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Law Times • November 10, 2014 Page 7 www.lawtimesnews.com Canada's medical marijuana industry offers a range of business opportunities BY NADIM WAKEAM AND PATRIcK GERvAIS For Law Times ublic opinion in North America related to the consumption of marijuana for both me- dicinal and recreational use has evolved greatly in the past few years. In the United States, rec- reational marijuana is now legally available in Colorado and Washington. Voters in Alaska and Oregon voted on the same issue last week. The New York Times re- cently called for ending the federal ban on marijuana. Medicinal marijuana is now available in 23 American states and in 2014 is an industry estimated at $2.6 bil- lion. North of the border, possession of marijuana is still a summary offence, but the government has approved it for medicinal use since 2001. About 40,000 Canadians are registered users of medical marijuana. Health Can- ada expects this number to increase tenfold within the decade. Canada's medicinal marijuana market is worth approximately $120 million and is expected to rise to $1.3 billion by 2024. The industry is already attracting investors from Canada and abroad. The government repealed Canada's marihuana medical access regulations, which had governed access to medicinal marijuana since 2001, on March 31, 2014, amid concerns about security and quality control mea- sures, the availability of marijuana to patients, and the illegal marijuana industry. The marihuana for medical purposes regulations, which came into effect on June 7, 2013, now govern the control, production, distribution, and possession of medicinal marijuana in Canada. The new regulations brought changes with respect to how Canadians access medicinal marijuana. Existing authorizations to possess, designated-person production licences, and personal-use production licences expired on March 31. As a result, individuals must now dispose of marijuana obtained under the marihuana medical ac- cess regulations, cease marijuana production, and notify Health Canada that they have taken these actions. Under the new regulations, users must obtain a pre- scription from an authorized health professional and pur- chase the product from licensed producers. In response to an application challenging the requirement to obtain mar- ijuana from a licensed producer and a subsequent Federal Court injunction, Health Canada is treating certain exist- ing licences as extending beyond March 31. More recently, Health Canada proposed additional amendments to the new regulations. It will create a prescription-monitoring program to monitor the use and prescription patterns of doctors and other health- care professionals who prescribe marijuana for medical purposes. The rationale of the amendments is to col- lect information that will improve the ability of licens- ing bodies to monitor the professional practices of their members with respect to the use of marijuana. The new regulations did not adopt a dispensary model and has limited the methods of distribution for medicinal marijuana. Under the new framework, the only way to obtain medicinal marijuana is through li- censed producers authorized by Health Canada. These licensed producers must ship marijuana directly to cli- ents or their health-care practitioner. Licensed produc- ers are not able to operate storefronts or provide me- dicinal marijuana to dispensaries or compassion clubs for distribution. Instead, producers will distribute all dried marijuana under the new regulatory framework via secured shipping methods. Dispensaries have historically operated as an act of civil disobedience and remain officially illegal under the new regulations. As of 2013, there were approxi- mately 50 dispensaries operating in Canada serving ap- proximately 30,000 patients. Dispensaries provide in- dividuals with community-based support, knowledge about uses of medicinal marijuana, and alternative access to various strains and routes of administration. Although not incorporated into the legal framework, police have generally tolerated well-established dispen- saries governed by best practices. However, it remains unclear how police will respond to these dispensaries under the new regulatory regime. The new regime leaves open opportunities for dispensaries to convert to educational resource centres that no longer dispense marijuana but may continue providing information, education, and referrals. Al- ternatively, dispensaries may begin transitioning to the new framework by becoming licensed producers them- selves. As a licensed producer, they could legally con- tinue producing and distributing medicinal marijuana. However, even as a licensed producer, dispensaries would still not be able to dispense marijuana on-site, again limiting their ability to provide a community- based model of care for patients. Concerns remain from the compassionate commu- nity on the lack of patient care, community support, and education that is available under the new regime as it does not recognize dispensaries or allow for mari- juana derivatives to be provided to patients. In 2011, the Canadian Association of Medical Cannabis Dispensa- ries was created to represent dispensaries nationwide. It actively participated in Health Canada's stakeholder consultation process on the new regulations but was ultimately unsuccessful in getting dispensaries recog- nized as legal providers of medicinal marijuana. The as- sociation continues to support the existence of dispen- saries and has put in place a certification process with the hope that uniform best practices and self-regulation will be a positive step towards the future integration of dispensaries into the current legal framework. Despite the Federal Court injunction, registered us- ers will soon likely need to purchase medicinal mari- juana from licensed producers. That is certain to gener- ate significant activity in Canada's medicinal marijua- na market as issuers seek licences and begin operating. There are several steps to obtaining a licence. Prospec- tive applicants must address five key areas in their ap- plications: • Site: Purchase and lease of a suitable location, ob- taining relevant licences and