[Filed June 24, 2020, 11:34 a.m.]

Preproposal statement of inquiry was filed as WSR 18-22-054.

Title of Rule and Other Identifying Information: WAC 314-55-035 What persons or entities have to qualify for a marijuana license? The Washington state liquor and cannabis board (board/WSLCB) proposes amendments to existing rule and new sections of rule regarding qualifications for a marijuana license, and to implement the directives of ESHB 1794 (chapter 380, Laws of 2019) regarding agreements by licensed marijuana businesses, intellectual property, now codified in RCW 69.50.395.

Hearing Location(s): On August 5, 2020, at 10:00 a.m., at 1025 Union Avenue S.E., Olympia, WA 98501.

Date of Intended Adoption: September 2, 2020.

Submit Written Comments to: Katherine Hoffman, 1025 Union Avenue S.E., Olympia, WA 98501, email rules@lcb.wa.gov, fax 360-664-9689, by August 5, 2020.

Assistance for Persons with Disabilities: Claris Nhanabu, ADA coordinator, human resources, phone 360-664-1642, fax 360-664-9689, TTY 711 or 1-800-833-6388, email Claris.Nhanabu@lcb.wa.gov, by July 29, 2020.

Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: The proposed rules significantly modernize, reorganize, and clarify the existing regulatory framework regarding qualifying for a marijuana license in the following ways: Clearly identifies business entity type and which entity or entities within that business type are considered true parties of interest; reaffirms residency and background investigation requirements; removes the spousal vetting requirement; creates a definition section, specifically defining, among other things, "control"; provides an updated description of persons not considered to be true parties of interest; updates and modernizes notification requirements; provides that licensed marijuana businesses may enter into agreements consistent with RCW 69.50.395; and establishes a new subsection distinguishing financiers from true parties of interest.

Reasons Supporting Proposal: Originally, revisions to WAC 314-55-035 were part of a larger, rule project designed to implement 2017 marijuana legislation. During public hearing on the proposal in October of 2018, many stakeholders objected to the proposed revisions to this specific section. Subsequently, WAC 314-55-035 was pulled from that rule proposal, and new CR-101 was approved and filed to allow additional stakeholder engagement and rule development on this specific rule section. During the 2019 legislative session, ESHB 1794 regarding agreements by licensed marijuana businesses, intellectual property was introduced and subsequently enacted, influencing the developmental path of this project. This rule proposal was developed with and in response to industry and stakeholder feedback regarding what constitutes a true party of interest, and is designed to assure [ensure] and protect the integrity of marijuana businesses licensed in Washington state.

Statutory Authority for Adoption: RCW 69.50.325, 69.50.342, and 69.50.345.

Statute Being Implemented: RCW 69.40.395.

Rule is not necessitated by federal law, federal or state court decision.

Name of Proponent: WSLCB, governmental.

Name of Agency Personnel Responsible for Drafting: Katherine Hoffman, Rule Coordinator, 1025 Union Avenue S.E., Olympia, WA 98501, 360-664-1622; Implementation: Becky Smith, Licensing Director, 1025 Union Avenue S.E., Olympia, WA 98501, 360-664-1615; and Enforcement: Justin Nordhorn, Enforcement Chief, 1025 Union Avenue S.E., Olympia, WA 98501, 360-664-1726.

A school district fiscal impact statement is not required under RCW 28A.305.135.

A cost-benefit analysis is required under RCW 34.05.328. A preliminary cost-benefit analysis may be obtained by contacting Katherine Hoffman, 1025 Union Avenue S.E., Olympia, WA 98501, phone 360-664-1622, email katherine.hoffman@lcb.wa.gov.

This rule proposal, or portions of the proposal, is exempt from requirements of the Regulatory Fairness Act because the proposal:

Is exempt under RCW 19.85.025(3) as the rules are adopting or incorporating by reference without material change federal statutes or regulations, Washington state statutes, rules of other Washington state agencies, shoreline master programs other than those programs governing shorelines of statewide significance, or, as referenced by Washington state law, national consensus codes that generally establish industry standards, if the material adopted or incorporated regulates the same subject matter and conduct as the adopting or incorporating rule.

Is exempt under RCW: WAC 314-55-035(5) is exempt under RCW 34.05.310.

Explanation of exemptions: WAC 314-55-035(5) adopts and incorporates by reference the directives of ESHB 1794 (chapter 380, Laws of 2019) regarding agreements by licensed marijuana businesses, intellectual property, now codified in RCW 69.50.395, without material change.

