Law Times

January 14, 2019

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Law Times • January 14, 2019 Page 3 www.lawtimesnews.com Lottery for retail cannabis favours big players BY AIDAN MACNAB For Law Times O ntario's cannabis re- tail authorization lot- tery guidelines place an onerous process on winners and only large, well- financed and established play- ers will be able to handle it, say lawyers in the cannabis sector. Applications were accepted from Jan. 7 until noon Jan. 9 and the lottery will be held Jan. 11 at which time Alcohol and Gam- ing Commission of Ontario will announce the 25 selected. By Jan. 16, the winners will need to produce a $6,000 licens- ing fee, a $50,000 line of credit, have a property leased, have hired employees and be ready to order product and open for busi- ness by April 1. The store must be in the as- signed region and in a munici- pality of more than 50,000 peo- ple and meet the school-distance requirements set out in the regu- lation. Applicants will also have to post their proposed location, go through a public consultation where the public will have an opportunity to object to that lo- cation, after which the applicant will have to respond and request a hearing. Failure to be up and running will cost the retailer $12,500 from their line of credit, with another penalty of $12,500 on April 15 and an additional $25,000 if they're still not sell- ing cannabis by April 30. The 25 winners will be the only can- nabis retail operators until Dec. 13, 2019, when a new application process begins. "But just think about who can afford that? Who can af- ford to get chosen on the 14 th and then get a lease, get the store open, train the employees and put up all the money a month and a half?" says Lou Brzezin- ski, partner at Blaney McMur- try LLP's commercial litigation group. While the government says they want a private-sector-run system so everyone is given an opportunity to be involved in the industry, the truth is only well-financed entities can af- ford to take the risks within this timeline, he says. "The AGCO's lottery sys- tem creates unrealistically fast timelines and the financial and contractual obligations imposed are so onerous that only large players can afford the risks in- volved," he says. It is a "really ambitious target date," says Trina Fraser, co-man- aging partner at Brazeau Seller LLP and advisor to the Cannabis Council of Canada, the cannabis industry association. "Applicants who find this timeline challenging may choose to wait for further opportunities for cannabis retail in Ontario which will follow the temporary lottery process," said Brian Gray, spokesperson at the Ministry of the Attorney General, in an emailed statement. Even with the tough require- ments it is expected a large number of applicants will be gunning for a winning ticket, according to Susan Newell, an associate in Osler, Hoskin & Harcourt LLP's health industry group. "Everybody wants into the cannabis market," she says. "I think people who didn't buy stocks early are now trying to find their own way into what's obviously a very booming industry." There are many unanswered questions arising out of this process, Fraser says. Prospective retailers do not know how the Ontario Canna- bis Store — the province's lone cannabis merchant — will al- locate product between online and storefront sales. They also don't know what the wholesale markup will be. While the government has said retailers can set their own prices, they are competing with the Ontario Cannabis Store's monopoly on online sales and with a huge black market, Fraser says. "Everybody who is putting their name in this hat and hop- ing to be one of these 25 retail- ers, it's just on the belief that this right to open one of the first 25 stores is going to be a very valu- able one, without any under- standing of what their costing or profit margins are going to be. Because you don't know," Fraser says. "They have said that retailers can set their own prices, but this is not an inelastic product. There is a price at which people will not buy your product." Fraser says she has clients who are saying they are in no position get the operation in or- der by April and are skipping the lottery to wait until the full ap- plication process opens up and others who say; "No, this is too big of an opportunity. If we are lucky enough to win, we'll figure it out." Gray said licences are non- transferable and those who en- tered the lottery are not allowed to "change their applicant type, ownership and/or corporate structure in such a way that would result in a change of con- trol of the [expression of interest] applicant or licensee during the lottery process." Control of the entity cannot change hands during the re- tail store authorization period which lasts until Dec. 13, 2019. Applicants can take on minority investors and Fraser says she ex- pects to see licensing deals, ser- vice contracts, convertible de- bentures, options and other in- novative ways for non-winning, well-capitalized companies to use the winners to get a foothold in the market. The cannabis market is still dealing with a deficit in supply, which is why only 25 spots were available for retail in 2019. Fraser says Health Canada has over 600 applications outstanding, some of whom are clients who have been trying to get licensed for four years or more. "Health Canada promised that they're trying to streamline their processes. They've allocat- ed more resources to processing applications. They've hired and trained more people. Hopefully, we're going to see those licences and expansions of existing sites be approved at a more rapid rate, so that the production can ramp up quickly," she says. "I think it's fair to say that supply will probably be an issue for at least the next year or so." Also, on Oct. 17, 2019 — a year post-legalization — edibles containing cannabis will be- come legal, which will add to the supply problem. "We've got literally hundreds of new product types coming onto the market this year. Until these products actually do come onto the market, we don't really know what the consumer de- mand for them is going to be," Fraser says. "So it's going to have to be a period of adjustment, where we see what it is the consumers are looking to buy and figure out how to allocate the avail- able supply to those types of products." LT NEWS LawSociety_LT_Jan14_19.indd 1 2019-01-08 3:16 PM Lou Brzezinski says the Alcohol and Gaming Commisson of Ontario's lottery system cre- ates unrealistically fast timelines. They have said that retailers can set their own prices, but this is not an inelastic product. Trina Fraser LawTimesNews.com Fresh Ontario legal news and analysis available on any device. Get More Online

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