Licensing Laws Learning what it takes to be a true party of interest

The Washington Administrative Code (WAC) divides cannabis rules violations into five categories, the most serious of which can result in license cancellation. A licensee’s failure to disclose everyone who owns, operates, controls or sources any amount of money to the licensed cannabis business will constitute a Group Three violation of Washington’s true party of interest rules, and can result in just such a license cancellation.

Avoiding a true party of interest violation has turned out to be less clear-cut than one might think, given the severity of the penalty. Under WAC 314-55, a “True Party of Interest” is anyone who either exercises “control” over the company (a term that remains undefined in the rules) or who receives or is entitled to receive a share of either net or gross profits from a licensee.

“This means that anyone taking a share of the company’s profits or revenues, whether in the form of a royalty in an intellectual property licensing deal, as performance-based rent, or as a standard profit distribution will qualify as a true party of interest.”

This means that anyone taking a share of the company’s profits or revenues, whether in the form of a royalty in an intellectual property licensing deal, as performance-based rent, or as a standard profit distribution will qualify as a true party of interest. Simplified, a true party of interest can be anyone who receives compensation based on the financial performance of the licensed business.

Additionally, a true party of interest can be anyone who exercises “control” over the company, even if that person is not entitled to share in profits or revenues. “Control” includes the ability to make important business decisions on behalf of the licensee, like hiring and firing employees, bringing on new investors, and signing contracts on behalf of the licensed business. The enforcement standard here is subjective for regulators, making it crucial for those who cannot otherwise qualify as a true party of interest to avoid exercising any control over the licensee.

If an individual meets the definition of a true party of interest, they must meet all statutory requirements to be associated with the licensee. All true parties of interest and their spouses, if any, must be able to prove a minimum of six months’ residency prior to the date of their application to the Washington State Liquor and Cannabis Board (“Board”) to qualify as a such. Proof of residency ranges from date stamped IDs and driver’s licenses to utility bills and lease agreements in the applicant’s name. Furthermore, true party of interest applicants must pass a criminal background check, which is based on a points system. In order to qualify, an applicant can’t have more than eight points. If an applicant has a felony conviction within the past 10 years, for example, they automatically receive 12 points, and cannot qualify as a true party of interest. If an applicant fails to disclose their criminal history to the Board, they will likely be denied a license.

Given the restrictive residency and criminal background requirements for true parties of interest, it’s unsurprising that many license applicants have attempted to hide various ownership interests from the Board. Many license applicants found themselves in a situation where their primary investors either didn’t meet the residency requirements, or had a disqualifying criminal offense in their background check, but decided to move forward with those investors regardless because they’re in need of financing.

Many of these same license applicants were unaware that a failure to disclose a true party of interest to the Board results in immediate license cancellation. On the flip side, those who are very lucky may escape with a large monetary fine and a mere license suspension, but leniency is not something to count on with the Board. Particularly where true parties of interest are purposefully hidden from the Board in an attempt to deceive it, license cancellation will be the ultimate outcome. In turn, it is imperative for all licensees to be transparent with the Board, and to disclose all individuals who are funding, receiving profits from or exercising control over the licensed business.

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