What’s Up in Weed

November 16, 2018

By: Andrea Hill

I am pleased to bring you this instalment of my blog, rounding up what’s currently happening in the cannabis industry in Canada and abroad.

I wrote for The Globe and Mail today about Ontario’s new retail cannabis store regulations released yesterday.  The article was published in their Report on Business Cannabis Professional newsletter and is now live in the Cannabis section of the Globe’s website!  Read all about it below:

Ontario clearly wants ‘the little guy’ selling pot in your town

Would you like to open a cannabis retail store in Ontario? You’re in luck! Unless you’re a licensed producer.

The Ontario government is expected to proclaim into force today the Cannabis Licence Act, 2018 and its Regulations, released yesterday afternoon.  Rarely do new regulations generate as much excitement as these, but rarely does a province create an entirely new business opportunity virtually overnight, and players big and small have been chomping at the bit to hear the rules of the game.

Here’s what we know:

On Dec. 17, 2018 the Alcohol and Gaming Commission of Ontario will begin accepting online applications with the goal of having private stores licensed and open for business by April 1, 2019. One operator can open up to 75 stores in the province, unless, in a twist unique to Ontario, you are a licensed producer.

Licensed producers are limited to owning one retail shop in the province, but the Regulations reveal that they are not out of the game completely: a licensed producer and its “affiliates” may together own or control, directly or indirectly, up to 9.9 per cent of another corporation with a retail operator license.

The definition of “affiliate” takes up half a page of size 10 font as the Regulations attempt to capture virtually every kind of interest that one business could have in another. You are an “affiliate” if you beneficially own or control, directly or indirectly, more than 9.9 per cent of the company’s voting rights; if you are a member of the same joint venture; or even if all you have is a direct or indirect influence that would result in control in fact.

The usual ways around affiliate rules in other contexts, such as the use of non-voting shares, probably won’t work well here because having a beneficial interest with a fair-market value of more than 50 per cent of the company still makes you an affiliate. The intent is clear: licensed producers are not to dominate the market at the expense of the “little guy” entrepreneur.

But there could be some creative solutions in Ontario for the country’s 132 licensed producers. For example, it is yet to be seen how marketing, branding and management agreements with retail operators will be viewed by regulators. Could a licensed producer own a management company that provides many things a retail operator needs, such as branding and staffing, like a hotel management contract?  Would revenue sharing or other revenue-based fee arrangements trip up the affiliate rules? Can an operator sell a licensed producer an option to purchase its shares in the future, for example if the law changes to relax these ownership rules?

Another way the Regulations support the cannabis entrepreneurship dream is by limiting the ability of municipalities to impede it, by stating that the only grounds on which municipalities can object to a retail store application are public health and safety, the protection of youth, and the prevention of illicit activities. (The Act already precludes municipalities from implementing licensing schemes or zoning restrictions to control where stores are located.)

The fact that an applicant’s store would be pot shop number 10 on the same city block, for example, is not in itself a valid basis for a municipality’s objection.

Municipalities must therefore decide by Jan. 22, 2019 whether they want to opt out of the retail store framework altogether (likely allowing the black market to continue to thrive), or opt in (permanently) and permit licensed retail operators that they can’t regulate.

The Regulations also tell us a bit more about the retail operating environment, and much of it seems achievable for a small business.  Stores and their storage and receiving areas must be walled off from the businesses around them, but can be located in indoor shopping malls. The entrance to each store is likely to include a security checkpoint, as no one who appears younger than 25 will be allowed to enter the store without presenting government-issued photo ID (and no one younger than 19 is allowed in at all, raising the prospect of kids left in cars outside retail shops).

While the only things a store can sell are cannabis, cannabis accessories, and (thoughtfully) shopping bags, it remains to be seen whether other offerings can be made to customers in-store, such as a complimentary latte or a lounge area with free wifi.

Of course, there are also business realities to consider – even with no licensed producers in the picture, competition from the legal and black markets will be fierce, and “little guy” applicants will almost certainly need financial backers and a differentiating factor to thrive, despite all the advantages in the law.  But this is Day 0, and possibilities abound.

One more important factor in how this will all play out is the power of the AGCO to establish “standards and requirements” respecting the conduct of licenceholders, including rules dealing with store premises, the prevention of unlawful activities, and advertising and promotion.  The AGCO has promised to set out these standards shortly in an online guide.

The AGCO has an explicit mandate to keep bad actors out of the business, and applicants should therefore be prepared for an up close and personal vetting process with an unpredictable scope. For example, the AGCO has the power to look past official records of an applicant and go up the ownership chain as far as they want, following directors, officers, shareholders, and everyone “interested” in them to find sources of capital and other influence.  Your financial records and tax returns will need to be squeaky clean.

Ontario is open for business to cannabis retail entrepreneurs – that much is certain. In a provincial market where demand for cannabis stores is so strong that illegal dispensaries risk raids and arrest for a piece of the action, the doors have been thrown open and the red carpet rolled out for the little guy.

Let the business begin.

View the article on The Globe and Mail’s website here: https://www.theglobeandmail.com/cannabis/article-ontario-clearly-wants-the-little-guy-running-its-pot-stores/.

What’s Up in Weed is not legal or financial advice. It is a blog by SkyLaw which is made available for informational purposes only and should not be used as a substitute for professional advice from a lawyer. This blog is subject to copyright and may not be reproduced without our permission. 

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