The legislative session is still in full swing and the Washington State Liquor and Cannabis Board (WSLCB) is busy testifying on numerous proposed bills, but they also released many new policies in December and some of them may have gone under the radar. So we’d like to highlight a few to make sure you were aware of them. Note that this is not intended to be a comprehensive overview.
Use of Personal Funds
On December 12, 2018, the WSLCB issued an interim policy that allows licensees to use funds within their possession to invest in their licensed business, even if those funds weren’t pre-vetted. BIP-06-2018, titled “Allowing marijuana licensees to spend their own money on their business prior to the Board vetting the funds,” states that the purpose is to allow for licensees to more easily operate without the real fear of having their license revoked for True Party of Interest violations, even in situations involving the licensee’s own money. The WSLCB pointed out that “[p]revetting funds can take 50 days or longer[.] The relevant part of the policy states,
After licensure, a true party of interest, including financiers, must continue to disclose the source of funds for all moneys invested in the licensed business. If the source of funds is an identified owner on the license, the WSLCB will allow these funds to be used upon receipt of the application. The WSLCB will then investigate the source of funds. If the source of funds is questionable, unverifiable, or determined by the WSLCB to be gained in a manner which is in violation of law, the WSLCB may revoke the license.
Many Washington businesses in the cannabis industry have found themselves in a serious bind when they’ve got expenses, such as payroll or utilities, but are unable to pay them due to delays in income, and they’ve already spent the total amount they had stated to the WSLCB as their “Source of Funds” in their initial application. Until now, the licensee was essentially faced with a no-win situation: pay their expenses out of unvetted funds and face license revocation if the WSLCB investigates, or don’t pay the expenses, which might mean not paying their employees, and watch their business crumble anyway, potentially facing litigation in the process.
This new policy alleviates that pressure and we welcome it. The WSLCB does not detail what is and is not allowed and leaves many questions, such as:
- Can a license owner use any account in their name, or only those disclosed to the WSLCB?
- Does it matter if the account is U.S. based or not?
- Must the licensee submit a WSLCB application for approval on the same day they use the funds, or can they submit the application at a later date?
- Does this apply retroactively to similar activities done before the policy was released?
Despite these questions, this new policy is sensible and should allow for licensees to operate without some of the ridiculous quandaries they faced before.
As we reported initially and on the final policy, the WSLCB issued a slew of interim policies on January 9 relating to requirements for packaging of marijuana products. The first thing licensees should know is that these changes take effect January 1, 2020, so they may continue with their present practices until then. Some of the changes include:
- Clarifying the prohibition on “false and misleading” packaging to include any packaging made to mimic or imply packaging containing alcohol
- Clarifying the prohibition on “curative or therapeutic effects” claims on packaging to include any statement or reference “of the product having an effect on the body or mind; …that the product produces a useful or favorable result or effect; or…that the product impacts the health of the consumer.”
- Marijuana infused edibles may only use colors and shapes from the WSLCB’s approved list, and the packaging must be white, cream, grey, black, tan, or brown. Also, only 3 accent colors are allowed.
On bullet point two, the WSLCB provides a list of words as examples of what is prohibited, including “relief, remedy, healing” and “curative.” This seems less controversial than the other policies, but prohibiting any claim that has an effect on the body or mind is interesting, as many products do just that without making medical claims. It took me all of 60 seconds online to find licensed cannabis products be described by the company as “relaxing,” “palate-pleasing,” and leaving customers in a “blissful state of happiness.” Technically those are all references to have an effect on the body or mind. Will the WSLCB be issuing violations for phrases like those? (I would venture a guess that it is unlikely, but their policy should be more tightly written.)
Agreements Including Security or Collateral
The WSLCB posted in its Fall 2018 newsletter that despite being common business practices outside of the cannabis industry, there are significant restrictions on any agreements that use security or collateral. These restrictions include:
- No cannabis product as security or collateral
- If a financial agreement mandates business decisions for a licensee (e.g. upon receivership), the non-licensee must be disclosed as a financier
- If a financial agreement would alter a licensee’s operating plan (e.g. equipment being used as security and subsequently being repossessed), the licensee must apply before making the changes
Consulting, Branding, and Management Contracts Require WSLCB Approval
Also in the Fall 2018 newsletter was a new policy that particularly seems to have flown under the radar, in which the WSLCB states,
Marijuana contracts including (but not limited to) consultant, branding, or management agreements require approval from the WSLCB. Licensees who have a business contract that requires approval can email them to [email protected].
This is a big departure from prior practice and law. SB 5131 was passed in 2017 in included a section (Section 16) that specifically stated licensees could enter into licensing, consulting, and other agreements related to a licensee’s intellectual property (trademarks, brands, patents, etc.), but that the agreements had to be disclosed to the WSLCB. This is also reflected in RCW 69.50.395 which is the bill codified into law. Up until recently, licensees seeking to comply with this law would simply email the agreement in question to the WSLCB and essentially forget about it. In my experience the WSLCB rarely, or perhaps never, followed up on these emails.
But the newsletter took this rule a big step farther, stating that these agreements must not merely be disclosed to the WSLCB, they actually have to be pre-approved. This makes transactions riskier, more problematic, and likely more prone to delay, as anyone that has dealt with the WSLCB knows that things can take a long time. It is debatable whether the WSLCB can actually do this, and one may have a good argument to challenge this policy. But until then, the more risk-averse licensees would do well to note this change in policy.