[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.
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.
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
- “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)
- 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)
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.
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
Centrifuge has conducted several audits of its technology stack. The audits can be found here:
- CNC is a member of the International Factoring Association (IFA)
- CNC is a member of the BC Craft Farmers CO-OP
- CapitalNow Cannabis on LinkedIn
- CapitalNow Cannabis’s blog
- Marigold PR is our PR representative
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:
- 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.
- 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.
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).
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