Washington Cannabis: Who is a True Party of Interest Under the New Rule?

washington cannabis marijuana

At long last, the Washington State Liquor and Cannabis Board (“LCB”) has finished revising its “True Party of Interest” rule (TPI). This process started way back in August of 2018 and after many revisions and multiple legislative changes. The LCB approved the new rule on September 2, 2020 and they will go into effect on October 3, 2020.

I wrote about the draft rules in detail here and if you are unfamiliar with TPIs generally, I recommend reading that post first as it outlines the changes have made it into this final version of the TPI rule. This post will focus instead on my main takeaways from the new rule.

Who is a TPI?

The new TPI rule does not change the basic premise that any individual who owns a marijuana business is considered a TPI. The new TPI rule states that the following individuals will be considered a TPI with regards to the corresponding entity:

Entity True Party(ies) of Interest
Sole proprietor Sole proprietor
General partnership All partners
Limited partnership, limited liability partnership, or limited liability limited partnership -All general partners

-All limited partners

Limited liability company (LLC) -All LLC members

-All LLC managers

Privately held corporation -All corporate officers and directors (or persons with equivalent title)

-All stockholders

Multilevel ownership structures All persons and entities that make up the ownership structure
Any entity(ies) or person(s) with a right to receive revenue, gross profit, or net profit, or exercising control over a licensed business -Any entity(ies) or person(s) with a right to receive some or all of the revenue, gross profit, or net profit from the licensed business during any full or partial calendar or fiscal year

-Any entity(ies) or person(s) who exercise(s) control over the licensed business

Nonprofit corporations All individuals and entities having membership rights in accordance with the provisions of the articles of incorporation or bylaws

 

Each TPI must qualify to own a marijuana license, which means they must not have a disqualifying criminal history and must be residents of the State of Washington. Under the new rule, this is still pretty restrictive. For example, if a corporation holds a marijuana license, it must ensure that all shareholders are approved as TPIs even if they hold only a small fraction of the total shares in the company. However, there is one big change with regard to spouses.

In the above table, you’ll see that the LCB considers those “with a right to receive revenue, gross profit, or net profit, or exercising control over a licensed business” to be TPIs. This is not new as the LCB has long maintained that revenue sharing and control create TPI relationships even if an individual or entity is not an owner of a licensed business. The new rule, however, defines some of these terms:

  • “Control” means the power to independently order, or direct the management, managers, or policies of a licensed business.
  • “Gross profit” means sales minus the cost of goods sold.
  • “Net profit” means profits minus all other expenses of the business.
  • “Revenue” means the income generated from the sale of goods and services associated with the main operations of business before any costs or expenses are deducted.

Of these new definitions, the “control” term is probably the most informative. Now we know that control turns on the ability to independently order or direct a licensed business.

Who is not a TPI? 

The biggest change to the TPI rule has to do with spouses. In the past, any person married to a TPI was considered a TPI themselves. That means that if you married the owner of a marijuana business in Washington, you would be subjected to the very non-romantic process of being vetted by the LCB. Not exactly the most romantic way to start a life together.

The inclusion of spouses in the original definition of TPI lead to some absolutely ridiculous scenarios. For one, if you were operating a marijuana business and your romantic partner did not qualify to own a marijuana license (e.g., they had a disqualifying criminal record or were not residents of the state of Washington) you would be forced to choose between marrying your partner and staying on a license. The LCB literally put a restraint on marriage. Thankfully, this arbitrary restriction is no more.

But, there is a little more to the story, as you can see from the following provision in the new rule:

A married couple may not be a true party of interest in more than five retail marijuana licenses, more than three producer licenses, or more than three processor licenses. A married couple may not be a true party of interest in a marijuana retailer license and a marijuana producer license or a marijuana retailer license and a marijuana processor license.

Washington law and LCB regulation prohibit vertical integration. This means that a retailer cannot have any financial interest in a producer/processor license, and vice versa. Although spouses no longer need to be vetted as TPIs simply due to the fact of marriage, a married couple cannot hold an interest in a retailer and producer/processor license. In addition, Washington’s licensing caps are imputed to married couples as well. An individual can only hold up to five retail licenses or three producer/processor licenses. A married couple cannot exceed either limit.

In addition, the new rule creates a non-exhaustive list of individuals that are not considered TPIs, including the following:

  • Financial Institutions
  • Individuals receiving a bonus or commission “so long as the commission does not exceed ten percent of their sales in any given bonus or commission period.”
  • Brokers (“A person or entity contracting with the licensee(s) to receive a commission for the sale of the business or real property.”)
  • Consultants
  • Service Providers (e.g., branding or staffing companies)
  • Landlords and lessors
  • Option holders

I want to elaborate on the last two categories. First, let’s look and landlords and lessors. Here is the relevant exemption language:

A person or entity receiving payment for rent on a fixed basis under a lease or rental agreement. Notwithstanding, if there is common ownership interest between the applicant or licensee, and the entity that owns the real property, the board may investigate all funds associated with the landlord to determine if a financier relationship exists. The board may also investigate a landlord in situations where a rental payment has been waived or deferred.

This codifies a long-standing policy where the LCB treats any overlap in ownership between a landlord and licensed marijuana business as creating a TPI or financier relationship. In the past, we have complained about this policy on this blog because the LCB failed to provide any warning to the industry as to who would be considered a financier or TPI. At least now the LCB has put the industry on alert.

Turning now to option holders. The new rule states that the definition of TPI does not include:

a person with an option to purchase the applied for or licensed business, so long as no money has been paid to the licensee under an option contract or agreement for the purchase or sale of the licensed business, or a business that is applying for a license.

It appears that the LCB is now prohibiting any time of option agreement where consideration is paid. At least that is how I read this definition. The LCB has long allowed for option agreements so this leaves option holders who have paid a fee to hold the option in a challenging position.

Bottom Line.

The new TPI rule does change who is and who is not considered a TPI but, I think many in the industry were hoping that this new version of TPI rule would go further. At least I know that I did. We’ll continue to monitor how this new rule plays out. We anticipate that it will be challenged early and often.

The post Washington Cannabis: Who is a True Party of Interest Under the New Rule? appeared first on Harris Bricken.

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