The proposed rule does not impose more-than-minor costs on businesses. Following is a summary of the agency's analysis showing how costs were calculated. There are no costs associated with these rules. The WSLCB applied a default cost of compliance ($100) when analyzing whether the rules would have a disproportionate impact on small businesses as defined in RCW 19.85.020(3). Below are calculations for minor cost thresholds across all license types based on the best analogous NAICS types. Although it is unlikely these rules would result in even the full default cost of compliance, the minor cost does not exceed any of the thresholds for any of the license types. Therefore, implementation of these rules will not result in any administrative, intrinsic or actual costs to the regulated community. The amendments and new rules offer increased public benefit by assuring [ensuring] that money invested in licensed marijuana businesses are fully vetted, supports robust foundations of local participants in Washington state businesses, and assures [ensures] that funds entering the Washington state regulated market through Washington state residents are not related to or derived from criminal enterprise. For these reasons, the proposed rules do not impose more than minor costs on businesses as defined by RCW 19.85.020(2).

2017 Industry NAICS Code	Estimated Cost of Compliance	Industry Description	NAICS Code Title	Minor Cost Estimate - Max of 1% Pay, 0.3% Rev, and $100	1% of Avg Annual Payroll (0.01*AvgPay)	0.3% of Avg Annual Gross Business Income (0.003*AvgGBI)
31199	$100.00	Marijuana processors	All other food manufacturing	$22,986.58	$9,214.26 2018 Dataset pulled from USBLS	$22,986.58 2018 Dataset pulled from DOR
111	$100.00	Marijuana producers	Crop production	$4,010.47	$4,010.47 2018 Dataset pulled from USBLS	$2,399.33 2018 Dataset pulled from DOR
453	$100.00	Marijuana retailers	Miscellaneous store retailers	$2,503.84	$2,365.88 2018 Dataset pulled from USBLS	$2,503.84 2018 Dataset pulled from DOR

AMENDATORY SECTION(Amending WSR 16-11-110, filed 5/18/16, effective 6/18/16)

WAC 314-55-035((What persons or entities have to qualify for a marijuana license?))Qualifying for a marijuana license.

A marijuana license must be issued in the name(s) of the true party(ies) of interest. The board may conduct an investigation of any true party of interest who exercises control over the applicant's business operations. This may include financial and criminal background investigations.

(1) True parties of interest((-)). True parties of interest must qualify to be listed on the license, and meet residency requirements consistent with this chapter. For purposes of this title, "true party of interest" means:

((True party of interest	Persons to be qualified
Sole proprietorship	Sole proprietor and spouse.
General partnership	All partners and spouses.
Limited partnership, limited liability partnership, or limited liability limited partnership	•	All general partners and their spouses.
	•	All limited partners and spouses.
Limited liability company	•	All members and their spouses.
	•	All managers and their spouses.
Privately held corporation	•	All corporate officers (or persons with equivalent title) and their spouses.
	•	All stockholders and their spouses.
Publicly held corporation	All corporate officers (or persons with equivalent title) and their spouses.
	All stockholders and their spouses.
Multilevel ownership structures	All persons and entities that make up the ownership structure (and their spouses).
Any entity or person (inclusive of financiers) that are expecting a percentage of the profits in exchange for a monetary loan or expertise. Financial institutions are not considered true parties of interest.	Any entity or person who is in receipt of, or has the right to receive, a percentage of the gross or net profit from the licensed business during any full or partial calendar or fiscal year. Any entity or person who exercises control over the licensed business in exchange for money or expertise. For the purposes of this chapter:
	•	"Gross profit" includes the entire gross receipts from all sales and services made in, upon, or from the licensed business.
	•	"Net profit" means gross sales minus cost of goods sold.
Nonprofit corporations	All individuals and spouses, and entities having membership rights in accordance with the provisions of the articles of incorporation or the bylaws.

(2) For purposes of this section, "true party of interest" does not mean:

(a) A person or entity receiving reasonable payment for rent on a fixed basis under a bona fide lease or rental obligation, unless the lessor or property manager exercises control over or participates in the management of the business.

(b) A person who receives a bonus as an employee, if: The employee is on a fixed wage or salary and the bonus is not more than twenty-five percent of the employee's prebonus annual compensation; or the bonus is based on a written incentive/bonus program that is not out of the ordinary for the services rendered.

(c) A person or entity contracting with the applicant(s) to sell the property, unless the contract holder exercises control over or participates in the management of the licensed business.

(3) Financiers - The WSLCB will conduct a financial investigation as well as a criminal background of financiers.

(4) Persons who exercise control of business - The WSLCB will conduct an investigation of any person or entity who exercises any control over the applicant's business operations. This may include both a financial investigation and/or a criminal history background.

(5) 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. The WSLCB must approve these funds prior to investing them into the business.))

