Washington State Cannabis: New Laws on Out of State Financing

How should cannabis laws treat out-of-staters? (bit.ly/1JZtWAZ)
How should cannabis laws treat out-of-staters? (bit.ly/1JZtWAZ)

After six public hearings held last November, the Washington State Liquor and Cannabis Board (LCB) voted to revise draft rules to align the medical and recreational cannabis markets. If adopted by the LCB (which is looking pretty likely), these new proposed rules will mean big changes for Washington’s marijuana market.

The new rules will remove the six month residency requirement for financiers, thus allowing much greater participation in Washington State’s cannabis industry by out-of-staters. WAC 314-55-010 (8) defines a financier as:

Any person or entity, other than a banking institution, that has made or will make an investment in the licensed business. A financier can be a person or entity that provides money as a gift, loans money to the applicant/business and expects to be paid back the amount of the loan with or without interest, or expects any percentage of the profits from the business in exchange for a loan or expertise.

The current LCB rules mandate that a financier is a true party of interest and that they, along with their spouse, must pass a criminal and financial background check in addition to demonstrating no less than six months residency in Washington State.

According to the LCB’s summary sheet regarding the new proposed rules, though the LCB will keep the current financier definition, amended sections WAC 314-55-020 and WAC 314-55-035 would no longer require financiers be considered true parties of interest subject to the six month residency requirement. It is important to note that all of the other qualifying conditions remain for financiers, including having to pass criminal and financial background checks. Additionally, as far as the new proposed rule reads, out of staters will likely be limited to just lending–out of staters still won’t be permitted to be owners of or receive any net or gross profit from licensed marijuana businesses unless they obtain the requisite residency.

Reasonable minds may disagree on whether lifting the restriction on out-of-state financiers is good or bad for Washington’s industry. Proponents of residency requirements typically argue that they serve as a deterrent against “big marijuana,” and that they ensure localized ownership and control. Those in favor of opening up financing to out-of-staters typically assert that increased access to capital gives cannabis business owners better options to start and grow their businesses. From our perspective as cannabis business lawyers who work in multiple states (we have lawyers licensed in Alaska, Arizona, California Illinois, Nevada, New York, Oregon, Washington, Washington D.C., and we have handled licensing matters in multiple additional states) we are of the strong view that allowing participation from out-of-staters makes for a healthier and more diverse and dynamic industry. So, we hope other states follow Washington’s lead and start treating cannabis like any other industry and open up to out-of-staters.

This new set of rules will be subject to public comment, with the first hearing scheduled on February 10, 2016 in Olympia. The LCB will then likely adopt the rules on or by February 24, 2016. If adopted, the new rules become effective March 24, 2016.

For more on investing in and lending to cannabis businesses to check out the following: