Washington Marijuana Business Owner-Finance: Some Regulatory Improvement

After years of us banging the drum for the WSLCB to change its financier approval process, there is a glimmer of hope out there that the agency is willing to listen to reason. The WSLCB has issued a new interim policy, BIP-06-2018, that allows existing true parties of interest and financiers to get clearance for providing additional funds to licensed marijuana businesses concurrently with contributing the funds.

The problem was that the WSLCB has required pre-approval of any new funding contributed to or spent on behalf of a marijuana licensee. That includes additional funding coming from financiers and true parties of interest that had already been approved by the state. This cumbersome process could take months, and it was creating a significant compliance problem in the state.

In the crowded marijuana business market, companies have needed to run extremely tight margins to stay competitive. Tight margins mean that any bit of bad luck can cause a company to go temporarily into the red. If a company doesn’t have the cash reserves to handle operating expenses in that time, the owners must often dip into their own pockets and fund the difference. But if payroll is due next week, it doesn’t help much that the WSLCB will allow an owner to contribute additional funds three months later. Faced with an impossible decision, most owners flouted WSLCB rules and contributed the money anyway. The penalty if the WSLCB found out about that was license cancellation, but there wasn’t much of an alternative. Failure to make payroll is a death sentence for most businesses regardless.

Under BIP-06-2018, however, existing true parties of interest and financiers may now contribute additional funds to a licensed marijuana business before those funds are approved. To benefit from this policy, the true party of interest or financier must have already been approved by the WSLCB with respect to the marijuana license they are contributing to. They must also submit the application for approval of funds prior to making the contribution.

There is a different type of risk at play in this new regime, namely what happens if the WSLCB does not approve the funding that has already happened. In its policy notice, the WSLCB clarifies that it can cancel the marijuana license if it cannot verify the source of funds. Hopefully the WSLCB would also allow the business to return the funds if it had cash on hand, but that isn’t guaranteed. So any true party of interest or financier taking advantage of this policy would need to feel confident that the source of funds is verifiable through tax reporting or other documentation.

We complain a lot about WSLCB policies, so it is nice to see them move in the direction to make life easier for regulated businesses every now and then. Here’s hoping this interim policy sticks, and for more smart rules changes in 2019.