Is Washington State Moving to Limit Canadian Investment in Marijuana Businesses?

Last week, the Washington State Liquor and Cannabis Board (the “LCB”) provided notice of a number of rule change proposals meant to implement 2017 legislative changes. Among these changes are clarifications as to who may invest in licensed marijuana businesses.

As a refresher, when Washington State originally legalized marijuana, all lenders were required to be Washington State residents. In June of 2016, the LCB removed the residency requirement for non equity lenders. As a result, out of state individuals or entities are now able to loan money to licensed marijuana businesses as long as they do not take an ownership or profits interest in the borrower’s business.

Since this 2016 change, there has been an influx of out of state lenders providing financing to licensed marijuana businesses. Not surprisingly, some of these loans have been at very high interest rates. The rules currently being proposed by the LCB state that financiers may only charge “reasonable” interest. Presumably, this is to prevent predatory lenders from entering the market. Clarifying the differences between a “financier” and a “true party in interest”, the proposed rules state:

  1. A financier may not receive an ownership interest, control of the business, or a profit-sharing interest or percentage of profits in exchange for financial support.
  2. Washington state residency requirements do not apply to financiers, but all financiers must be United States residents (emphasis added).

Until now, neither state legislation nor LCB rules explicitly required financiers to be US residents (as opposed to Canadian residents, for example). The LCB is likely concerned that foreign investment, even by our neighbors to the north, could trigger further scrutiny of the state’s legal marijuana industry by the feds. Many Canadian marijuana firms are looking to enter the U.S. market either via non equity investment and/or licensing agreements. Thus, it will be interesting to see whether this rule change takes effect and if so, how it affects the marijuana industry.

Licensing intellectual property and/or providing consulting services to Washington state marijuana businesses is a popular way for non residents to participate in the industry. To try to curb any avoidance of state rules precluding out of state ownership or control of marijuana businesses via these contracts, the LCB now requires all licensing and consulting contracts to be disclosed to the agency.

The LCB’s proposed rules seek to clarify the distinctions between a “consultant” and a “true party in interest”. The new rules define a consultant as

“…receiving flat or hourly rate compensation under a written contractual agreement so long as the consultant does not receive any percentage of profits or interest in the licensed business or management or control of the licensed business such that would indicate or create a true party of interest relationship.”

One of the biggest obstacles in regard to establishing the consultant/licensee relationship  is complying with this requirement that that the consultant not exert too much control over the licensed business. There is no bright line rule as to what constitutes too much control; and both parties will want to work with their legal counsel to ensure that the consulting agreement doesn’t trigger true party of interest concerns with the LCB.

The proposed rules include a number of other changes, including allowance of volume discounts, prohibition of license issuance within exterior boundaries of tribal lands, exceptions for “free products” or “treats or services”, and further clarifications regarding issuance of marijuana research licenses. A summary of the proposed changes can be found here.

Stay tuned to this blog for further rule updates, including new rules re testing of CBD for use in marijuana edibles.

For more information on the regulation of marijuana businesses in Washington State, please contact Heather Wolf.