR between 2013 and 2019 and extrapolating the growth rate to the subsequent years, we estimate the factoring market in 2026 to be $4.7T.” -RBF Capital
  • “Overall, the global factoring market has seen growth of over 5% to an estimated 2019 volume of $3,495 billion compared with the previous year’s 3,308 billion USD. The Americas together are in third position with 8% share of the total world factoring volume. The overall value was 264 billion USD, a growth of less than 5%. Within that region, South and Central America have a 5% share of the total world factoring volume with a value of 160 billion USD which is a 10% increase. Argentina (+34%) Chile (+26%) and Peru (+15%) are key markets in that region. With a value of under 104 billion USD, North America suffers from the drop in Chinese trade with a decrease just short of 4%. Reliable default rates for factoring have not been identified. The exposure-weighted default rate for Supply Chain Finance (SCF) Payables Finance was low at 0.13% in 2018, a 0.02% increase compared to 2017 level of 0.011%.” -Maker RWA Team.
  • Canadian provincial boards include OCS, AGLC, BCLDB, SQCD, NTLCC, SLGA, and NSLC.
  • CNC is operational in and has factored invoices from all of the major provinces: Ontario, Alberta, Saskatchewan and British Columbia.
  • In addition to regular invoice factoring, the Canadian Federal Government provides tax credits for innovations and technological advancement. Many companies in the cannabis industry qualify; we identify these companies and offer to factor approved their government approved tax credits refund.
  • Exec team have a historical loss rate of 0.5% over 13 years (based on total amount defaulted divided by total amount factored)

Equipment Financing

  • CNC’s underwriting process includes both standard credit checks, social channels review (to understand who they are), lien registrations, a court reporting with ten years of historical data, and direct real-time monitoring of the companies’ federal tax balances as well as our proprietary Capital Now Research and Monitoring™. Risk mitigation practices for equipment financing including personal/corporate guarantees, lien registrations, down payment requirements, manufacturers buybacks (see below) and credit and life insurance. Typically, CNC also takes total dominion of the borrowers’ A/R for the loan term. Taking control of the borrower’s incoming revenue gives CNC the ability to guarantee payments will be made as promised.
  • In certain circumstances, when the equipment purchased is referred from a manufacturing company, the Manufacturer will participate in a guaranteed buy-back which further our enhance our ability to recover the outstanding loan balance in case of default
  • Clients have the option to buy out at any time with a three-month penalty interest + discharge fees.
  • In addition to banking best practices, CNC requires:
    • Active Health Canada Cannabis license (logistics and supply companies excluded)
    • Supply contracts
    • Personal guarantees (In some cases)
    • Online access to Federal tax accounts
    • Real-time access to borrower’s operating accounts
    • Life and disability Insurable (Must be offered in Canada but is optional)

3. Provide a brief history of the project

About CapitalNow Cannabis

CapitalNow Cannabis was started to address a discriminatory lack of financial solutions in the cannabis supply chain, providing urgently needed working capital to the industry. Difficult payment terms set by the governmental boards provided CNC with the evidence it needed to start purchasing invoices providing the liquidity cannabis entrepreneurs required to maintain and grow. Please see above for more information.

Joshua Reynolds, President

Joshua Reynolds has delivered creative sales and financing solutions for over 35 years across automotive, heavy equipment, fashion and other business sectors. For the last 16 years, these sales solutions have been focused exclusively on financing the transactions between B2C and B2B, resulting in product developments and launches, team development, marketing knowledge and multiple national sales awards. His relationship-building ability and serious attention to detail have helped bridge the various personalities’ gap over his sales career.

Pep Ruckpanich, CFO

Pep is an investor, experienced Defi user and world traveler. He leads tech investments at Blackfish Holdings; a Thai family office primarily focused on real estate. He was the President of Medical Development Enterprise, a 44 year-old medical device distributor in Thailand focused on ventilators and ICU-related products. He graduated magna cum laude from the University of Richmond with a degree in finance and management.

About Centrifuge

Centrifuge provides the infrastructure to allow transparent and secure onboarding of RWAs to MCD. New Silver was the first asset originator to back DAI with RWA using the Centrifuge model. CNC is one of many projects currently in the pipeline to help MakerDAO scale RWA backing to $300M by the end of 2021.

4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

CapitalNow Cannabis’s Tinlake pool deployment is scheduled for Q3 2021 and will be accessible via tinlake.centrifuge.io

Technical documentation about Tinlake can be found here: https://github.com/centrifuge/tinlake 1 and the Maker specific implementation here: https://github.com/centrifuge/tinlake-maker-lib 3

5. Link any available audits of the project. Both procedural and smart contract-focused audits.

Centrifuge has conducted several audits of its technology stack. The audits can be found here:

6. Link to any active communities relating to your project.

7. How is the applying collateral type currently used?

The SPV will be financed by issuing DROP Tokens for 90% of the net asset value of the pool of NFTs plus cash on hand (collectively “Pool Valuation”) and TIN Tokens for 10% of the Pool Valuation.

The Issuer expects to invest in:

  1. Cannabis-related invoices with a 2021 YTD average value of $92,500 CAD expect these invoices to be paid within 30-60 days, depending on the payment terms. Upon paying an invoice, the Issuer will repay the outstanding balance drawn against the invoice NFT and accrued interest thereon.
  2. Qualified cannabis-related equipment financing deals will have an average value of $430,000, and we expect to hold these assets over 12-36 months. The monthly payments will be going into the SPV. Once the outstanding balance drawn against the NFT and accrued interest has been paid in full by the borrower, the SPV will release the collateral from the SPV back to the borrower.

8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

The SPV will bear legal responsibility for the collateral.

The SPV structure creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left unaffected by the parent’s financial, operational or legal health.

The SPV structure ensures DROP token owners will have a legal claim to the underlying assets. The collateral for the individual or pool of loan(s) and invoice(s) are assigned to a legal entity, the “SPV,” and lenders get an ownership interest in the entire portfolio of this entity.

9. Where does exchange for the asset occur?

The SPV enters into a subscription agreement with lenders who receive DROP from the SPV to provide DAI. The DROP token can be redeemed against the payment of the invoice or monthly payment of the underlying collateral directly from the SPV by any DROP holder. This is ensured by the Tinlake smart contracts and is the primary way for interacting with these tokens.

10. (Determined by Legal Domain Team) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

The issuance of DROP and TIN tokens is handled via Securitize, with AML/KYC procedures and compliance with US securities guidelines. Investors based in the US must be accredited investors (generally defined as having a net worth of at least $1 million).

12. (Optional) List any possible oracle data sources for the proposed Collateral type.

13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

  • The equipment manufacturers: in certain circumstances, when the equipment purchased is referred from a manufacturing company, the Manufacturer will participate in a guaranteed buy-back which further our enhance our ability to recover the outstanding loan balance in case of default
7 Likes

Is your coverage strictly based in Canada, or are you considering expanding to the U.S. and Europe? Also, can you please expand on the current cannabis legislation in Canada? Not familiar.

Can you please provide details of the agency granting these ratings? If available.

Can you please provide colour on the timeframe for equipment depreciation?

Also, will CapitalNow invest in the TIN tranche?

Thank you in advanced.

5 Likes

"Is your coverage strictly based in Canada, or are you considering expanding to the U.S. and Europe? Also, can you please expand on the current cannabis legislation in Canada? Not familiar."
It is federally regulated in Canada and that is where we currently offer our services. Regulations do differ by province such as payment terms and procurement system. However, beyond farmgate where they can sell direct to customers, cannabis licensed producers have to sell to the provincial government boards such as OCS, AGLC, BCLDB, SQCD, NTLCC, SLGA, and NSLC who will then distribute to retailers or end-consumers.

We definitely plan on expanding internationally as more countries around the world regulate the industry. We already offer our services to export deals (ie from Canada to Germany) since we can get insurance on those contracts and minimized our risk; this service has allowed us to start cultivating relationships with cannabis companies from various markets around the world.

"Can you please provide details of the agency granting these ratings? If available."
Sources: S&P, DBRS, Fitch, Moody’s and FAO. Please find more detail via this link

"Can you please provide colour on the timeframe for equipment depreciation?
Also, will CapitalNow invest in the TIN tranche?"
Extraction and processing equipment can typically be used for up to 5-10 years while lighting and certain cultivation equipment can last 1-3 years.
Yes, we plan to participate on the TIN.

Thanks for the thoughtful questions.

3 Likes

@Pep_Ruckpanich Is there a targeted portfolio mix of the invoices and equipment financing? If not, what has historically been the balance between the two?

Thanks!

For portfolio mix: we are expecting 15-25% factoring/invoice

2 Likes

How much Dai do you anticipate could be minted from this collateral over the next 10 years?

