WA House RSG - Committee Meeting
(January 18, 2024)

Here are some observations from the Thursday January 18th Washington State House Regulated Substances and Gaming Committee (WA House RSG) Committee Meeting.

My top 5 takeaways:

• HB 1341, "Concerning cannabis license ownership," was presented to members by Committee Counsel Peter Clodfelter (audio - 1m, Video - TVW).
  • One of the original licensing requirements under Initiative 502 (I-502) was that cannabis license holders had to be residents of the state of Washington. There had been repeated efforts at legislation to allow for out-of-state ownership, with the issue being a leading concern among members of the Washington CannaBusiness Association (WACA).
  • HB 1341 was introduced in 2023 and WA House RSG hosted the first public hearing on the proposal that January, but it wasn’t advanced beyond the committee.
    • The companion bill, SB 5377, moved further and had been added to a Washington State Senate Rules Committee calendar that March.
  • Clodfelter referred to his briefing on January 16th (audio - 2m, Video - TVW, Testifying, Not Testifying) before the remainder of the hearing was postponed. During the hearing, he quickly reviewed the bill analysis for HB 1341:
    • Requires the Liquor and Cannabis Board (LCB) to suspend a cannabis producer's license if no activity has been recorded on the license after July 1, 2021, and for the license to be reissued to the licensee in certain circumstances tied to federal cannabis law or policy changes.
    • Authorizes out-of-state ownership of licensed cannabis businesses.
    • Modifies requirements about who must qualify for and be named on a cannabis license so that, generally, a natural person holding an ownership interest of 10 percent or less of the entity is not required to qualify for or be named on the license, subject to requirements.
    • Authorizes the LCB to impose additional licensing fees to recover costs incurred in investigating a nonresident required to be investigated.
  • A fiscal note prepared in 2023 by WSLCB officials suggested there would be costs for staff time assessing active licenses, investigations, and information technology along with changes in an ongoing “project to upgrade the agency's internal licensing and enforcement systems.” The bill was expected to cost  $639,631 in fiscal year (FY) 2024, $255,508 in FY 2025, and $511,016 in subsequent bienniums.

• Co-Chair Sharon Wylie talked about why she was sponsoring HB 1341, noting the unique financial pressures cannabis companies face, and expressing her willingness to adapt the legislation to suit stakeholder needs (audio - 2m, Video - TVW).
  • Wylie called the issue "the highest priority for many of the members of the cannabis community,” and said she was still “looking at some possible amendments down the road."
  • The industry had been legalized over a decade ago and, Wylie observed, “there was a lot of concern that big pharma, big tobacco, out-of-state folks would come in and put…small growing businesses out of business.” She said as other states legalized cannabis following Washington, they “have not had a problem with out-of-state investors.”
  • Although there hadn’t been a federal crackdown on cannabis licensees, business owners had found “many segments of the business [were] a lot more expensive than they anticipated,” Wylie commented. She indicated there weren’t enough investors in Washington, “and nobody will give them bank loans. So capital is a problem for this industry.”
  • She hoped the legislation would be moved out of the committee even though “there are some concerns that I have some ideas to address, and I will keep the committee apprised of those, but I would really like to see [HB 1341 moved] in a short session.”

