In June of this year, the Washington State Liquor and Cannabis Board (the “LCB”) removed the residency requirement for certain financiers. I have encountered some confusion as to the effect and reach of this rule change. The third edition of my ebook – Turning Green to Gold has just been released and details the new changes affecting marijuana business investments.
Out of state lenders can now loan money to marijuana licensees as long as these out of state lenders do not take an ownership or profits interest in the licensed marijuana business. This means that an out of state lender cannot take an equity stake in the limited liability or corporation that holds the marijuana license. Rather, the out of state lender can only loan money to the licensee based on a promise that the licensee will repay the debt pursuant to a standard commercial loan agreement.
The new rule has opened the door to out of state hard money lenders and private funding from out of state friends and family of the licensee. These loans will likely be made at higher than standard commercial rates given the risk to the lender as well as the inability of marijuana licensees to obtain bank loans. What the LCB will ultimately tolerate in terms of high interest rates and loan terms is unknown.
It is also important to understand that the new rule change did not affect the ability of licensees to be true parties in interest in other licensed marijuana businesses. Retail licensees, for example, can only be true parties in interest in three retail licenses and cannot hold an ownership interest in either a producer or a processor license. Thus, a retail licensee, who already has an ownership in interest in three licenses, cannot provide financing to another licensee in exchange for an equity stake in that fourth retail business. Similarly, a retail licensee cannot provide financing to a producer or processor licensee in exchange for an ownership percentage in either of those businesses.
The rule change that went into effect last month only allows for limited participation in the state’s legal marijuana market by out of state financiers. Any licensee considering borrowing from an out of state lender and any financier considering lending to a licensee needs to carefully review the LCB rules with their legal counsel. Violation of these rules can result in serious consequences including cancellation of the marijuana license.
For more information on the regulation of marijuana businesses, please contact Heather Wolf.