sourcing security equipment, location, and other information. • Records: Standard forms, preservation of records and method, privacy concerns, recall procedures. • Product: Cost considerations, production quantity and capacity, microbiological standards, labelling and packing requirements pursuant to food and drug regulations, activities involved. • Personnel: Security checks and clearances, biometric scanning, supervision, and authorized individuals. • Notification: To local government, police, and fire authorities of proposed activities. Producers must also designate qualified quality as- surance people responsible for the quality control of the marijuana and submit a report on their qualifications and the regulatory compliance of the buildings and equipment they will be using. Under the new regulations, the minister must issue a licence after examining an application as long as there are no grounds for refusal. Grounds for refusal include general technical ineligibility, falsified documents, in- adequate security measures, previous nefarious con- duct with respect to controlled substances, and failure to produce security clearances. Before the minister will issue licences, Health Cana- da verifies compliance with the new regulations' secu- rity requirements and its directive on physical security requirements for controlled substances through a pre- licence site inspection. It also verifies the quality assur- ance report at this inspection. The licence is renewable annually and allows for the production of marijuana and the operation of the business. Health Canada's healthy environments and con- sumer safety branch's office of controlled substances monitors compliance and enforcement. Licensees must maintain adherence to the new regulations and are subject to a matrix of municipal, provincial, and federal laws. They include provisions under the Food and Drugs Act (for advertising, labelling, manufactur- ing, and inspection), the Controlled Drugs and Sub- stances Act (for inspections) and the narcotic control regulations (for advertising). As the commercial marijuana industry grows, it is raising capital in ways similar to other innova- tive industries, including clean technology and re- newable energy. Interest appears to be strong with about 900 companies having submitted applications to Health Canada for licences under the new regulations as of June 2014 and approximately 25 new applications coming in weekly. Issuers looking to enter the market can raise funds in the following ways: 1. Prospectus: Issuers can raise capital by issuing a pro- spectus containing a detailed disclosure of the busi- ness and the securities they are offering. Unlike issu- ers in the natural resources industry, prospective issu- ers have no specific disclosure obligations and there are no requirements regarding specific technical re- ports stamped by a qualified person. The drawbacks are that issuing a prospectus can be an expensive and time-consuming process that might be impracticable for smaller issuers and entrepreneurs. 2. Private investment: Ontario issuers under the On- tario Securities Act's accredited investor exemption can raise funds from high-income individuals or those with substantial assets. This exemption allows high-income individuals or certain related parties to the company to invest directly in a private com- pany while bypassing the prospectus requirement. Similarly, private companies can also raise funds through the minimum $150,000 investment exemp- tion available to investors. The Ontario Securities Commission has recently pro- posed four new exemptions to raising capital general- ly that would be available to businesses in this indus- try should they get approval. They include an offer- ing memorandum exemption through which issuers would be able to raise capital after providing com- prehensive disclosure to investors; a family, friends, and business associates exemption that would enable startup issuers to raise capital within the personal net- works of their principals; an existing security holder exemption through which issuers listed on the Toron- to Stock Exchange and its venture exchange as well as the Canadian Securites Exchange could raise capital from existing security holders; and a crowdfunding exemption whereby issuers could raise capital from investors through an online platform registered with securities regulators. 3. Stock exchange listing: There are currently 31 medi- cal marijuana companies listed on Canadian ex- changes. Issuers can seek a listing on an exchange with the most accessible options being the Canadian Securities Exchange or the TSX venture exchange as a Tier 2 industrial, technology or life sciences busi- ness. The Canadian Securities Exchange, which cur- rently lists 13 marijuana companies, is the most f lex- ible board for small issuers at an early development stage. While both exchanges have minimal business qualifications or restrictions relative to the main TSX board, the cost of an initial public offering or a listing can eat into the funds companies raise. The commercial medicinal marijuana industry in Canada is in its infancy and is offering an early advan- tage for those willing to take the risk whether by raising capital privately or going public. As the traditional phar- maceutical market faces patent expirations and decreas- ing research and development budgets, one avenue for an exit is selling to pharmaceutical companies as they increasingly focus on acquiring specialty biotechnology businesses to spur growth in new markets. Potential risks include the difficulty of predicting demand and compe- tition until licensed commercial producers commence operations under the new regulations. Producers should also consider protecting their patents and trademarks, plant breeder rights, trade secrets, and production and operational techniques. LT uNadim Wakeam is chairman of the mining group at Blaney McMurtry LLP with a focus on corporate and secu- rities law. Patrick Gervais focuses on a range of commercial matters at Blaneys. The authors would like to thank Zach- ary Garcia and Jessica Weik, both students at Blaneys, for their assistance with research for this article. COMMENT u SPEAKER'S CORNER P