Pubdate: Fri, 25 Mar 2016
Source: Los Angeles Times (CA)
Copyright: 2016 Los Angeles Times
Author: Rick Anderson


New Rules in 2 States Could Attract Major Outside Investors.

SEATTLE - When the legal pot industry began to boom in Washington 
state, big-money investors predicted the cannabis trade in the 
Northwest would soon be the darling of corporate America.

Former Mexican President Vicente Fox appeared at a Seattle news 
conference in 2013 along with pot entrepreneur Jamen Shively, who 
laid out plans to create the first national brand of marijuana and 
promised Big Tobacco-like growth.

"Yes," he said, "we are Big Marijuana."

But it all went up in smoke and Shively's national pot brand never 

Now that may be about to change.

The Washington State Liquor and Cannabis Board this week introduced a 
rule that will allow investors from around the U.S. to help finance 
the state's exploding legal marijuana industry. Oregon approved a 
similar practice last month, and Colorado is expected to follow suit, 
eliminating its two-year residency requirement for financiers.

Though the change comes with risks of Big Marijuana or criminal 
cartels entering the markets, the states are moving quickly to 
attract more investors in the expectation that California, with a 
potentially vast recreational pot market, might enter the competition 
if voters legalize recreational marijuana sales this fall.

Liquor and Cannabis Board spokesman Brian Smith says the new 
Washington rule will take effect in June, eliminating a six-month 
residency requirement for investors.

Financiers will still not be allowed to have an ownership stake in 
the businesses they back, he adds. But a bill before the Legislature, 
if approved, would permit nonresidents to own as much as 49% of a 
marijuana operation.

Some worry that "will lead to the big business takeover of the 
marijuana market in Washington," said Bellingham, Wash., attorney 
Heather Wolf, who represents industry entrepreneurs. That was also 
the concern in 2013, when Washington prepared to launch legal sales 
of recreational marijuana approved a year earlier.

The state's fledgling pot market, envisioned as a low-key, 
mom-and-pop industry, would be Wal-Marted, some feared. Shively, 
chief executive of a company called Diego Pellicer - named for a 
Filipino hero and major hemp farmer who was also Shively's 
great-great-grandfather - predicted he would mint more millionaires 
than Microsoft, where he once worked as a corporate strategy manager.

Fox, not involved in Shively's venture, said he supported the plan in 
the belief that legal marijuana was the solution to ending the costly 
drug war that plagues Mexico and the U.S.

But after Shively and Fox dropped out of the picture and the Big 
Marijuana threat subsided, the mom-and-pop-system went on to success.

So did Uncle Ike's, a Seattle neighborhood pot store that in one 
recent month did $1.4 million in sales. It's one of 223 Washington 
pot stores that sold $260 million in products in the last fiscal 
year, generating $65 million in state excise tax and hundreds of 
thousands of highly happy customers.

This fiscal year, Washington pot sales have skyrocketed to $620 
million, and have put $119 million into the state tax coffers. But 
not all pot entrepreneurs are raking in profits. To help them, and 
expand their markets, Washington and other states are easing 
outside-investment restrictions.

"There's only so many people willing to invest in this risky and new 
industry," Colorado state Sen. Chris Holbert, a Republican, recently 
told the Associated Press. "So allowing people from out of state to 
become investors in this business ... seems like a good idea."

That's also how it seems to Jamen Shively's old company, Diego 
Pellicer. The former Big Marijuana corporate hopeful has returned 
with lowered expectations, and is planning to open its first pot 
store next month.

"We have been tracking Washington's position on out-of-state 
investors," said Ron Throgmartin, chief executive of Diego Pellicer 
Worldwide of Santa Monica, which owns the Washington subsidiary, 
Diego Pellicer Inc. "We applaud their recent changes to allow such investment."

It's apparently a good idea to the once-outsider-shy Washington pot 
industry as well. At several recent public hearings, no one spoke out 
against the proposals to drop residency requirements, while many 
spoke in favor.

"This bill would be an incredible tool for the industry to help get 
it better capitalized, which it desperately needs to do," said Ezra 
Eichmeyer, a marijuana industry consultant. "This entire industry had 
to launch from scratch, in a very short period of time, all at the 
same time, without any bank loans, and being limited to investment 
capital only from Washington."

Today "that is hindering us," he said. Despite the millions in annual 
sales and an average $14 million in monthly tax revenue, Eichmeyer 
said, "We've captured only a fraction of the illicit drug market."

More investors and more sales will mean millions more flowing into 
the state's tax coffers and less going to the black market, he said.

Wolf, the industry attorney, also supports the residency change. "I 
think it is a good thing since marijuana businesses need access to 
more capital," she said. She doesn't think outsiders are a force to 
fear. On her legal blog, Wolf points to regulations that limit the 
number of licenses and licensees, therein preventing "any single 
entity from dominating the marijuana market in Washington," she said. 
Outsiders would also have to pass criminal-background checks.

"The legal marijuana market in Washington state is primarily an 
all-cash business," Wolf said. "To date, only four credit unions in 
the state are accepting marijuana business accounts." Pot producers 
have only friends and family living in Washington to turn to for loans.

Ephrata, Wash., attorney Patrick Moberg, whose brother is a licensed 
pot grower, says the residency law was likely illegal anyway, and 
other laws will prevent corporations from taking over. "Washington 
justified the residency requirement claiming it would prevent 
marijuana from traveling into other states, but this argument is just 
silly," he said. "In reality what it has done is stifle development 
of the marketplace."

Diego Pellicer Worldwide's Throgmartin says that because his company 
is publicly traded, the corporation "believes that profiting directly 
from the sale of cannabis, even though permitted by state law, may 
violate federal intrastate commerce laws, by passing those profits to 
shareholders that reside in states where cannabis still remains 
illegal." But it will begin selling pot in Washington through its 
local entity, Diego Pellicer Inc.

"The first Diego Pellicer-branded flagship store will open in Seattle 
next month, and we are excited to set the new standard for 
recreational marijuana retail stores in the U.S.," Throgmartin said, 
noting that former company honcho Shively is a partner in the store.

He and other investors can expect growth, according to a new 200-page 
report by ArcView Market Research on marijuana sales and trends. It 
predicts Washington will be the largest pot market by 2020 at $2.3 
billion, followed by Colorado at $2 billion.

Almost a dozen states are considering changes to weed laws, the 
report notes, with California and Nevada expected to approve adult 
use and eventually become major markets, turning the West into 
America's legal cannabis kingdom.

Anderson is a special correspondent.
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MAP posted-by: Jay Bergstrom