Marijuana

Out-Of-State Investment In Washington's Marijuana Market Still A Question Mark (For Now)

Don't get too excited yet, because there is virtually no chance of Washington cannabis opening to out-of-state investors until 2017.

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Hilary Bricken

Hilary Bricken

Anyone who lends, gifts, or invests any funds to or in a Washington State licensed marijuana business, called a “financier,” has to have resided in Washington for no less than six months (the only exception is for banks). Thus far, out-of-staters have only been able to participate in Washington’s marijuana market by providing turn-key real property to licensees as their landlords, by selling or leasing of equipment to licensees, or by providing consulting services.

I have lately been getting many calls and emails from people who have heard that the Washington State and Liquor and Cannabis Board (the “Board”) is finally going to allow out-of-state investors to participate in Washington’s marijuana marketplace. This post is to clear the air regarding the current state of things on the out of state investor front.

First, the Washington State Board has only proposed its new rule regarding out of state financing; it has not adopted that new rule yet. The Los Angeles Times broke the story, in an article entitled, How new rules in two states could give birth to Big Marijuana and, for whatever reason (probably the story’s headline), many people interpreted this article to mean the Board had actually passed the rule, which is just not true. The Board is taking public comment until May 4 on the proposed new rule and if it were to adopt it, it won’t even take effect until June of this year.

What also seems to be getting lost in translation is that even if adopted, the new rule will remove the existing six-month residency requirement for out-of-state lending only. For instance, if you live in Nevada and want to take an equity position in a Washington State licensed marijuana business or if you expect a percentage of net or gross profit, you still need to show at least six months of Washington residency. You can find the proposed rule here.

It is true though that the Washington State Legislature is considering allowing out-of-state ownership of marijuana-licensed businesses. This proposed legislation would limit marijuana licenses to the following:

A business entity or nonprofit entity, unless formed under the laws of this state or holding a certificate of registration under chapter 23.95 RCW, and provided that:

More than fifty percent of the interest in the entity is held by one or more interest holders who lawfully reside in the state; and all interest holders who are not state residents are resident citizens of the United States.

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If this bill were to pass, out-of-state U.S. citizens could have up to a 49% equity stake in a Washington marijuana business. In addition, the Board would have “discretionary authority to deny a license or license renewal to an entity if [the Board] is unable to investigate a nonresident interest holder in the entity in accordance with the investigatory standards applicable to the investigation of a state resident.”

The summation of the testimony of those who favored this bill was that it is necessary “to clarify existing law about out-of-state investment in the commercial marijuana market and to enable marijuana businesses to obtain investment capital from large business entities.”

Domestic marijuana businesses need investment capital in order to grow and compete, and the bill will make such capital more readily available. The other states with legal marijuana markets are more liberal than Washington in allowing out-of-state corporate investments, so Washington needs the same to remain competitive. Currently, many licensees are operating on narrow profit margins, and making out-of-state investment capital available would facilitate their financial survival.

The summary of those whose testimony was described as “other” (but not opposed), focused on concerns about an influx of large corporate entities entering the marijuana marketplace. These speakers argued for restrictions and requirements that would ensure “large entities with big money are not allowed to dominate the market.”

Because the Washington State legislature will not be in session again until January 2017, there is virtually no chance of Washington cannabis opening to out-of-state investors until 2017. So for now, the Washington cannabis marketplace will rely solely on the Board’s discretion regarding out of state financing and on its tweaking of current rules. So, don’t get too excited about out-of-state money coming into Washington State. At least not yet.

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Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at hilary@harrismoure.com.

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