• Several representatives from the cannabis sector made the case for allowing license ownership to be extended to parties outside the state, finding it had already hindered investment compared to other legal jurisdictions.
  • Brooke Davies, WACA Deputy Director (audio - 2m, Video - TVW)
    • Acknowledging that financing had “been a top priority for our organization for many years now,” Davies remarked on some types of costs they faced, concluding “in general our expenses [were] typically 20 to 30% more than any other business because of…how it's regulated and the risk involved with that.” She indicated Washington and Alaska were the only legal cannabis states with this limitation. “We've heard in the past that if we remove this residency restriction, we might have big business come in and take over,” explained Davies, “but we simply do not see that as a concern,” comparing it with the state’s wine industry. 
    • Davies explained the issue of “deferred producer/processor licenses” had been included “as a response to concerns that we heard [about] inactive licenses that are out there” gaining access to capital and starting back up, which could “create more oversupply.” She noted that WACA members worked on a previous bill to add “an amendment to help tighten up that language based on some concerns that folks had, and we're happy to work on that here as well.”
  • Ezra Eickmeyer, Producers Northwest Founder (audio - 2m, Video - TVW)
    • Eickmeyer warned that in the future federal authorities would legalize cannabis, “and when they do the interstate Commerce Clause is going to force us into interstate commerce on a very short notice.” Although “there are other changes we need as well,” he felt “this is the biggest one that's going to hinder us from being competitive against other states.”
    • Wanting the Washington cannabis sector to flourish and “be an exporter of weed to the rest of the country when that happens in the future,” Eickmeyer suggested the possibility relied on passing HB 1341. He recognized that “there's fear about big business takeovers,” but other protections “like limits on a number of licenses you can have, the size of grows…have guarded against that from happening already to this point.” Eickmeyer was open to “amendments, if there needs to be a delayed clause on this,” but “if our industry even knew that the date was coming and we could start planning…that would be helpful.” He argued passage of the bill was something “industry desperately needs…and we're trying to make sure that all of Washington's cannabis industry thrives together in the future.”
  • Andy Brassington, Evergreen Herbal President and WACA Board of Trustees Vice President (audio - 2m, Video - TVW)
    • Finding the residency restriction to be “unfair, it's unconstitutional, and it's bad for business,” Brassington opposed the unique restriction. He indicated a U.S. Supreme Court case, Tennessee Wine and Spirits Retailers Association v. Thomas, deemed a similar requirement for liquor licenses to be unconstitutional. In-state ownership laws meant “Washington is not even on the radar” of investors, Brassington testified, and warned the state was a “second rate, overlooked market already, and has been for years.” 
    • A legal challenge against cannabis social equity licensing programs brought in several states appeared unlikely to be upheld in Washington state by a federal judge who refused to stop WSLCB from issuing equity licenses because the plaintiff was “unlikely to succeed on the merits because the Dormant Commerce Clause does not protect a right to participate in an interstate market that Congress has declared illegal.”
  • Lukas Hunter, Harmony Farms Director of Compliance and Government Affairs (audio - 2m, Video - TVW)
    • A former WSLCB employee, Hunter had seen the struggle of licensees from both a regulatory and licensee perspective. He shared that “maybe a year ago, Harmony Farms was making about a million dollars on average a month in sales. We're now down to around $800,000 in December.” Stating the company made “around 20% margin on our products, or on the gross revenue. That brings us down to about $160,000…to pay our rent, our utility bills, our power bills, and then that leaves us with $10,000 a month to hopefully stash away to be able to buy new packaging, to look into new product development.” Very little was left should they want to upgrade facilities, even with a “somewhat profitable margin,” he said.
    • “At the end of the day we have predatory loans that we can get, but we really need to have equity loans so we have engaged financiers,” concluded Hunter.
  • Doug Henderson, The Painted Rooster Cannabis Company CEO (audio - 2m, Video - TVW)
    • Henderson echoed comments on the tight margins and questionable constitutionality of the existing policy, and stated his company wanted new financing for “innovation” like “how we can recycle what we're producing to absorb carbon from the atmosphere.” He’d also seen other companies expand into the Washington cannabis sector “through branding and intellectual property deals.” Henderson expected “legacy growers that have been around a really long time do actually have a shot, big and small, as well as the newcomers to the industry.”
  • Jamie Hoffmann, Craft Elixirs President (audio - 2m, Video - TVW)
    • “I'm here to testify that I care very much about the Washington state cannabis industry as a whole and not just my small business,” Hoffmann told lawmakers. However, the law kept her from growing “my business beyond the borders of the state,” she said. Hoffmann wanted to both be a model for businesses making cannabis edibles as well as grow her company, but “now I can only offer work at our one small facility in Seattle, and one day lose them altogether to work for a much bigger company.”
    • She argued the legislature couldn’t halt the expansion of cannabis legalization around the country, and wondered how “so few people care so much while the majority…seems to care so little and why don't these loud voices care about the entire…cannabis industry beyond the state borders?”
    • Hoffmann felt the law required cannabis business owners to “keep their small businesses small” and asked for the legislation to be passed so licensees could have “the choice to move beyond the borders of Washington.”
  • In addition to the seven people who testified in favor, three individuals signed in to support the bill (Testifying, Not Testifying).

• Two members of Black Excellence in Cannabis (BEC) opposed HB 1341 on the grounds it would further disadvantage social equity program licensees who were trying to stand up businesses among established competitors.
  • Peter Manning, BEC Co-Founder (audio - 2m, Video - TVW)
    • Perceiving potential negative impacts the bill “may have on the Black and Brown community’s participation in the Washington cannabis industry,” Manning claimed there wasn’t “one Black-owned store in Seattle.” Finding there were too few licensees of color overall, he expected the legislation “will only further the hurt and the pain that the Black community has suffered at the hands of the LCB overlooking them.”
    • “White retailers…have had this industry wrapped up for the last ten years,” reasoned Manning, and that “competitive edge will be favored towards them and will give us no footing.” He suggested the social equity legislation and effort which had already been undertaken would be “wasted.”
  • Mike Asai, BEC Vice President (audio - 2m, Video - TVW)
    • Asai said, “we haven't gone back and made things right,” blaming SB 5052—a 2015 law opening a second cannabis licensing window in order to merge the medical and recreational cannabis markets—for harming “medical pioneers” like himself. He regarded HB 1341 as something that would “hurt the small growers. It will hurt social equity.” Asai commented “it doesn't matter what other states are doing, it’s what this state didn't do we need to stay focused on here.”
    • Claiming that other applicants under SB 5052 were granted licenses even though they “did not qualify,” Asai said this was a “painful” situation that legislators should see remedied before considering out-of-state ownership.
  • Manning and Asai also offered comments on the progress of the WSLCB social equity program to WA House RSG members in December 2023.
  • Co-Chair Shelley Kloba offered “apologies to Scott Waller who's at the Washington Association on Substance Misuse and Violence Prevention who was hoping to testify ‘con,’ and then also Shawn DeNae and Bill Wagenseller, Washington Bud Company, also hoping to testify ‘con’...we invite you to make sure and give us written commentary” (audio - 1m,  Video - TVW)
  • Along with the six people who signed up to testify against the legislation, 55 individuals signed up as opposed (Testifying, Not Testifying).

