Overly cautious rules on legal marijuana are driving away needed capital investment, writes columnist Jonathan Martin.
It’s no secret that the tech industry likes marijuana. On HBO’s true-to-life comedy “Silicon Valley,” Erlich Bachman, the blowhard entrepreneur, has a marijuana home-grow in his garage, a bong in the dining room and “get kush” on his to-do list.
It took a while, but Silicon Valley’s huge institutional investment funds are finally buying green.
Peter Thiel, co-founder of PayPal (and inspiration for the awkward savant investor in “Silicon Valley”), led the market in January with a $75 million investment in Privateer Holdings, a Seattle-based private equity firm specializing in marijuana.
That stamp of approval was followed, almost overnight, by venture capital from early investors of Uber, Tesla and Reddit flowing into marijuana-focused companies. Cannabis investment has gone mainstream.
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What does this mean for Washington, the co-pioneer with Colorado on legalization? Not much. The investment is likely to skip right past us because the state hasn’t gotten legalization quite right, at least from an Economics 101 perspective.
I talked with Brendan Kennedy, co-founder of Privateer Holdings, just before the Thiel investment became official. With an influx of capital, Kennedy was enthusiastic about new marijuana brands (he is rolling out a Bob Marley line) and in developing markets in Jamaica and Uruguay. Privateer has a 60,000-square-foot grow farm in Nanaimo, B.C., and is getting pitched by new companies daily.
“We don’t look in Washington,” Kennedy said over lunch. “It’s sad, really.”
Kennedy’s reasons reflect a growing frustration about Washington’s approach to legal marijuana. It is both hyper-cautious about legally sanctioned pot yet indifferent about the black market and unregulated medical-marijuana dispensaries.
“Every state is talking the same way: ‘We’re not going to make the same mistakes as Washington,’ ” said Kennedy.
The Thiel investment spotlights one of the oddities of our pot regulations, one that adds to the burden for state-licensed businesses. Initiative 502 had a residency rule, requiring any state-licensed “sole proprietor” to live in Washington for the past three months. The state Liquor Control Board decided to extend that to financiers (and their spouses, to boot).
Think about it: If the rule applied to alcohol, Redhook and Elysian beers — homegrown companies now owned by conglomerates — would be yanked off the shelf.
If the rule applied to alcohol, Redhook and Elysian beers — homegrown companies now owned by conglomerates — would be yanked off the shelf.”
“I don’t know a single other industry with that kind of restriction,” said Troy Dayton, CEO of The ArcView Group, an angel-investor network for marijuana. “It’s silly,” he added.
The rule goes back to the state’s concern about federal intervention. Out-of-state owners, on theory, would smuggle Washington-grown stuff elsewhere, triggering federal angst. Colorado is getting sued by its red-state neighbors for just that reason.
That seems to be a problem of criminality, not residency. In the transition from prohibition to legalization, regulations are still too clenched to let the free market work and to kill off the black market. Loosen up a bit, folks.
Dayton said the residency rules also put small pot startups at a disadvantage. Limited to only in-state capital, fewer investors are in the “driver’s seat to drive a harder bargain” for equity with marijuana retailers and growers, Dayton said.
Marijuana industry lawyer Hilary Bricken agrees: “Believe it or not, while Washingtonians favored legalization, they’re not so big into marijuana investment,” she said. “It can be very, very difficult to find eligible and willing investors.”
Not surprisingly, Liquor Control Board Agency Director Rick Garza bristles at the overregulation critique. The I-502 market is getting better. More legal marijuana stores are coming on line, including one in Wallingford just this week. Sales have topped $1 million a day.
And the Legislature is at last trying to fix the Economics 101 problems. Unregulated medical marijuana is getting reined in. A distributor license is being created. Lawmakers are arguing over a change to simplify marijuana tax rates — and even lower them.
When I asked Garza if the lack of eligible investors was hurting the market, he was diplomatic. “I could see how (easing the rule) would allow out-of-state investment as long as they’re good investment companies and they go through the regular background-check processes.”
The Legislature, however, is still getting it wrong. Instead of easing restrictions on investors, state House Republicans got the residency requirement extended, to six months, in a bill now pending before the state Senate.
So unless Silicon Valley plans to buy a pied-à-terre in downtown Seattle, the open checkbooks for marijuana investment are closed for Washington.