Washington Cannabis
Washington homegrown cannabis

The Washington State Liquor and Cannabis Board recently issued a report on recreational cannabis home grows to the Washington State Legislature without making a specific recommendation as to whether the state should legalize recreational home cultivation. Instead, the LCB analyzed the following  three proposed option (which options we discussed here):

  1. Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis.  The LCB would impose requirements to ensure security and to prevent youth access and diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
  2. Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the homegrown program.
  3. Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.

The Board weighed the benefits and drawbacks of each measure. A tightly regulated system provided in the first option would address concerns over traceability and public safety but would require allocating significant resources to monitor home grows. The second option would allow local governments to control home cultivation but could result in inconsistent and confusing rules and regulations across the state. The third option would mean the state would not need to implement a new system but would continue allocating resources to prohibit home cultivation.

The LCB contacted cannabis regulators from Colorado, Oregon, and Rhode Island. Colorado and Oregon allow for recreational home cultivation (along with all other states that have legalized recreational marijuana) and Rhode Island permits medical home cultivation with tight regulations. Colorado’s constitution provides a right to home cultivation. The Colorado State Legislature expressed concerns about large home grows as the law originally allowed for up to 99 plants in a home and in 2017, Colorado limited that number to 12 plants per home. Oregon citizens can grow up to four plants generally but can grow more after obtaining a permit or a doctor authorization. Oregon recommended a low number of plants if recreational grows are allowed. Rhode Island expressed concerns over diversion and created a strictly regulated home grow system where all grows must be permitted and plants traced in the traceability system.

The Washington Board also spoke to the Association of Washington Cities, Washington State Association of Counties, the Washington Association of Sheriffs and Police Chiefs, the Department of Social and Health Services, Department of Health, Washington Healthy Youth Coalition, and received public comment through a public hearing and written comments. The LCB reports that law enforcement generally opposed implementing a home cultivation program as it could create public health and safety concerns, including diversion of legally grown product to the illicit market. Law enforcement officials also expressed concern over whether the state could regulate home grows as individuals are afforded privacy protections in their homes that can prevent law enforcement officers from inspections. Other state agencies expressed concerns about children accessing cannabis grown in their homes.

The report emphasizes Washington’s compliance with the Cole Memo through a tightly regulated system, stating that recent changes made by the legislature continue “to add public safety measures to the system rather than making it more lax.” It summarized the viability of home grows as follows:

If the maximum plant number is kept very low, the less of an overall impact there may be to a regulated system and diversion to feed the illicit market and marijuana being exported to other states. While the majority of people may likely follow the rules, there may be those who will intentionally not stay within legal requirements with the goal of engaging in the illicit market.

The Board also emphasized the need for clear regulation if the State allows recreational home cultivation:

The more clearly and simply the parameters are drawn – how many plants a person may have, definitions of a plant and the level of maturity of plants a person may have, restrictions on when a person is illegally growing vs. legally growing – the less overall impact to the regulated system and the greater the enforceability of home grows, thus supporting the tenets of the Cole Memo. This greater enforceability does not completely abate enforcement concerns.

The LCB’s analysis will now be used by the Washington State legislature to implement a program to legalize home cultivation or to uphold the status quo. Washington’s legislative session starts in January and we’ll continue to write about the status of homegrown cannabis in the Evergreen State.

Right now the jury is definitely still out.

Washington and Federal Cannabis lawsLast week, the Federal Department of Justice (DOJ) filed a motion with the Ninth Circuit Court of Appeals to stay or remand appellate proceedings in its case against Rhonda Firestack-Harvey, Rolland Gregg and Michelle Gregg, the remaining members of the Kettle Falls Five, because it does not have funds to continue the prosecution. The Kettle Falls Five is the name given to a group of medical marijuana growers in Kettle Falls, a town in North East Washington. The group consisted of Rhonda Firestack-Harvey and Larry Harvey, their son Rolland Gregg and his wife Michelle, and Jason Zucker.

