Earlier this year, the Washington State Liquor and Cannabis Board (the “LCB”) removed the residency requirement for certain financiers. 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. These lenders, however, are subject to financial investigations and background checks.
The question that I have recently encountered is this – when the out of state lender is a large corporation, does the LCB require background checks and financial investigations of all shareholders? This is a particularly thorny question when the out of state lender is a public company or an entity with hundreds of shareholders.
The LCB rules do not directly address this issue. The LCB rules require that all shareholders of corporations that are “True Parties in Interest” in a marijuana business license must be vetted. A True Party in Interest is any person or entity that holds a marijuana licensee and/or has an equity or profits interest in a marijuana license. This holds true for both public and private corporations that are True Parties in Interest.
Out of state lenders are not considered “True Parties in Interest,” however, and the rules just state that the entity must undergo a financial and criminal background investigation. Thus, arguably it may be possible to simply have the officers of the corporation and/or the board of directors vetted depending upon the size of the corporation and/or the circumstances of the loan agreement.
The purpose of the vetting financiers of marijuana businesses is to ensure that the funding of these businesses comes from legitimate and legal sources. Whether this truly requires the vetting of all shareholders when a corporation is simply providing a loan rather than taking an ownership stake in the marijuana business is open to question.
Currently, the LCB appears to be handling this issue on a case by case basis as the out of state financing rule is relatively new and there have not been many large corporations seeking to act as lenders to Washington State marijuana businesses. But, Washington State may see more out of state lending due to the combination of growing acceptance of marijuana legalization at the state level and the lack of change in regard to federal banking laws.
If you are a licensee seeking an out of state loan or are an out of state lender then you should consult with the LCB as to the vetting requirements for your particular loan transaction. Aside from the vetting issue, all marijuana licensees must disclose the source of funds invested in the licensed business. Thus, communication with the LCB on all loans and other funding matters can be crucial for compliance with state law.
For more information on the regulation of marijuana businesses, please contact Heather Wolf.