Financiers from outside the state could soon be allowed to put money into Washington’s young pot industry. That’s welcome news to entrepreneurs, but others worry it may be a step toward Big Tobacco-like commercialization.
Money from California to Maine could soon be pouring into Washington under a proposal to allow out-of-state financiers in the state’s young pot industry.
That new wrinkle might breathe life into some underfinanced companies in Washington’s decentralized industry that counts more than 750 producers, limited in the number of licenses they can own and the size of their farms.
Or it may begin a creeping domination by big money, others say, that could lead to a takeover by corporate forces akin to Big Tobacco.
State regulators have allowed only those who’ve resided in Washington for six months to be owners or financiers in the state’s legal pot industry. But a proposed rule changebefore the Liquor and Cannabis Board (LCB) would drop the residency requirement for financiers, though they’d have to undergo criminal-background checks, could only loan money to business owners and couldn’t own stakes in Washington companies.
Opinions about the proposal are mixed. Some in the industry are not worried. Some would like to see limits on out-of-state investment. Others are concerned that the rule change could be a small but significant step on the way to corporate consolidation and commercialization.
“I think most licensees want this because it’s so difficult to get financing,” said Heather Wolf, a Bellingham lawyer who represents pot entrepreneurs. Wolf said she represents small farmers “who can’t even get loans from their parents because they live out of state.”
But Jonathan Caulkins, a Carnegie Mellon University professor who has consulted for the LCB, sounded a note of caution. “These actions would nudge the industry a little farther and a little faster down the path of commercialization we expect it to follow,” Caulkins wrote in an email.
Like “dying from 1,000 cuts,” Caulkins said, the “transition to Budweiser/RJR-Altria mode is going to occur in steps and stages.”
A bill in the Legislature would allow out-of-staters to own up to 49 percent of a pot company, but the legislation appears stalled this session. There’s a similar proposal before lawmakers in Colorado, which has a two-year residency requirement in its legal pot industry.
Washington’s residency requirement was established because Initiative 502 author Alison Holcomb didn’t want big corporations to dominate, said Rick Garza, LCB director. Decentralization is a hallmark of Washington’s industry, which limits retailers to three store licenses and caps the size of farms at 30,000 square feet, or about two-thirds of an acre. Unlike Colorado, Washington doesn’t allow growers to be retailers.
Some believe the residency requirement helped keep the federal government, which is adamant that legal pot not leak into other states, from clamping down on Washington’s new industry.
In public hearings, Garza said, the rule change was backed by a “chorus of testimony” as long as out-of-state financiers faced the same background checks as residents.
The reasons go back to the federal prohibition of pot. With federally regulated banks skittish about loaning to pot merchants, and just four credit unions in Washington willing to serve the industry, some entrepreneurs struggle to stay open. Some don’t get even that far.
One client he represented couldn’t raise enough capital to launch his business before his license application lapsed, said Seattle attorney Hal Snow.
Washington law treats spouses as co-owners of assets. Coupled with the residency requirement, that rule also can create problems for pot entrepreneurs. An applicant who moved from Oklahoma to get into Washington’s industry divorced his wife because she needed to stay behind a while in her nursing job, said Patrick Moberg, another Seattle lawyer specializing in the industry. The two remarried when she was able to become a Washington resident, Moberg said.
Grower Alex Cooley said allowing out-of-state money could strengthen Washington companies before big corporate money becomes inevitable. “I don’t run across a lot of people looking to give me interest-free loans,” Cooley said.
With commercial loans scarce and the investment pool limited, some entrepreneurs would like to turn to family members, but can’t if they live outside the state. “People tend to think of out-of-staters as big guys, but it’s also family,” said Wolf, the Bellingham lawyer.
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Shawn DeNae, a grower on the brink of getting a state license, likes the idea of putting some limits on out-of-state money. “Let’s open it up to close blood relatives and see how that goes,” DeNae said.
As long as the caps on farm size and number of licenses remain in place, Moberg said he isn’t worried about corporate money overrunning local industry. “We’ll not have ‘Big Marijuana’ until they get rid of the caps,” he said.
Holcomb, the initiative author, agreed the caps are the chief deterrent to “Big Marijuana.” But she said “there does seem to be a risk that the rule allows for concentration of practical control of the market in a small number of hands if there is no limit on how many enterprises a financier can back.”
A leading industry group, the Washington CannaBusiness Association (WACA), is neutral on the rule change.
“Our members fall all over the map, from extreme opposition to all for it,” said Vicki Christophersen, WACA’s executive director. “Arguments ranged from a desire to encourage local folks,” she said, “to others concerned that out-of-state money could bring a big-business focus and whether that will pass muster with the feds.”
The LCB is scheduled to vote March 9 on rule changes, but that decision could be delayed if the board considers other changes, according to agency officials.