The Kettle Falls Five were charged by the federal government after a 2012 raid on their farm in Northeast Washington. The group was collectively growing medical cannabis plants in an amount permitted by state law. The federal government vigorously prosecuted the Kettle Falls Five over the last five years. The feds originally sought 10-year mandatory prison terms. The feds dropped charges against Larry Harvey who was battling stage four pancreatic cancer. Mr. Harvey passed away in August 2015.

Jason Zucker pleaded guilty and testified against the other defendants prior to trial. He was sentenced to 16 months of prison time based on his cooperation.  The remaining defendants faced charges of growing, possessing, and distributing cannabis, in addition to charges relating to firearms found on the same property as the cannabis grow. Rhonda, Rolland, and Michelle were acquitted of all charges except growing cannabis. Michelle and Rhonda received a sentence of one year and a day and Rolland received a sentence of 33 months.

The Kettle Falls Five appealed to the Ninth Circuit. The DOJ was expected to continue its vigorous prosecution, which makes its recent motion to stay or remand the case quite a surprise. In its motion, the DOJ provided the following explanation:

This motion is based upon Congress denying funding to the Department of Justice for the prosecution of medical marijuana patients in states where medical marijuana is lawful. The purpose of this motion is to acknowledge that the United States was not authorized to spend money on the prosecution of the defendants after December of 2014 because the defendants strictly complied with the Washington State medical marijuana laws.

This refers to the Rohrabacher-Blumenauer Amendment which limits prosecution of state-compliant medical marijuana actors.  As part of a federal budget deal in December 2014, Congress cut off funds for the federal prosecution of medical marijuana growers and users in states where medical cannabis is legal, so long as those actors are following state law. Since 2014 the Amendment has repeatedly been renewed.

The DOJ’s motion also cites United States v. McIntosh,  in which the Ninth Circuited decided the Rohrabacher-Blumenauer Amendment prohibited the DOJ from “spending funds for the prosecution of individuals who engaged in conduct permitted by the state medical marijuana laws and fully complied with the laws.” The DOJ’s motion states that the “prohibition regarding DOJ expenditure of funds applies even though the prosecution was properly initiated prior to [Rohrabacher-Blumenauer’s] enactment.”

The DOJ asks the court either to either back off on the appeal or to send the case back to the trial court. This is promising as it appears the DOJ may have finally seen the writing on the wall and is going to drop its case against the Five. However, it may also mean the DOJ is attempting to hold off on prosecuting the defendants to see if Congress reaffirms the Rohrbacher-Blumenauer Amendment, which is not guaranteed, especially given the current political status of our federal government. It should go without saying that Jeff Sessions has openly lobbied Congress against the Amendment.

In any event, this is an opportunity for defense counsel to ask the judge to toss out the case, which we fervently hope will be its eventual outcome. On a broader scale, this motion shows that the Rohrabacher-Blumenauer Amendment is a powerful tool to limit federal prosecution of medical cannabis growers.

Cannabis sales soar in Washington

Washingtonians have long been known for their love of coffee, but a new commodity is gaining popularity across the state: cannabis. The Evergreen state is living up to its name, as consumers cannot get enough legal cannabis. It only took nine months for Washington cannabis sales to hit the $1 Billion mark in 2017 and rake in over $300 Million in taxes!

These sales numbers come on the heels of a report from the Washington State Institute for Public Policy that shows a decrease in teen use of cannabis since the passage and implementation of Initiative 502. Teens also report that it is more difficult to access cannabis since legalization. Not only is the legal cannabis industry profitable, it also seems to keep youth from using.

Washington’s experiment with legalization appears to be working. Here’s hoping other states and the federal government take note.

You can find more information on sales data at the Washington State Liquor and Cannabis Board’s website.

Unlike other states with recreational cannabis, Washington does not allow for home cultivation of recreational cannabis. However, that could change soon as SB 5131 requires the Washington State Liquor and Cannabis Board (LCB) to study the viability of home cultivation. The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana.  Written public comments may be submitted through October 11 at rules@lcb.wa.gov or hard copy at PO Box 43080, Olympia, WA 98504.

The LCB will hold a public hearing on Wednesday, October 4, 2017, at 10:00 AM on whether the State should allow home grows of recreational marijuana.  Written public comments may be submitted through October 11 at rules@lcb.wa.gov or hard copy at PO Box 43080, Olympia, WA 98504.

