How new rules in two states could give birth to Big Marijuana

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

Former Mexico 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 materialized.

Now that may be about to change.

Former Mexican President Vicente Fox, left, speaks as Jamen Shively of Diego Pellicer looks on during a news conference May 30, 2013, in Seattle.

(Elaine Thompson / Associated Press)

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 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 out-of-state 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 felt. 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.

Plants are nearly ready for harvest at the Ataraxia medical marijuana cultivation center in Albion, Ill.

(Seth Perlman / Associated Press)

“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 to turn to for loans – and they have to live in Washington.

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.”

DPW’s Throgmartin said 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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