Effective October 3, 2020, new rules apply as to whom may qualify for a marijuana license in Washington State. The Washington State Liquor and Cannabis Board (the “LCB”) recently revised its True Party in Interest Rules, the new rules can be found here.
Any individual that holds a marijuana license and anyone who has an ownership interest in any legal entity that holds a marijuana license (i.e. any shareholder of a corporation or member of a limited liability company), must qualify as a True Party in Interest (“TPI”). Any person or entity that has a right to receive revenues or profits from a marijuana licensee is also considered a TPI as is any person or entity that exerts control over the licensed business. All TPIs must be Washington State residents and pass criminal and financial background checks. The new rules do not change this fundamental principle.
The new rules, however, do clarify what constitutes control over a licensee. “Control” is now defined as “…the power to independently order, or direct the management, managers, or policies of a licensed business.” The LCB continues to interpret this term broadly and thus, licensees and other stakeholders should take care not to trigger the TPI rules by allowing a third party to exercise “control” via a consulting contract, intellectual property licensing agreement, or other services agreement.
The biggest change to the TPI rules is the removal of the spousal qualification. Previously, anyone married to a TPI also had to qualify as a TPI (i.e. they had to be a Washington resident and pass criminal and background checks). The new rule removes this requirement for spouses, which should make things much easier for marijuana license applicants and licensees.
A big caveat to the spousal rule change is that spouses are still considered TPIs in regard to the number of licensees any one person or entity may hold. A married couple may not be a TPI in more than 5 retail licenses, more than 3 producer licenses, or more than 3 processor licenses. A married couple may also not be a TPI in both a marijuana retail license and/or producer or processor license since the prohibition on vertical integration continues to apply to married couples.
The new rules include the following non exhaustive list of individuals and entities that do not need to qualify as a TPI:
- A landlord receiving rent on a fixed basis;
- A person receiving a bonus/commission on their sales pursuant to a written agreement, as long as the commission does not exceed 10% of their sales;
- A person or entity receiving a commission from the sale of the marijuana business or real property;
- A consultant receiving a flat or hourly rate pursuant to a written agreement;
- A person with an option to purchase the license and/or licensed business as long as no money has been paid to the licensee under the option or purchase contract;
- Any business or individual providing services to a licensee (i.e. branding or staffing) as long as the licensee retains the right to and controls the business; and
- A financial institution.
With regard to the landlord exception noted above, the new rule states that the LCB may investigate a landlord to determine if a financier relationship exists with the licensee if there is common ownership between them and/or where rental payment has been waived or deferred. Often licensees want to defer rent when first starting operations at a new location, and licensees should be prepared for such a deferral to be scrutinized by the LCB.
Another notable revision is in regard to option agreements. Previously, there were no explicit rules governing option agreements. The new rules, however, make it clear that whenever money is paid via an option agreement, the option holder will be considered a TPI.
Although the new TPI rules do provide some clarification on what individuals and entities must meet the TPI requirements, compliance with these rules can still be tricky especially in regard to drafting third party services contracts. Licensees and stakeholders should carefully review these new rules prior to entering into any agreements with third parties so as not to inadvertently trigger any TPI compliance issues.
For more information on the regulation of hemp and marijuana businesses in Washington State, please contact Heather Wolf.