Entity	True party(ies) of interest
Sole proprietorship	Sole proprietor
General partnership	All partners
Limited partnership, limited liability partnership, or limited liability limited partnership	All general partners All limited partners
Limited liability company (LLC)	All LLC members All LLC managers
Privately held corporation	All corporate officers and directors (or persons with equivalent title) All stockholders
Multilevel ownership structures	All persons and entities that make up the ownership structure
Any entity(ies) or person(s) with a right to receive revenue, gross profit, or net profit, or exercising control over a licensed business	Any entity(ies) or person(s) with a right to receive some or all of the revenue, gross profit, or net profit from the licensed business during any full or partial calendar or fiscal year Any entity(ies) or person(s) who exercise(s) control over the licensed business
Nonprofit corporations	All individuals and entities having membership rights in accordance with the provisions of the articles of incorporation or bylaws

(2) A married couple may not be a true party of interest in more than five retail marijuana licenses, more than three producer licenses, or more than three processor licenses. A married couple may not be a true party of interest in a marijuana retailer license and a marijuana producer license or a marijuana retailer license and a marijuana processor license.

(3) The following definitions apply to this chapter unless the context clearly indicates otherwise:

(a) "Control" means the power to independently order, or direct the management, managers, or policies of a licensed business.

(b) "Financial institution" means any bank, mutual savings bank, consumer loan company, credit union, savings and loan association, trust company, or other lending institution under the jurisdiction of the department of financial institutions.

(d) "Net profit" means profits minus all other expenses of the business.

(e) "Revenue" means the income generated from the sale of goods and services associated with the main operations of business before any costs or expenses are deducted.

(4) For purposes of this chapter, "true party of interest" does not include (this is a nonexclusive list):

(a) A person or entity receiving payment for rent on a fixed basis under a lease or rental agreement. Notwithstanding, if there is a common ownership interest between the applicant or licensee, and the entity that owns the real property, the board may investigate all funds associated with the landlord to determine if a financier relationship exists. The board may also investigate a landlord in situations where a rental payment has been waived or deferred.

(b) A person who receives a bonus or commission based on their sales, so long as the commission does not exceed ten percent of their sales in any given bonus or commission period. Commission-based compensation agreements must be in writing.

(c) A person or entity contracting with the licensee(s) to receive a commission for the sale of the business or real property.

(d) A consultant receiving a flat or hourly rate compensation under a written contractual agreement.

(e) A person with an option to purchase the applied for or licensed business, so long as no money has been paid to the licensee under an option contract or agreement for the purchase or sale of the licensed business, or a business that is applying for a license.

(f) Any business or individual with a contract or agreement for services with a licensed business, such as a branding or staffing company, will not be considered a true party of interest, as long as the licensee retains the right to and controls the business.

(g) A financial institution.

(5) Notification.

(a) Except as provided in this subsection (4)(a)(i), (ii), and (iii), after licensure the licensee must continue to disclose the source of all funds to be invested in the licensed business, including all funds obtained from financiers, prior to investing the funds into the licensed business.

(i) Revenues of the licensed marijuana business that are reinvested in the business do not require notification or vetting by the board.

(ii) Proceeds of a revolving loan where such loan has been approved by the board within the three previous years do not need to be vetted by the board, unless the source of the funds has changed or the approved loan amount has increased.

(iii) If the source of funds is an identified true party of interest on the license, or a previously approved financier associated with the license, or a previously approved revolving loan, the board will allow these funds to be used upon receipt of an application to use such funds. The board will then investigate the source of funds. If the board cannot verify the source of funds after reasonable inquiry, or the board determines that the funds were obtained in a manner in violation of the law, the board may take actions consistent with the provisions of this chapter.

(b) Licensees must receive board approval before making any ownership changes consistent with WAC 314-55-120.

(6) Disclosure agreements and intellectual property.

(a) Licensed marijuana businesses may enter into agreements consistent with the provisions of RCW 69.50.395.

(b) Notwithstanding the foregoing, no producer or processors may enter into an intellectual property agreement with a retailer.

(7) Financiers.

(a) Consistent with WAC 314-55-010(11), a financier is any person or entity, other than a financial institution or a government entity, that provides money as a gift, a grant, or loans money to an applicant, business, or both, and expects to be paid back the amount of the loan, with or without reasonable interest.

(b) A financier may not receive an ownership interest, control of the business, a share of revenue, gross profits or net profits, a profit sharing interest, or a percentage of the profits in exchange for a loan or gift of funds, unless the financier, if directly involved in the loaning of funds, receives board approval and has qualified on the license as a true party of interest.

(c) Washington state residency requirements do not apply to financiers who are not also a true party of interest, but all financiers must reside within the United States.

(d) The board will conduct a financial and criminal background investigation on all financiers.