Out-of-State Investment in Washington’s Marijuana Market

There are still many mountains to climb before out of state investment is allowed into Washington cannabis.
Many mountains to climb before Washington cannabis opens to out of state investment

Our Washington State cannabis business lawyers have been getting tons of calls and emails on whether the Washington State and Liquor and Cannabis Board (the “Board”) is finally going to allow out of state investors in Washington’s marijuana marketplace. This post is intended 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 story 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 only 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 Washington residency of at least six months. You can find the proposed rule here.

It is though true that the Washington State Legislature is considering allowing out of state ownership of marijuana-licensed businesses via House Bill 2364, came out in January. Two substitute versions of the bill were proposed in the House, one of which came through in March during the legislature’s first special session. A copy of the second substitute bill can be found here. This proposed legislation limits 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.

If this bill were to pass, out of state U.S. citizens could take up to 49% equity 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 House Bill Report makes note of those who testified regarding the bill and notably, no one testified in opposition to it. For those in favor, the summation of the testimony was that the bill is necessary:

[T]o 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 allow out-of-state corporate investments, so Washington needs the same in order to remain competitive. Currently, many licensees are operating on narrow profit margins, and making corporate investment capital available would facilitate their financial survival. The bill would make the investment process much more transparent, open, and honest.

And for those whose testimony qualified as “other” (but not opposed), the summary of that testimony was as follows

The owners of small marijuana enterprises are concerned about an influx of large corporate entities entering the marijuana marketplace. There should be some restrictions and requirements in place that would ensure that large entities with big money are not allowed to dominate the market. The bill should require that majority control of business entities be held by state residents and that investors be citizens of the United States.

The Washington State legislature concluded its first special session on March 29th and neither the Governor nor two-thirds of both houses have called for another special session. This means that we will not see this bill picked up again until the next regular session, which won’t be until January 2017.

For now, the Washington cannabis marketplace will rely solely on the Board’s discretion regarding out of state financing through tweaking of current rules. So, don’t get too excited about out of state money coming into Washington State as it’s going to be a while before out of staters can really invest.

2 responses to “Out-of-State Investment in Washington’s Marijuana Market”

  1. Are there any states that allow for international investors? I thought I read about one the other day (can’t find the article now) and was wondering how background checks would be conducted? Otherwise, would they just do something like lease equipment back to their in-state business partner, or sell product packaging to their in-state partner or some such thing?

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