The LCB must consider home cultivation in light of the Cole Memorandum, the Obama-era policy statement from the Department of Justice that tacitly permits states to legalize marijuana so long as those states enact strong and effective regulations. The Cole Memo outlines eight enforcement priorities:

  1. Preventing the distribution of marijuana to minors;
  2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
  3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
  4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
  5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
  6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
  7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
  8. Preventing marijuana possession or use on federal property.

The LCB has opposed home cultivation in the past. In 2015, Washington lawmakers considered a bill that would have allowed cultivation of up to six cannabis plants. In response, the LCB sent a letter outlining the Board’s concern that unregulated home grows would increase the occurrence of all eight enforcement priorities outlined in the Cole Memo.

The LCB worries that home cultivation will lead to diversion. Washington producer, processors, transporters, researchers, and retailers must all use “seed-to-sale” traceability software. As the name suggests, a cannabis plant is monitored throughout its life to prevent cannabis from being diverted to other states, to minors, or to the black market.

The LCB is seeking public input on three proposed options:

  1. Tightly Regulated Recreational Marijuana Home Grows. This option would impose a strict regulatory framework. Home cultivators would need a permit to grow legally. Permit holders could then purchase plants from licensed producers. Each household would be allowed four plants and all plants would be tracked in the same traceability system used to monitor commercially grown cannabis.  The LCB would impose requirements to ensure security, preventing youth access, and preventing diversion. Both the LCB and local authorities would monitor home grows. Cannabis processing would be subject to the same restrictions as apply to medical cannabis (e.g., no combustible processing).
  2. Local Control of Recreational Marijuana Home Grows. Like Option One, this option would require a permit, require safeguards to prevent diversion, limit each household to four plants, and allow permit holders to purchase plants from producers. Option Two would not require home cultivators to use the State’s traceability system. It also would give greater authority to local jurisdictions to create more restrictions and to authorize, control, and enforce the home grown program.
  3. Recreational Home Grows are Prohibited. The third option is to maintain the status quo and prohibit home cultivation.

The LCB must report its findings to Washington’s legislature by December 1, 2017. Lawmakers provided the LCB with no additional funds, meaning the Board must conduct its study without expanding its budget. There is no guarantee that anything changes but this is could be the beginning of recreational home cultivation in Washington.

Receiver time?

Back in 2014, we wrote that bankruptcy is not an option for marijuana businesses. That issue has been litigated here and there since then, but as of today, cannabis businesses are no better off than before. The hard reality is this: all bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code. Those courts have held that it would be impossible for a U.S. Trustee to control and administer a debtor’s assets (cannabis) without violating the federal Controlled Substances Act.

Bankruptcy laws are designed to afford a fresh start to honest but unfortunate debtors, while providing equal treatment to creditors. Without recourse to bankruptcy, parties can only: (1) liquidate without court supervision, or (2) explore state court receivership. Liquidating without court supervision offers no protection to pot business creditors. State court receivership does afford protections, but adds complexity because states closely regulate who is allowed to possess and sell marijuana (through licenses). For a while, it was an open question as to whether a state court receivership would actually work in the cannabis context. Recently, one actually did.

In the case at issue, a landlord (creditor) had leased space to a licensed marijuana business tenant (debtor). The tenant failed to pay rent, and the landlord evicted the tenant and acquired a judgment for unpaid rent. Because RCW 7.60.010 et seq. provides that a Washington state court may appoint a receiver over a marijuana business, the landlord convinced the court to issue an order appointing a receiver to sell the tenant’s cannabis and satisfy the judgment. The landlord then successfully navigated the licensure issue with the Washington State Liquor and Cannabis Board, sold the pot, and collected on its judgment.

Washington is not the only pro-cannabis state with statutes and administrative rules that seek to bridge the bankruptcy gap by allowing creditors to seize and sell cannabis. In Oregon, OAR 845-025-1260 provides “Standards for Authority to Operate a Licensed Business as a Trustee, a Receiver, a Personal Representative or a Secured Party.” Our Oregon and Washington cannabis lawyers have assisted numerous clients in acquiring and perfecting security interests under the relevant rules. We expect California to adopt a similar regime.

