Submitted by Darren Smith, Weekend Contributor
The culmination of numerous examples of barriers of entry into the marijuana industry in Washington State along with regulatory costs, high taxation, competition from medical marijuana dispensaries, the well-established illegal market, and uncertainty is hampering implementation and legalization. From an investor perspective of market forces, the risks might be too high to attract further interest and this could halt or at least greatly slow growth.
In what could be a strong indicator, the Washington Liquor Control Board, which is charged by statute with licensing and regulating the industry, reported recently that the large majority of applications currently in the review process for acquiring a marijuana permit have stopped.
The Board issued warning letters to fifty six applicants giving the businesses sixty days to schedule an interview with a licensing inspector to move forward with the licensing process. But recently few had finished the process. The Board claims that businesses have also failed to provide suitable retail locations that would be acceptable to the board. Earlier there were several reports that the Board had made the process difficult for applicants by requiring, among other things, leases to be signed before the location approval was granted. Other, almost nonsensical actions included a Belleview applicant that was told he could not set up shop because the location was too close to a youth center. That “youth center” happened to be the administrative headquarters of a youth charity.
Further complicating the matter has been a slew of municipalities, both city and county, that passed indefinite moratoriums, outright bans, or untenable zoning ordinances putting pressure on previously approved applicants, who were assigned exclusive territories, to find effective alternative means to locate or in most cases effectively dissuading their further consideration. The courts have further added to the mess by upholding restrictions, including input from the State Attorney General’s office issuing an opinion stating Initiative 502’s language did not pre-empt banning by ordinance marijuana industries within their jurisdiction.
In the early stages the Board issued fifty seven retail marijuana licenses of which thirty two stores have actually opened for business. That was statewide. Specifically in the City of Seattle, where the Board permitted thirty two slots to be allocated by future applicants, only one retailer presently has opened, Cannabis City south of the downtown area.
At the beginning of the licensing process, hundreds of entities submitted entries into a lottery the Board held to award application slots for consideration during the licensing process. The Board believes many of these entries were by speculators expecting to then sell the award on a secondary market. The secondary market then collapsed. Some of the numbers of the entries could have been inflated as it was revealed in some cases individuals submitted multiple entries or assigned proxies to do so on their behalf. When the Board announced that transfers would not be considered unless the business was in operation and the subsequent transferee then submitted to the same background check.
The Board claimed if applicants did not arrange for a the meeting with the background investigator after the sixty day warning period, they would forfeit their slot and it would be allocated to the next highest applicant in the lottery for their consideration.
The matter is further complicated by supply issues from producers (growers) to retail licensees open for businesses. Some shops are now intermittently closing due to lack of product. The Board states they are working with potential growers to help alleviate the supply problem but the issues facing many of the retailers are likely affecting that producer side of the supply chain.
In one example of the regulatory risk producers might be facing is artificial controls imposed by the Board upon producers. One medium sized early adopter received notification from the Board that ten percent of their potential capacity needed to be unallocated for production. The Board claimed that it was needed to control oversupply problems in the market. Later, Board director Rick Garza made a statement during an interview with the press that “Washington does not have a supply problem.” After the first few days, most retailers ran out of stock.
Regulatory risk poses another dissuasive element toward growth in any industry.
The problem with supply by artificial capacity controls by a state agency is likely, at least significantly, due to mandates by the U.S. Justice Department which expressed concern about interstate trafficking between states having prohibitions. The feds made threats of intervention if the states, including Colorado, had overcapacity or oversupply that could lead to illegal export. To avoid this it is likely the Board then became overly aggressive in curtailing supply without truly knowing what the market could actually bear.
The Board places blame on the retail applicants for delaying the process but there exists the strong possibility that interest in pursuing the business is waning among investors. The regulatory scheme, especially when seen from a producer point of view, puts greater emphasis on well capitalized investors due to the costs of opening. Those entities tend to have greater ability to analyze the market and the cost/benefit of pursuing incorporation. If their research indicates the investment is not viable, they likely will choose to walk away. Since this leaves the possibility of small business leading the growth, the upstart costs and lack of resources to contest legal barriers by municipalities and addressing often inconsistent directives from the Board could also prove to be dissuasive. The lack of entry by small entrepreneurs into the market could be significant in forming niche markets and diversity.
Time will be ultimately reveal the trend with more certainty, but unless some fundamental changes are made the full statewide implementation of legalized marijuana could be in jeopardy.
By Darren Smith
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