Rule Change May Permit Out-of-State Financing in Washington State

financing

The Washington State Liquor and Cannabis Board is considering rule changes that would allow more out-of-state investment in Washington’s cannabis industry. If adopted, the changes could go into effect as early as March 24, 2016.

For investors, though, these changes are a very mixed bag, still in need of some clarification:

  • It appears that the revised rules would permit out-of-state individuals and entities to lend money to marijuana businesses pursuant to a standard loan agreement, providing that the lenders pass financial and criminal background checks.
  • It is not clear whether out-of-state investors will be able to receive any profits from a marijuana business in exchange for financing.
  • An investor who takes an ownership interest in a corporation or limited liability company in exchange for financing will still likely need to meet the residency requirement.

The hearings, to begin on Feb. 10, will provide an opportunity for further explanation and comment.

 

What Would Change; What Wouldn’t

At present, LCB rules require that “financiers” must demonstrate that they have been Washington State residents for no less than six months. It does this by means of two definitions. A financier is

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.

Marijuana licenses may be issued only to residents and the application must disclose the names of all true parties of interest. True parties of interest include the owners of the business, whether sole proprietorship, corporation or any other form of organization. The definition extends to all corporate shareholders as well as limited liability company members. The term also includes financiers.

The proposed change removes financiers from true party of interest matrix. But owners of marijuana businesses must continue to meet the residency requirement. Whether someone who “expects a percentage of profits in exchange for a loan or expertise” is a financier without also being an owner is a question of near theological complexity.

 

Why the Change?

The LCB’s constituency is clearly not investors, but the Washington cannabis industry itself. Residency requirements are often used to ensure that a business has some connection to the local community and that the profits stay within the local economy. They also permit states to protect smaller businesses and control the market without facing pressure from powerful national corporations in the vein of “Corporate Weed.”

But in the last few months the prices of recreational marijuana in Washington have steadily declined, and new licenses are expected to be granted in 2016. Under the circumstances, many entrepreneurs might welcome an expanding universe of financing options. Whether opening the door to out-of-state lenders without also permitting out-of-state equity investment will be enough to do the trick, remains to be seen.

After six hearings last year, the LCB is widely expected to approve the rule changes on or by Feb. 24. The public comment period that will begin on Feb. 10 may be a last chance for amendment or clarification.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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