Thx

We think more than 1 billion DAI can be minted from cannabis related assets/collateral because traditional banks take a long time to get comfortable with an emerging industry and this will be the case throughout the world as countries legalized cannabis. Est TAM in 2026 is USD $90 billion.

3 Likes

Sir, I kindly ask that you PLEASE reconsider your vote. 85,000 loans to date with a default rate of 0.05%.

You say Regulations? They say 85% of cannabis sales go thru Canadian Provincial Boards, OCS, AGLC, BCLDB, etc. – BTW very regulated market–Canada is on it.

Look, I can’t explain it as well as the founders–why I truly recommend that you re-watch the replay of the call w/founders (CNC) and you at least let them move thru the Greenlight Poll and make your final decision at a later date. At least consider it? Thank you in advanced Sir!

4 Likes

Yeah, it pains me too as a advocate for drug legalization-and-regulation. However, Planet_X’s reasoning makes sense. Why risk arousing unwanted scrutiny when there are plenty of other non-controversial collateral to on-board? Who wants news orgs to start writing articles about the stoner cannabis people running MakerDAO? At this stage, it’s just not worth it. Maybe someday we’ll have the gravitas to poke the drug war zealots in the eye, but now is not the time.

2 Likes

I think that’s the whole point. We “Maker Community” are not understanding the business model here, and the Founders vision. I also think that this is a sector with passion. Same passion that Crypto enthusiast posses. If I say the word “crypto” to my grandma, immediately she things its fake money, dirty money, criminal money. We can’t take the same approach and immediately make assumptions w/out doing the due diligence.

Please take a look at the replay of the call–it has great founders, smart people doing business under Canadian regulation. Good track record.

2 Likes

I’m not saying there is anything shady about CNC. It seems plausible that they are legally compliant with Canadian law. However, legalization is a recent thing. We should not neglect the ugly history of cannabis prohibition.

Ha, it’s a good chance to mention my parody site, Drug Dealers Against Legalization | ddal

1 Like

Haha pretty cool. I do think you should update your stats–18 states, including Washington, D.C., had legalized marijuana for recreational purposes. And 36 states and Washington, D.C., had passed laws legalizing or decriminalizing medical marijuana.

All in all we have to remember that the Cannabis industry employs a hell of a lot of people. And if we are going to start picking and choosing which industries we support–we better be ready to do a lot of good for society. Not just worry about “Makerburn” and how high MKR trades in 2021. But I get your drift.

3 Likes

As a defi user & enthusiast and CFO of CapitalNow Cannabis, we would argue the opposite. We see financing federally regulated cannabis market in Canada (while still being in North America and a developed country), as an amazing example of how defi can create greater access to financial services to those who are usually discriminated against (but are good borrowers).

We have gotten ahead of this and hired a professional PR agency, Marigold PR. They mainly work with cannabis companies but have also worked with crypto-related companies. The narrative we want to write is how Maker DAO is providing financial services to a federally regulated market in Canada while minimizing the risk for investors via government securitized invoices and overcollateralized equipment loans.

Side note and our response:
“Sen. Warren (a member of the Senate Banking Committee and one of the loudest critic of defi) cited five risks posed by an underregulated crypto market. In her words, they are:”

  • Exposure to hedge funds and other investment vehicles that lack transparency
    you can see (real-time) which eth address own our ERC-20 tokens and how much they own. regulators should check out Messari’s crypto fund scanner if they want to see what transparency can look like
  • Risks to banks
    Banks aren’t providing essential services to our clients. So one could argue that we are allowing our clients to build onchain credit and one day use traditional banking services.
  • Unique threats posed by stablecoins
    General DAI risk and at no point will any cannabis companies be transacting with DAI. Only the SPV/pool will be interacting with DAI.
  • Use in cyberattacks that can disrupt the financial system
    We immediately convert DAI to fiat for our clients using a regulated and compliant OTC provider.
  • Risks from decentralized finance"
    We are brining greater transparency to our industry. Asset details including payment date and financing fee will be onchain for the public to see and immutable.
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Thank you for taking the time to understand what we do and how we protect our company, investors and stakeholders. Are there additional materials (other than MIP6 and presentation) that would make it easier for the community to understand?

To be honest, our exec team was originally very concerned about staying compliant with the flow of money. So we discussed with multiple law firms and they were all comfortable and confident enough that we can compliantly do this that they were willing to take us on as a client.

3 Likes

@Planet_X what does this proposal have to do with stablecoin regulations? I don’t see how this is any different than any other Federally regulated RWA.