Why are surety bonds required for obtaining licenses in some states – Cannabis Business Executive

Have you ever wondered why surety bonds are required for obtaining licenses in most states throughout the country?  Individuals as well as business entities are required to post surety bonds.  In most cases, the beneficiary (or obligee) of the bond is the state or consumers that have been harmed by a violation of an established safety code or suffered financial loss from a transaction that went awry from a licensed entity.  States rely on revenue from surety bonds and have done so for many years.  It helps them adjust or settle the results of bad actors in their jurisdictions.   

From a bonding perspective, the Cannabis industry is no different. Cannabis bonds are now required in at least 19 states, with this number expected to climb as more states legalize recreational and medical cannabis programs. The bond amounts vary from $5,000 to $5,000,000.

Various types of Cannabis entities such as Cultivators, Processors, Retailers and Distributors may be required to post bonds, depending on the state(s) that they are doing business in. These operations have different obligations to the states that require these bonds.  Retailers are paying taxes along with regulating who is purchasing cannabis and other responsibilities.  Processors are responsible for making sure the products are compliant with the regulations set by the state.  The correct ratio of THC and CBD is set, and it is their responsibility to make sure it is correct before selling to consumers. Cultivators are growing organic or pesticide free products for sale to the processors and making sure what they grow is sold and if there is a fungicide or infestation that might be harmful that product does not go to market.   The state is regulating the industry and the surety bonds are providing the financial tools to the states to administer these regulations for the safety of the consumers in their jurisdiction.   

Sureties (the insurance entity providing the bond) will underwrite a $5,000 bond requirement differently from a $5,000,000 requirement.  Smaller obligations are usually underwritten with a credit check or answering a few questions about the business. Larger bonds are considered based on the company’s financial wherewithal and experience in the industry. The underwriting process for the bonds is equivalent to an additional screening step for the states when issuing licenses.  The state typically performs background checks, etc. and when the state requires a surety bond, they can rely on the surety underwriting process to screen out those applicants that might not qualify from a financial standpoint.

Surety bonds are not without controversy. In 2018, Oklahoma Attorney General Mike Hunter and medical cannabis advocates argued that the bond requirement in Oklahoma was overreaching. While the bond requirement may make it more difficult for entities or people to become licensed, the bond will help to pay reparations to anyone harmed by a bad actor.