One of the reasons creditors get such high rates of interest for loans to cannabis businesses—in addition to the fact that banks won’t lend to them—is because many pot businesses lack lienable collateral. For many of them, the net worth of the business is mostly tied up in the cannabis itself. It is now clear that, at least in Washington, the cannabis can be liquidated by a third party, whether or not the pot was initially proferred by the debtor as collateral for a loan. In that way, cannabis businesses are being treated by progressive states much like non-pot concerns.

That we finally have had one successful state court receivership probably won’t nudge circumspect lenders to reach out to the cannabis industry. However, cannabis businesses can feel encouraged that their number one asset (their cannabis) may have marketable value when looking for loans; and lenders can feel hopeful that if everything falls apart, there may be liquidation value in the cannabis crop. None of this “solves” the bankruptcy issue, but it’s a step in the right direction.

Cannabis business lawyers
Why so few cannabis warehouses?

Among several changes to marijuana laws that SB 5131 enacted in July, Washington’s license cap on retailers moved from three licenses to five licenses. The Washington State Liquor and Cannabis Board at first wanted to delay implementation of the new license allotment to 2018, but has now consented to begin processing license acquisition applications immediately. This isn’t for new license issuance — that window is still closed. But existing retailers that own three licenses can now acquire two more.

As market consolidation occurs in Washington’s retail cannabis space, our cannabis business lawyers have been working with retailers on the problem of inventory management in the marijuana space. Inventory issues represent a misunderstood but glaring headache for marijuana businesses across the state.

Any time a retail operation has more than one location, that operation wants to run its inventory processes as efficiently as possible. Many multi-location retail operations in other industries utilize centralized warehousing as a key cog in their inventory management systems. Having a single regional warehouse able to directly supply many retail stores has significant benefits. First, the per square foot price of storage at a warehouse location is significantly cheaper than at a high-traffic retail area. Additionally, if a retailer controls the warehouse, it effectively separates itself from the friction point of dealing directly with suppliers. All outside vendors can deliver to the warehouse and the warehouse can distribute the goods to the individual retail stores at a time and method convenient for the retail stores — delivery becomes less of a hassle and negotiation.

But, as always, this is significantly more challenging in the cannabis space. The state’s tied-house rules and tiered licensing severely limit the movement of marijuana product and who can control it at any stage in that process. A single retail license works for a single retail location   — a licensed retailer cannot maintain a separate warehouse and a retail store with a license. Every retail location must negotiate and organize shipments from licensed processors that, because of the tiered licensing rules, are third parties. If I own five retail locations and I want to stock them all with a specific product, I must organize five different shipments of that product.

There are two different fixes to this predicament. One is to take advantage of WAC 314-55-079(8), which states: “A marijuana retailer may transport product to other locations operated by the licensee or to return product to a marijuana processor . . . .” So if I own four retail locations, I have a little bit of flexibility. I could maintain a networked internal distribution model, where each location transports to each other location when necessary. Or, I could use one location as my de facto warehouse. If I have three retail stores in the city and one out in the county, I could expand the county’s inventory space, direct all deliveries there, and manage distribution from that central location.

There’s a catch, of course. This rule only applies if all the retail stores are owned by a single entity — a real liability concern. Most companies with multiple retail cannabis locations that each carry their own liability insurance hold the locations in separate business entities. This limitation of liability strategy is a core component of U.S. corporate law. If there is a massive tort or contract claim against a single retail location held in its own entity, the plaintiffs have access to every asset and insurance policy of that specific entity, but they don’t have any claim to the parent company or to other affiliated retail entities. Managing liability exposure through different business entities can represent the difference between a disastrous occurrence killing your profits for a year and killing your business forever. Retailers in that context must undertake a cost benefit analysis by figuring out whether the liability risk is worth the gain from increased inventory management efficiency?

The other solution is to negotiate a form of symbiotic relationship with a licensed processor. As stated, before, tied-house rules limit the ability of retailers and processors to engage in many business arrangements. Retailers cannot borrow money from, get discounts from, or receive gifts from licensed processors. They cannot enter any binding agreement where the purchase of one product is contingent upon the purchase of another product.

