By David Kerr
You’ve submitted your application for an I-502 license.
You should realize that the Washington State Liquor Control Board rules are being interpreted and implemented in real time as the licensing process unfolds.
The following information is based on a reading of the rules as published and communications with the Liquor Control Board about how the rules will be applied, but everything in this process is a matter of first impression in Washington state.
Someone could (and probably will) challenge the Washington State Liquor Control Board on the residency requirement or some other aspect of financing rules, and those rules will change (and then perhaps change again).
Find a good counselor or advisor who is tuned into the process; keep an eye out for any changes; don’t assume that what seemed clear last week is still the same the next week; ignore rumors; stay flexible and positive; persevere; get that license!
Investors, Financiers and True Parties of Interest
You have had (or will soon have) your initial telephone interview. In this interview, one of the things the Liquor Control Board is primarily interested in is your start-up costs and how you intend to finance those costs.
Unless your answer is “I have had all the money I need sitting in my bank account for months, just waiting for an opportunity like this,” then you are likely going to need to bring in investors or other financial resources.
Bringing in investors or financiers for an I-502 business can present unique challenges that other business entrepreneurs don’t face. It is important to think about the challenges before bringing in an investor or financier and getting your application process twisted up with the Liquor Control Board.
Investors and financiers are treated differently by the Liquor Control Board. Generally, investors will almost always be “true parties of interest” who are treated the same as an applicant for the purposes of residency, criminal background history and finances.
Financiers, on the other hand, are not always true parties of interest and have a somewhat easier time when it comes to residency requirements (although a financier will still go through the criminal and financial investigation).
It is important to understand the different treatments so you don’t inadvertently have a financier become a true party of interest.
A true party of interest is a person who has an equity interest in the business (member, partner, shareholder, etc.), or exercises control over the business, or has the right to receive a percentage of the gross or net profit from the business (WAC 314-55-035).
A financier is any person or entity (other than a bank) that provides money as a gift or loans money to the applicant or business and expects to be paid back the amount of the loan either with or without interest (WAC 314-55-010).
Here is the kicker – if a financier has the right to receive a percentage of the gross or net profit from the business, rather than merely collecting interest on a loan (or gifting you the money because they really like you), the financier becomes a true party of interest and is treated like an applicant.
This is really important when it comes to the applicant residency requirement (and a true party of interest is considered the same as an applicant by the Liquor Control Board).
How Does Residency Affect True Parties of Interest and Financiers?
Initiative 502 and the rules adopted by the Washington State Liquor Control Board (WAC 314-55-020) require that all applicants applying for a marijuana license must have resided in Washington for at least three months prior to the application for a marijuana license.
Since true parties of interest (investors that have an equity interest in the business or financiers that have the right to receive a percentage of the gross or net profit from the business) are treated as applicants, it is necessary that they have resided in Washington for at least three months prior to the application. Not three months before they are added as a member of your LLC, or before they became shareholders in your corporation, or before you sign a financing agreement that entitles them to a percentage of profits from your business.
It means three months before you submitted your application in November or December of 2013.
This also means that your brother or cousin or friend that moves to Washington sometime in 2014, with the intent of becoming a member of your LLC, or a partner with you in your marijuana business, may run into trouble because (as a true party of interest) they didn’t reside in Washington for three months prior to the date of your application.
On the other hand, a financier who only provides money as a gift or loans money does not appear to have the same residency requirement as a true party of interest.
While they still have to be residents of Washington, it does not appear that they need to have resided in the state for three months prior to the time of the application.
That means that a financier could establish residency after the date of the application and still gift or loan money, as long as the financier didn’t cross the line and become a true party of interest.
A word About Spouses
The Liquor Control Board considers the spouse of any true party of interest as a true party of interest in their own right. So if your investor has a spouse who is uncomfortable, unwilling or unable to comply with the residency requirements, criminal background history or financial disclosures required as part of the license application process, this is going to cause you problems with your application. Make sure you consider spouses when looking at potential investors.
David Kerr is of counsel with Fifth Avenue Law Group in Seattle.