With federal legalization, Canada emerges as a global leader in cannabis
The cannabis industry is a fast-paced and multi-faceted industry that presents a myriad of opportunities for entrepreneurs. Since the legalization of recreational cannabis in Canada in 2018, the industry has seen many highs and lows in its short lifespan. This is in part due to the legislation and regulations governing the operations of the cannabis industry in Canada.
The regulatory scheme in Canada comprises both federal laws and regulations, as well as provincial-based laws and regulations, all of which stem from the Cannabis Act. Those looking to participate in the industry in Canada should be aware of the licensing schemes that have been established under each of these arrangements.
Production, manufacturing and processing
The production, manufacturing and processing sectors are wholly regulated by the federal government through Health Canada.
Canada 2020 Sales and Statistics
January: $154.1 million
February: $151.9 million
March: $181.2 million
April: $180.2 million
Source: Statistics Canada
April 2020 Breakdown
7,592,177 packages of marijuana sold in recreational and medical stores
Canada has a total of 97,232,640 square feet of licensed cultivation space including indoor, greenhouse and outdoor cannabis farms.
46,325,940 packages of marijuana in inventory at distributor, processor, retail and cultivation facilities.
43% of inventory is held by distributors
Source: Health Canada
Reporting by Health Canada was slowed due to the COVID-19 pandemic between March and June 2020. The agency has resumed publishing market data July 2020. All dollar figures in CAD.
Health Canada has its own licensing and application process with respect to the manufacturing, production and processing of cannabis and cannabis products. There are a variety of licenses available depending on the type and size of operations, allowing for variation in production, from craft operations to large, factory-like operations.
In light of the initial volume of applications Health Canada received, it instituted the requirement that those looking to apply for any license must demonstrate that the proposed facility had been built prior to submitting an application, and each application must include evidence to that effect. This has effectively placed a high initial capital cost to those looking to enter the industry and makes such an investment riskier, because there is no guarantee that a license will be granted, even after having a facility built.
In addition to the production and manufacturing side, the retail industry is a largely developing sector. The responsibility and power to grant retail store licenses has been designated to each province, with each establishing their own licensing schemes. Thus, the retail store application process will vary between provinces. Some provinces have placed further restrictions on retail store license ownership by placing limits on the number of retail store licenses to be issued, the number of licenses that can be held by one entity and the ability for a retail store owner to be connected to a federal producer.
The application process for a retail store license requires an applicant to have secured in some manner, whether by lease or agreement, a proposed retail location, because the retail space and location of the proposed store will be vetted during the review process. Furthermore, an in-depth review into the finances of the company and any controlling shareholders is also part of the application process. As such, those looking to become involved in a retail store, whether as an owner, shareholder, board member or otherwise, should be aware of the financial disclosure obligations and the security clearance requirements.
In addition to the provincial licensing requirements, a potential retailer should also take into consideration any municipal zoning bylaws, development permits and business licenses that may be required. Some municipalities have placed a limit on the total number of stores they will allow within a particular area, which may present additional challenges to potential retail store owners and should be reviewed and assessed prior to entering into any type of lease agreement.
The Cannabis Act also restricts the marketing of cannabis activities, products and cannabis-related accessories. The restrictions govern a wide array of promotional activities, packaging specifications and the sale of non-cannabis-related promotional items. These restrictions have largely been put in place to prohibit advertising to youth and to enhance public awareness of health risks associated with cannabis.
Health Canada considers whether promotional activities are compliant on a case-by-case basis by taking into consideration factors including the purpose, content and context of the promotion, as well as the intended audience. Accordingly, this presents a degree of uncertainty on acceptable marketing practices. Some cannabis retailers have turned to using social media as a method of overcoming these restrictions, which in some instances has proven to be a successful strategy.
In addition to the restrictions posed by the Cannabis Act, there are added provincial restrictions. Some provinces, such as British Columbia, require marketers to obtain a marketing license under the same scheme as retail store licensees in order to be able to work with cannabis retailers or producers. Similar to a retail store license, marketers must apply and obtain approval for a marketing license.
Much like any other venture, cannabis companies require funding to operate and manage. Many cannabis businesses have increasingly turned to private equity and retail investors to raise capital and many have completed public offerings as a way of gaining access to greater liquidity and capital. Since many U.S. cannabis companies are unable to raise capital on U.S. stock exchanges due to the U.S. federal government’s continued ban on cannabis, exchanges in Canada, in particular the Canadian Securities Exchange (CSE), provides an opportunity for many U.S.-based cannabis businesses to raise capital on a public market. While listing on the CSE does require certain capital requirements, the potential funding that can be achieved will outweigh any outlays that may be required. The Canadian markets present an excellent opportunity for business looking to expand and develop long-term growth.
Mahdi Shams and Alizeh Virani
Mahdi Shams is a partner at MLT Aikins who acts for both public and private companies and has worked on a broad range of domestic and international transactions. He has extensive experience advising on cannabis matters including incorporating and organizing licensed producers under Canada’s medical and recreational regimes and setting up licensed retailers. He can be reached at firstname.lastname@example.org.
Alizeh Virani is an associate lawyer based in the firm’s Vancouver office. She maintains a general employment and civil litigation practice. She has particular focus in assisting organizations with cannabis regulatory matters, including licensing. She can be reached at email@example.com.