Proposal to Amend Washington’s Cannabis Regulations

The Washington State Liquor and Control Board (“WSLCB”) held a public hearing on May 30, 2018, to discuss proposed rules to amend the state’s cannabis regulations. The rules, which are pending final board adoption, would, if passed as proposed, make several notable changes to the state’s cannabis regulations.

One notable change is a new section applying to receiverships. Previously, while a few creditors had found success enforcing receiverships involving cannabis licenses, the area had been a grey area in the law. The new section would clarify the uncertainty by codifying the process and requirements for placing a cannabis license into receivership.  Among other criteria, potential receivers would need to serve original notice to the WSLCB, file a receiver application with the WSLCB, and meet all the requirements for a licensee under Washington law.

Another important change is the treatment of commission-based payments to employees and payments to consultants. Under the proposed changes, an employee receiving commission would not be a true party of interest as long as he or she does not receive more than five percent of the gross profits of the licensee as their commission-based compensation. The proposed changes also state that consultants receiving a flat-fee or hourly rate would not be considered a true party of interest.

A new section also would codify the use of payment services to facilitate retail sales so long as the provider of the services does not have any interest, as a true party of interest or financier, in a cannabis licensee. While the new section may provide security to money transmitters and retailers searching for noncash payment options, it will be unlikely to affect the access to credit cards for payment at cannabis retailers. That change would need to come at the federal level, as large credit card companies continue to avoid authorizing cannabis purchases due to the illegality of cannabis under federal law.

The proposed rules would also modify the start-up inventory procedures for producers. Under the current rules, cannabis producers have fifteen days to bring all cannabis plants consisting of the producer’s preferred genetics, to the licensed premises and register them in the state traceability system. This is the only source of new genetics (those not already logged in a licensee’s traceability system) into the market, as after the fifteen-day window producers can only start plants from genetics purchased from another producer. Under the new rule, producers will be unlikely to introduce new genetics and will have to purchase plants, clones, and other genetics from licensed producers within the state.

The proposed rules also would close the window to apply for a processor license and codify processing service arrangements. Processing service arrangements involve one processor (processor B) processing usable cannabis or an altered form of usable cannabis (cannabis product) for another licensed processor (processor A). The new regulations allow these arrangements, but with strict restrictions. Processors could no longer split profits as compensation for the processing. Rather, the arrangements must operate on a cash fee basis, with all cannabis product returned to processor A before delivery to a retailer.  Furthermore, such activities cannot exceed fifty percent of the overall business of the processor providing the processing services (e.g., processor B).

The full text of the proposed changes are available here.

Stephanie Gambino

Stephanie Gambino

As an associate in Dorsey’s Corporate Group, Stephanie’s practice focuses on corporate and transactional matters. She supports clients in both domestic and cross-border transactions ranging from corporate governance matters to securities offerings and general commercial transactions. Stephanie also supports clients with a variety of U.S. regulatory issues, including advising on issues relating to securities offerings and other highly regulated industries.