• Three cannabis industry stakeholders relayed their position of ‘other’ on the proposal, uncertain whether the impacts helped enough businesses trying to stay open.
  • Micah Sherman, Raven Co-Owner and Washington Sun and Craft Growers Association (WSCA) Board Member (audio - 2m, Video - TVW)
    • “I've been in front of this committee many times over the years opposing various versions of this bill,” Sherman established, as he’d “felt quite strongly that it was important that we maintain this policy for a variety of different reasons. And I'm here today to just sort of explain why I'm shifting not to necessarily be supportive of this bill, but I’m no longer strongly opposed to it.”
    • He framed choices the legislature had made in prior years regarding “licensing and management agreements that dramatically changed…how out-of-state money can come into the industry through intellectual property management and other sorts of agreements.” Having witnessed “severe consolidation, severe malinvestment in a variety of ways,” Sherman asserted, “we've seen the harmful effects of those policies already.” He’d come to believe out-of-state ownership “only restricts small folks. Large businesses have multiple avenues to supersede this policy and bring in these sorts of effects anyways.” While the constitutionality of the restriction had been raised, “we're seeing significant changes on the national level with regards to rescheduling and interstate commerce agreements,” Sherman remarked, “so I think it's time to deal with this policy in some way. Whether the specifics of this bill need adjustment I'll leave up to folks that feel stronger about it.”
    • Ranking Minority Member Kelly Chambers wondered whether the “residency issue” would impact newer or older licenses “any differently, or do all need access to capital?” Sherman hadn’t viewed the change as “strongly” impacting businesses “based purely on size,” as he expected a variety of factors would be involved in determining which businesses attracted new owners and investors. “It's gonna have a…mixed effect and it won't be based on any one factor,” he replied (audio - 1m, Video - TVW)
    • Representative Melanie Morgan mentioned “all the policies that we have passed to this date” which she expected had “secured your small business in being profitable and maintaining in the industry.” She wondered about potential impacts for those equity applicants who were becoming licensed, who hadn’t “even got roots in the ground yet to be able to have everybody participate in the industry” (audio - 2m, Video - TVW).
      • Sherman responded, “No, I think the changes that have been made have not been helpful to the profitability of my business, and I think that a lot of those changes were made as a way to avoid” residency restrictions. He felt equity businesses coming online in the future wouldn’t “be protected by this policy anymore because of those other changes,” offering crowdfunding as something which could be permissible with out-of-state ownership changes, and was “a popular form of funding for cannabis businesses, in particular social equity businesses, across the country.”
      • He anticipated “both detractions and benefits from this policy, and my point was that we've changed policies that basically got rid of all of the benefits and now we're just left with the detractions.” Sherman didn’t believe it was “obvious that new social equity businesses would be negatively affected by this. I think that there's ways that this bill could be implemented that would benefit those businesses.”
  • Caitlein Ryan, The Cannabis Alliance Executive Director (audio - 2m, Video - TVW)
    • Ryan was ‘other’ on the legislation because there wasn’t consensus among her membership who had “been historically split on the issue.” She said Alliance members recognized “this will be a necessary step in the evolution of the markets…many of our licensees see opportunities to create differentiated incentives for small businesses.”
    • However, Ryan argued for amendments to add “measures in this bill that have been proven effective in other industries, that bolster local long-term growth and increase revenue,” which she hoped could help “offset the potential impact of…an initial wave of mergers and acquisitions.” While some businesses were experiencing “stagnation,”  others had “been waiting and fighting for a decade in Washington state for early and ongoing unjust exclusions” from the industry.
    • Ryan remained optimistic that “we will continue to move forward with this issue to seek common ground.”
  • Bethany Rondeaux, Olympus Horticulture Owner (audio - 2m, Video - TVW)
    • Rondeaux told lawmakers, “I do support parts of this bill, but I have some concerns,” specifically “there are only 350…active grow licenses in Washington state, and approximately 700 inactive licenses.” She wanted the bill to “address the specific and significant number of inactive licenses first, but not in tandem.” Rondeaux advised an effort to suspend based on activity “recorded on the license after July first 2021, that's pretty open ended and vague.” She called for “more robust language in this field to make sure that there are proper rails in place to protect small businesses…before granting MSOs [multi-state operators], publicly traded in Canadian companies access as out of state owners.”
    • Sympathetic that some businesses wanted to grow beyond Washington, Rondeaux also hoped to “sell to a broader buying pool…but I just want to make sure that we are protecting the small business owners” as well. She added that her business was “able to be active outside of Washington state. I am active in two other states and…those two states are either a break even or loss most of the time.” Washington was the “most stable,” which she partially credited to the prohibition on out-of-state ownership.