Pot States Take Fresh Look At Out-Of-State Investment


DENVER (AP) — States that have legalized pot are taking a fresh look at making it easier for out-of-state investors to get in the weed business, saying the industry's ongoing difficulty in banking means they need new options to finance expansion.

The four states that allow recreational pot sales – Alaska, Colorado, Oregon and Washington – have another big reason to take a new look at pot investment. That's California, the nation's most populous state and largest marijuana producer, though it allows the drug only for people with certain medical ailments.

California voters could approve recreational pot this fall, giving the nascent pot industries in the other states reason to want to attract investment now, before a giant enters the picture. California has no ban on out-of-state owners, pressuring other pot states to loosen the rules before California opens for business.

"There's only so many people willing to invest in this risky and new industry, so allowing people from out of state to become investors in this business … seems like a good idea," said Colorado Sen. Chris Holbert, R-Parker, and sponsor of a bill to allow out-of-state ownership of marijuana businesses.

The head of the Colorado Cannabis Chamber of Commerce was more blunt.

"We can't go get a loan from the bank to grow our business to help us accelerate," Tyler Henson said. "We are susceptible to falling behind other states."

But the prospect of big out-of-state money flowing into legal pot states still gives regulators pause.

Pot-business residency ownership requirements generally date to the early days of regulated pot as a safeguard against investment by foreign drug cartels. Those fears have largely dissipated, but public officials have hung onto the residency requirements because they believe it keeps the industry small and easier to manage.

Pot regulators also cite the U.S. Department of Justice, which has repeatedly warned pot states they must keep drug money out of interstate commerce or face a crackdown.

"The regulators will say, 'Do we have money flying cross-country to be deposited in the pot industry? Let's just keep it local,'" said Chris Lindsey, legislative analyst for the Marijuana Policy Project, which oversees legalization campaigns in many states.

Alaska's pot regulators voted last year to ease residency requirements for pot industry investment, then backtracked in December. The regulators ended up using the more stringent standards needed to qualify to receive a yearly check from Alaska's oil wealth fund.

Residency requirements range from six months in Washington to two years in the other states.

In Washington and Colorado, those requirements apply to business applicants and investors. But Washington's Liquor and Cannabis Board announced this month that it intends to drop the ban on out-of-state investment to make it easier for marijuana businesses to raise money. The change would take effect in March if it's approved as expected.

In Oregon, majority ownership must rest with Oregon residents. Outside investment is allowed there, but non-resident owners can't be directly involved in a business' operation or management. A bill currently pending in the Oregon Legislature would change that.

Marijuana businesses and activists believe that marijuana residency requirements are an endangered breed, though. Linsley argued that state marijuana protections will one day be as illegal as any other kind of business protectionism.

And residency requirement can simply invite shadowy financing "schemes," said another sponsor of Colorado's residency bill. In Colorado, for example, some investors pour money into ancillary pot businesses, such as warehouses or lighting companies, then exact heavy kickbacks from the in-state pot growers.

"I want to make sure that we have background checks on those investors," Pabon said. "To me, this is a transparency measure to allow what is already happening in Colorado but to do it above-board."

One prominent Denver marijuana attorney called the removal of marijuana ownership requirements a logical next step in the industry's maturation. As long as interested pot investors can't have a say in how a company is run, they're unlikely to pour much money into it, Brian Vicente said.

"Residents of other states are already allowed to loan money to these businesses. Given the risk they are assuming in this uncertain industry, they should be able to hold equity in the companies as well," Vicente said.

But the change won't be easy, neither for regulators nor the existing marijuana businesses in legal states.

"I think the industry has always liked the idea of being a homegrown industry," said Jason Warf of the Southern Colorado Cannabis Council. "This definitely opens the door for your larger out-of-state venture capitalists to walk right in. If we have folks with much more capital than our owners who are able to walk in, when our owners have had to meet these requirements for many years, it would just be an unfair advantage."

(Photo Courtesy of CNBC)

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