However, the rules don’t prohibit communication between cannabis retailers and processors and they don’t prohibit processors from making purchases based on the needs of retailers with which they do business. In theory, then, a processor could know the demand schedule of a retail group with whom it does business and act as an intermediary purchaser for that retail group. The retail group would probably end up paying a higher price for the product, as it would be adding an additional middle-man to the transaction, but this model pulls in some of the benefits of centralized warehousing. This system does present some risk to both parties, though, as their ability to enter contingent contracts is severely limited. A processor making a bulk purchase it assumes the retailer is going to buy may find itself in deep financial straits if the retailer chooses to buy elsewhere.

There are a few rule changes that could make things easier for retailers here in Washington State, but the WSLCB’s goal isn’t necessarily to make things easy for marijuana retailers. Outside of increased lobbying, cannabis business owners will need to continue doing the best they can within the system we have.

Washington State Cannabis LawyersThe Washington State Liquor and Cannabis Board (LCB) yesterday rescinded its interim policy prohibiting a business or individual from owning multiple cannabis producer licenses. Now, a business and its principals can own up to three cannabis production licenses, which is up from just one license.

Though the LCB’s own rules (WAC 314-55-075) state that “any entity and/or principals within any entity are limited to no more than three marijuana producer licenses,” as of 2014, it restricted cannabis producers to no more than one producer license. Our Washington State cannabis lawyers never liked that restriction as we thought it encouraged illegal grows and bad behavior. See Washington LCB Producer License Roll-Back May Encourage Black Market Growers

The LCB announced its decision to rescind its one producer license policy at yesterday’s LCB meeting and noting how Washington State cannabis producers had been pushing to be able to expand and how the LCB’s own rules (WAC 314-55-075) allow ownership of up to three producer licenses. The LCB said it was time for the Board to “get out of the way” of Washington State cannabis producers.
We wholeheartedly agree.

To be clear, this shift in LCB policy towards producer licenses does not mean the LCB will be accepting new producer applications or expanding canopy space for existing producers; the LCB will not issue producer licenses to any new applicants nor will its policies on canopy space change. What this announcement does mean though — and this is a big deal — is that anyone who already holds a Washington State producer’s license will now be free to expand its cannabis production capabilities and canopy by purchasing other licensed producer businesses (up to two more). We know there is a massive pent-up demand for such purchases and sales because hardly a week goes by without one of our Washington State cannabis producer clients telling us of their desire to expand their production operations (mostly to better achieve economies of scale), and we also get frequent calls from companies (and clients) wanting to sell their production operations.

What we predict will happen in the market is a massive consolidation of smaller and/or struggling cultivators who will sell their businesses to larger-scale producers that are well organized and well capitalized. For years we have suspected this market consolidation of cannabis producers would occur in Washington and we see it likely to happen in other states as well.

If you are contemplating buying or selling a Washington cannabis production business/license you should be sure to check out the following:

 

 

Washington State New Cannabis lawsIn 2015, Washington passed Senate Bill 5052, which allowed medical marijuana patients and their designated providers to grow cannabis plants for personal medical use and band together to form medical marijuana cooperatives. That bill did not provide a legal pathway for cooperatives, medical marijuana patients, or designated providers to acquire plants. It also did not allow retail sales of plants directly to consumers. In 2016, the Washington Legislature passed legislation allowing cooperatives to purchase plants from licensed marijuana producers, but failed to address the ability of other patients to acquire plants.

Washington lawmakers recently addressed this issue with Senate Bill 5131, which allows qualifying patients and designated caregivers to purchase cannabis plants directly from licensed marijuana producers. A “qualifying patient” is a person who has been recommended medical marijuana by a healthcare professional and a “designated caregiver” is a person the qualifying patient designates in writing as authorized to procure medical cannabis. Qualifying patients can enter into a medical marijuana authorization database and receive a recognition card from the state. Not all qualifying patients enter the database and so some qualifying patients do not hold recognition cards. Carrying a recognition card brings advantages, such as tax discounts and the right to purchase larger quantities of marijuana in a single transaction.

