Federal rules stymie cannabis investments

Photo/Ted S. Warren/AP

Alaska’s forthcoming cannabis regulations might stop homegrown bud businesses from seeing a dime from the hot-ticket marijuana investment scene developing in the Lower 48.

Outside investment raises both industry and regulatory hackles in the Alaska cannabis scene, either as the surefire road to a federal crackdown or the harbinger of boutique-killing Big Marijuana, depending on who is asked.

Due to federal law, Alaska banks and credit unions refuse to handle cannabis-related accounts or loans. Cannabis businesses without their own startup capital have few options for funding beyond bootstrapping or borrowing from private lenders.

With potentially high entry costs, already-wealthy Alaskans could dominate cannabis business while smaller competitors scrabble for startup capital. Outside investment could narrow the gap, but also bring in big competitors in the $3 billion cannabis industry.

Regulators, however, are fearful of violating federal money laundering guidelines, and view Outside investment dollars as a possible route for dirty money from drug cartels.

Members of the Alaska Marijuana Control Board are cautious about allowing Outside investment due to the Cole Memorandum, a letter from assistant U.S. Attorney General James Cole which outlines federal marijuana enforcement priorities in the face of state-by-state legalization.

“The memo said the state should have strict laws preventing money laundering,” said Bruce Schulte, chairman of the Marijuana Control Board that is currently reviewing draft regulations for commercial marijuana to be recommended to the state Legislature in November. “Our theory was that if we disallow Outside investment we don’t have as many opportunities for money laundering. The flipside is that there are Outside funding sources available that Alaskans might want to take advantage of.”

Those funding resources are becoming more and more available as the market further establishes itself in the Lower 48. ArcView Group, a 470-member cannabis investment company, has sunk more than $41 million into cannabis industry startups.

Even Silicon Valley tech companies’ are getting into cannabis investment — firms like Privateer Holdings, a Seattle-based marijuana investment company, which had $75 million buy-in earlier in 2015 from Paypal co-founder Pete Thiel and has raised $82 million for cannabis industry players, according to a June article in Fortune.

Schulte said the board simply hasn’t received much information regarding investment regulations beyond boardroom rhetoric, and needs more.

“I’m looking for a compelling argument to support that goal of industry success,” said Schulte. “What I have suggested to people is, if they have a strong interest one way or the other, come up with a compelling reason. Cite examples. Give us some legal basis for either way. So far all we’ve got to hang our hat on is the Cole Memo.”

During its last meeting, the board left language in the draft regulations that would effectively ban Outside investment in cannabis industry. Under the draft regulations, the board will not issue a license to an individual, partnership, limited liability corporation, or corporation unless the shareholders and partners are residents of the state as defined by Permanent Fund Dividend application rules, which require a full calendar year of residency.

Anyone with a direct or indirect financial stake in the company must be listed as a licensee, and therefore follow the same residency requirements.

The draft is similar to alcohol regulations, but lack a provision that allows financial stakeholders of alcohol business to stay off the license if their total contribution is less that 10 percent of the total operating cost.

During the meeting, vice chair Brandon Emmett tried to amend the language to allow “non-controlling” financial interest, but withdrew the amendment when no other board member seconded the motion. As the chair, Schulte may not second motions.

Beyond money laundering concerns, members of the cannabis industry who pushed for the initiative fear Outside investment as the vehicle for big industry to carpetbag what they prefer to be an Alaska-first industry.

“It’s just going to let corporations come in and take over the industry,” said Jessica Jansen, co-founder of Canna-Farm Co-op and executive director of the Alaska Cannabis Growers Association.

But without Outside dollars, others say, the industry will be dead on arrival in the Last Frontier. With only 10 percent of Washington’s population and 14 percent of Colorado’s, Alaska has a smaller pool of capital from which to start the industry. 

“If we want the business to be dominated by 10 wealthy Alaskan families, we’re in a good place to do that,” said Leif Abel, executive director of the Coalition for Responsible Cannabis Legislation, which publicly released a statement condemning the board’s regulation.

Able attended the Marijuana Investor Summit in Denver in April, and said he gave the 1,000 or so investors in attendance the same message: don’t come to Alaska just yet.

Abel’s legal counsel, Colorado attorney John Crone, said the Marijuana Control Board is being deliberately overcautious, as financial regulations already track business investment origins. 

“There’s a whole scheme of securities laws and regulations that exist,” said Crone. “If you’re an LLC and want to sell a membership for example, you have to comply with securities regulations. Every business in Alaska already has to deal with this.”

Abel and Crone think Alaska has an opportunity to learn from Washington’s and Colorado’s failures just as much as their successes.

Washington has strict rules regarding out-of-state investment and investment in general, but more liberal than Alaska’s proposed rule. Sole proprietors of cannabis industries must meet a three-month residency requirement.

Even though less restrictive than Alaska’s proposed regulations, Brendan Kennedy, co-founder of Pioneer Holdings, said in a Seattle Times interview that his company simply doesn’t look at Washington as a potential investment pool.

“Every state is talking the same way: ‘We’re not going to make the same mistakes as Washington,’” said Kennedy in the interview.

Indeed, Colorado voted in May to loosen some of its previously restrictive cannabis investor residency requirements. Non-residents have always been able to loan money to Colorado cannabis businesses, but with a wealth of tax-related complications and the inability of the business to actually convert the loan into equity. Out-of-state investors can now sign option agreements for future financing dependent on a two-year residency in Colorado.

DJ Summers can be reached at daniel.summers@alaskajournal.com.

Updated: 
11/24/2016 - 9:48am

Comments