Because this is the beginning of the year, and because I have had many clients ask me about the status of Washington's cannabis market lately, I wanted to weigh in on my predictions for Washington cannabis developments in 2021.
Even though we would consider Washington's marijuana market quite mature when compared to many other states, the Washington State Liquor and Cannabis Board (WSLCB) remains vigilant (and in some cases, militant!) and continues to seek input from stakeholders as it refines its policies and procedures. In early January, the WSLCB adopted a slew of rules that will impact licensees in 2021:
a. Emergency Rules (WAC 314-55-1055) – Marijuana Product Disclosure Form (Effective January 6, 2021)
This rule requires all manufacturers of THC products to disclose all compounds used in production and processing and is specifically targeted to root out any noncompliance with the Vitamin E Acetate Ban (see below).
b. Emergency Rules (WAC 314-55-1065) – LCB Vitamin E Acetate Prohibition (formerly LCB Vitamin E Acetate Ban) (Effective January 6, 2021)
This rule extends the ban on vitamin E acetate.
c. Emergency Rules (WAC 314-55-077) – Marijuana Processor License – Privileges, Requirements and Fees (Effective January 6, 2021)
This extends the emergency rule permitting enforcement action against any licensed marijuana processor that fails to comply with the ban on vitamin E acetate.
d. Emergency Rules (WAC 314-55-079) – Marijuana Retailer License – Privileges, Requirements and Fees (Effective January 6, 2021)
This extends the emergency rule permitting enforcement action against any licensed marijuana retailer that fails to comply with the ban on vitamin E acetate.
e. Adopted Permanent Rule (CR-103P) Certificate of Compliance (relating to location compliance)
This rule implements legislation requiring the WSLCB to issue a certificate of compliance for a marijuana business (a) applicant and (b) license holder under certain circumstances. For the applicant, the certificate will be issued if the business premises meets the statutory buffer zone requirements at the time the license application was filed. For the license holder, the certificate will be issued if the business premises meets the statutory buffer zone at the time the WSLCB receives the license holder's application to receive a certificate of compliance.
The certificate provides a safe harbor in that it allows the licensee to operate the business at the location even if an otherwise disqualifying factor later emerges regarding the statutory buffer zone.
WA Task Force on Social Equity
The Washington task force on social equity was born from legislation enacted in 2020 in the wake of the mass social justice protests. The task force is in its infancy, and its developments are being closely covered by the Cannabis Observer.
The task force recently adopted operating principles focusing on anti-racism and will be creating its first working groups to address disproportionate impact areas, technical assistance, and license types in Washington's marijuana market. Its goal is to address the racial inequity in the initial licensing rounds in part by making up to 34 marijuana retailer licenses available from existing licenses (forfeited, revoked, or canceled) and available licenses not yet issued by WSLCB. $1.1MM has also been appropriated to assist applicants with the licensing process and related business plan assistance.
We can expect to see significant changes in the retail market in 2021 as the task force continues its work and the WSLCB complies with its legislative mandate. We can also expect increased education especially focused on communities and areas that have been historically disproportionately affected by the enforcement of marijuana prohibition laws.
Cannabis Compliance Consultation
The WSLCB recently announced the composition of its Cannabis Compliance Consulting Team, which allows licensees to request a site visit for help identifying areas of potential non-compliance with an aim toward encouraging voluntary compliance rather than licensees waiting for the WSLCB to discover and initiate some type of formal enforcement. These 11 consultants are spread across the state and are available to help producers, processors, retailers, researchers, and transporters. Even though they cannot issue administrative violations, we expect to see a tepid response during 2021 from most licensees who are loath to invite any governmental or quasi-governmental authorities into their business for compliance related matters.
The WSLCB made a big announcement in late 2020 regarding its shutting down the cannabis testing lab Praxis for falsifying test results. The WSLCB will continue to root out fraud in all aspects of the marketplace. For those interested, there will be dialogue sessions on cannabis testing where you can provide your input.
New Financing Arrangements
In the wake of the social equity program rollout we expect to see increased investment as financiers lend funds and invest in up to a 49% equity stake in new social equity retail licensees. As a reminder, check out this post regarding the difference between a true party of interest and a financier. Different disclosure rules apply to these parties as relates to licensees, and you do not want to be the license holder, the true party of interest, or the financier on the WSLCB's wrong side.
We have blogged in the past about the WSLCB's overreaching into license holder qualifications and restrictions, and nowhere is this more relevant than in instances where WSLCB regulations clash with industry consolidation. In the past few months we have been involved in many discussions and deals regarding industry consolidation, where MSOs (multi-state operators) and international cannabis companies (especially Canadian public companies) are trying to buy and sell interests in WSLCB licensees. We can expect more of this in 2021 and more WSLCB resistance to MSOs and foreign funds investing in the Washington cannabis market.
Washington's hemp program is quite mature because of the state's experience with the marijuana industry. The WSLCB continues to hold its ground on CBD products it considers within its purview, which is why food and vapor products containing CBD are only permitted within the state legal marijuana market. No significant changes will happen on this front until the FDA comes out with more guidance on the status of CBD and related cannabinoids.
Litigation and Dispute Resolution
We expect to see an increase in disputes among license holders, owners, financiers, suppliers, and customers in the industry. This is due in part to Covid fallout and part to industry maturity. People who engaged in transactions without a lawyer or without a good lawyer involved will be fighting over both their business relationships and the poor contracts that underpin them (if they even bothered to put a contract down on paper).
We do not expect the WSLCB to let up at all in 2021, but there are many ways for Washington and out-of-state cannabis businesses to thrive within the marketplace this year.
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