All Washington marijuana patients can grow marijuana for their personal use, unlike recreational users, but qualifying patient cardholders can grow more. Cardholders may cultivate six cannabis plants at home (up to fifteen plants if their physician recommends it) which can yield a maximum of eight ounces of useable marijuana. Cardholders can also join state-registered medical marijuana cooperatives to cultivate marijuana with four other patients. Patients who are not cardholders may grow up to four cannabis plants and possess up to six ounces of useable marijuana produced from those plants, but cannot join a cooperative.

SB 5131 also allows qualifying patient cardholders to purchase immature plants and clones:

Qualifying patients and designated providers, who hold a recognition card and have been entered into the medical marijuana authorization database, may purchase immature plants or clones from a licensed marijuana producer as defined in RCW 69.50.101.

The Washington State Liquor and Cannabis Board (LCB) recently issued an interim policy statement that describes how members of cooperatives, cardholder, and cardholder’s designated providers can purchase cannabis plants and seeds but makes no mention of how patients without qualifying patient cards can purchase seeds. The LCB is mandating that Washington State cannabis producers receive documentation before selling plants or seeds. Members of a cooperative must show a valid recognition card and a copy of the letter from the LCB confirming the person is part of a registered cooperative. Qualifying patients must show a valid recognition card. It appears that there still is no means for patients who do not enter the database and receive a recognition card to legally obtain seeds to grow their own medical cannabis.

The LCB’s policy statement provides additional guidance on the sale of plants and seeds. Immature plants or clones are defined as plants that have no flower, are less than 12 inches in height and less than 12 inches in diameter. Producers must abide by security and traceability requirements including a 24-hour waiting period imposed on all cannabis transfers. Patients and providers must notify a producer 24 hours before picking up plants or seeds. All transfers must occur on the producer’s licensed property and deliveries are prohibited. Cooperatives, patients, and caregivers are not permitted to purchase more plants than they were authorized to grow by a physician or under Washington law. The patient or caregiver must buy the plant in person and producers cannot sell to anyone other than those who called in on a product. Sales tax applies to the sale of plants or seeds, but the state’s marijuana excise tax does not.

You can find more on SB 5131 at the following links:

California cannabisThough we very much want states (and our clients) to follow the federal government’s “robust regulation” directives in the 2013 Cole Memo, we can’t help but bemoan when “robust” state cannabis regulations take the fun and creativity out of cannabis business operations.

Over the years, clients and potential clients have come to the cannabis lawyers at my firm with a bevy of business proposals that in federally lawful world would make sense and probably even be profitable. Unfortunately, we have to nix most of the “creative” business models and product proposals we see in California, Washington, and Oregon (the cannabis states in which we have our offices and in which our lawyers do most of their work) because these states rarely tolerate or permit unique business models or ideas.

In the spirit of the innovation that we have had to quash, the below are the five best/most interesting business proposals killed (or suffering a slow death) from comprehensive cannabis business regulation:

  1. Delivery. It’s a small miracle when a state allows cannabis delivery to customers by dispensaries. And even those few states that permit this typically put it under such serious restrictions you’d think the driver is moving millions in gold or a high level federal prisoner. Washington State doesn’t allow delivery, which helps the illegal market there. Oregon didn’t permit home delivery by retailers until February of this year. Even California’s proposed MCRSA retailer regulations (which will be withdrawn in full, but probably re-issued in similar form in the near future) restrict deliveries to retail licensees that have complied with a massive amount of security procedures.
  2. Fresh food manufacturing and manufacturing certain other products. States do not generally like cannabis manufacturers processing fresh foods or potentially hazardous foods or foods that might appeal to kids. The list of prohibited products varies by state, but the following fresh food items nearly always make the list: heated food, refrigerated food, anything with alcohol for drinking, pies, fruits, vegetable butters, dairy products, meats and seafoods. California planned to ban caffeinated products in its draft MCRSA manufacturer rules. And good luck trying to find any legally sold cannabis-infused gummy candies (or really any traditional candies other than chocolate and fruit chews) in California, Oregon or Washington.
  3. Cannabis events. We’ve previously written about how state cannabis regulations tend to be the death knell for the kinds of cannabis events that were immensely popular just a few years ago. Many states prohibit any gifting of cannabis and that has led to far fewer cannabis cups and cannabis parties.
  4. Marijuana online exchanges and marketplaces. Cannabis-legal states just aren’t ready for cannabis businesses to sell online or through exchanges of any kind. Whether it’s because of a lack of transparency or trust, or just the potential logistical nightmares, states pretty much force in-person transactions within the cannabis chain of distribution, all the way down to the consumer. California may be the one hope here since MAUCRSA retailers can use “technology platforms” they own and control for customer deliveries.
  5. On-site consumption and branded merchandise. No state allows public consumption of cannabis and most also prohibit their cannabis licensees from selling branded merchandise. Though some cities (Denver and Portland) have made a push for social, on-site consumption, most states loathe this as well, which is a real shame since consuming with others in a social setting normalizes cannabis and would likely boost tourism. California is another bright spot here as MAUCRSA will allow for consuming cannabis on the premises of retailers and micro-businesses, but only if the cities and counties in which those businesses sit also allow for this. As far as sales of branded merchandise, the majority of states prohibit cannabis businesses from selling any branded merch. from their licensed premises. For example, Washington State bans that practice (but Oregon does not). California is trying to take it a step further by stopping the sale of all branded merchandise by any cannabis businesses whatsoever.
Cannabis financing
Cannabis financing. Cash is good.

Washington State marijuana businesses face heavy regulations regarding business financing. One of the unique aspects of Washington’s cannabis business regulations is its level of control over every dollar contributed to a licensed cannabis company. Prior to receiving a license, a marijuana company must declare all capital it will receive, whether in the form of equity or in the form of debt. There is no de minimis exception, so if someone is putting a thousand dollars into a million dollar company, that thousand dollars and whomever contributed it must go through the state’s pre-clearance process. Once a company is licensed as a Washington cannabis business, any additional contributions or loans to that business must be approved by the Washington State Liquor and Cannabis Board (LCB) before they can be paid to the company, including additional loans or contributions from individuals who were previously approved. The one exception to this rule is that loans from chartered financial institutions do not need LCB approval.

This creates a major problem when cannabis licensees get into financial danger, which can happen for any business. Sometimes, money problems arise with very little notice. Whether due to a failed crop, unexpected bills, an employee emergency, or something else, cash crunches happen. Even for cannabis businesses with access to banking, it is rare for them to have access to an unsecured line of credit similar to what other non-cannabis businesses can get. When a cannabis business runs into a cash crunch, it has to figure out how to keep things afloat while figuring out how to infuse capital without violating Washington regulations. If a business is lucky, its current owners have sufficient personal capital to make additional contributions, because the LCB clearance process is shorter for individuals already in the system. If a business is unlucky and it has to bring in outside capital, it is looking at what can be a months long approval process before any of that capital can be paid in. Those months can mean the death of a business.

All of this leads to a common outcome — cash contributions to businesses without LCB clearance in violation of LCB regulations. When the worst thing the LCB can do is cancel a business’s license, you can understand why someone would be willing to violate those regulations when the alternative is worse. Many marijuana business owners have more tied up in their business than just the business assets — they signed personal guarantees with landlords and other vendors that will survive business failure. If you are in that scenario, it is hardly illogical to bring on an outside financier outside the rules and hope you don’t get caught.

But regulations that put business owners into this type of quandary are the type that should be revisited and revised. There are plenty of simple fixes to avoid or at least mitigate the current challenges struggling cannabis businesses face. For example, the LCB could change the structure of approval for interest rate lending to make it more of a notice requirement — save the hard approval process for equity owners and profit-sharers.

Unless and until the LCB takes another look at this issue, the best advice we can give is to shore up your capital reserves. If you are just starting out in the cannabis industry, contribute more capital than you need to your cannabis business and let your unused capital sit in the bank as a rainy day fund. If you are making sales, put a portion of that money to the side and don’t use it for either reinvestment or profit distributions. The more cash you have on hand to deal with unexpected challenges, the greater your chances of surviving those challenges long enough to go through the LCB’s regulatory process of getting new lending or capital contributions approved.