The Government of Canada's proposal to legalize marijuana for recreational use in 2017 has been the focus of considerable media attention, and has spurred the interest of individuals and companies desiring to enter the budding industry. This article will highlight some of the potential commercial and legal issues that will likely confront prospective market entrants.
Legal landscape of the marijuana industry
At present, the precise regime that will be implemented by the
Government of Canada is not known; however, the regulatory
considerations below will bear considerable commercial
consequences. Each of the following has been analyzed in light of
the current regulatory framework, its ever-changing nature and the
corresponding business implications.
Licensing – The current licensing
regime allows Health Canada to oversee the medical marijuana
industry by restricting access to the market and continually
enforcing compliance. The Marihuana for Medical Purposes
Regulations (MMPRs) meticulously stipulate each step of the
production and distribution process, governing activities related
to production, sale, storage, transportation and destruction of
dried marijuana. Licenses under the MMPRs are issued, denied and
revoked at the absolute discretion of Health Canada. The prospect
of a perpetually denied or delayed application presents a degree of
risk for both companies and their respective investors, as the
regulated industry is still in its infancy.
It is likely that the stringent requirements for applications, as
well as the ongoing supervision and oversight of Health Canada (or
an applicable governmental authority), will continue in the
recreational-use marijuana regime. For this reason, companies that
wish to enter the market would be well advised to ensure, and its
investors and financiers be equally cognizant of, full and diligent
compliance with the licensing requirements.
Distribution and the Allard Decision
– Despite the detail and intricacy of the MMPRs, uncertainty
lingers regarding the enforcement and illegality of alternative
methods of distribution. Health Canada issued an information
bulletin re-affirming that compassion clubs and dispensaries under
the MMPRs are illegal.1 In spite of this,2
the city of Vancouver, in June 2015, implemented a municipal
licensing regime to regulate the operation of marijuana
dispensaries (thus, allowing dispensaries that abide by the
relevant municipal guidelines to operate).
Further convoluting the landscape in February 2016 is Justice
Michael Phelan's Federal Court decision. In what has become
commonly known as the "Allard Decision," the court ruled
that the distribution system as mandated by the MMPRs unjustifiably
infringed upon the life, liberty and security interests described
under Section 7 of the Charter of Rights and Freedoms.3
The declaration was suspended for six months to allow the newly
elected Liberal government to amend the MMPRs. Only months later in
May 2016, the city of Toronto undertook a city-wide raid as part of
"Project Claudia," an investigation and operation to shut
down marijuana dispensaries across the city that resulted in
product seizures and several criminal charges.4 Not only
must the lack of uniformity be addressed by the new licensing
regime, but the proposed method of distribution5 and
taxes (as may be applicable) will also bear a significant impact on
business models and profitability.
Advertising, Promotion and Use – Substances
such as tobacco, alcohol and medical marijuana are subject to
strict advertising and packaging controls to ensure public health
safety. In Ontario, tobacco retailers are generally prohibited from
advertising tobacco products and using any display that would allow
a potential purchaser to view or handle the tobacco product before
purchasing it. Under the MMPRs, advertisements for medical
marijuana are prohibited entirely, and various companies have
bemoaned the difficulty in promoting brand uniqueness and
differentiation, in addition to the dissemination of information to
potential consumers.6 It is highly likely that similarly
strict regulations will apply to recreational use marijuana as
well; however, the impact on the multitude of social media
platforms will be difficult to predict.
Commercial landscape of the marijuana industry
According to Health Canada,7 there are currently 31
producers of dried medical marijuana licensed under the MMPRs, with
numerous interested producers either applying for or awaiting
approval.8 Companies currently licensed under the MMPR
regime are likely poised to control a large portion of the future
recreational-use market. Optimistic predictions state that current
statistics are likely only a restrained indication of the potential
market capitalization of the nascent marijuana industry. While this
may appear promising, here are some commercial concerns:
Sunk Costs – Commercial production facilities
require large-scale, sensitive and intricate equipment and
machinery that carry significant operating costs. The
Cannabis genus of plants requires a large amount of
sunlight, which forces producers to either operate traditional
indoor facilities at steep utility costs or locate and purchase
limited geographical locations within Canada for greenhouse
operations. In addition, Health Canada must approve each growing
facility before production is allowed to commence. In spite of the
regulatory and overhead obstacles, producers have shown remarkable
innovation and entrepreneurship to lower the cost of growing and
cultivating marijuana.9
Agri-Business – By its very nature,
the agriculture business is subject to multiple factors that can
influence crop quality and yield. Marijuana producers have the
added complexity of ensuring uniform content of certain
psychoactive chemicals, while abiding by production regulations
(e.g., plants cannot be treated with pesticides). The growth cycle
from seed to harvestable crop varies anywhere from three to six
months, which delays profitability whilst incurring significant
costs. Seeking and developing advantages that boost the likelihood
of successful crop quality and yield will likely require a keen
understanding of the regulatory environment by both incumbent and
prospective producers.
Market Uncertainty – As of May
2016, there are almost 40,000 registered medical marijuana clients,
a number that has shown steady growth in each yearly quarter since
April 2014.10 The industry is believed to be currently
valued between $80 to $100 million, and could climb as high as $5
billion post-legalization.11 While such optimism invites
enthusiastic entrepreneurs, the future of the industry remains
shrouded in mystery. Product diversification, innovation, financing
and advertising are some of the many commercial considerations that
must be addressed by regulation. Moreover, long-term medical
research and findings will also likely play a significant role in
shaping both future regulations and the broader public
appetite.
Conclusion
The marijuana industry is poised to undergo a drastic paradigm shift, and market analysts have made varying predictions regarding its eventual profitability. Until the Government of Canada tables its proposed legalization regime, it will be difficult to ascertain the breadth and depth of the upcoming regulatory environment. This unique situation means that companies most knowledgeable of regulatory developments will be able to quickly respond and adapt to the new market and place themselves in the best competitive position to succeed.
Footnotes
1 Health Canada's Accessing Marijuana for Medical Purposes -
Information Bulletin was issued on June 8, 2015, and provides
clarity as to Health Canada's position on the current
regulatory framework.
2 The federal government at the time has opposed Vancouver's
municipal regime, stating that all operating dispensaries to be
illegal. See: http://www.theglobeandmail.com/news/british-columbia/vancouver-medical-marijuana-businesses-without-licences-must-close-by-friday/article29761684/
3 Allard et al v. Her Majesty the Queen in Right of Canada.
4 See: https://www.thestar.com/news/gta/2016/05/26/toronto-police-and-drug-squad-raid-marijuana-dispensaries.html
5 The prospect of using the Liquor Control Board of Ontario as a
means of retailing marijuana products has been proposed. See: http://www.cbc.ca/news/canada/toronto/wynne-marijuana-lcbo-1.3364158
6 See: http://ottawacitizen.com/news/local-news/health-canada-warns-marijuana-producers-about-advertising
7 Number of licensed producers was obtained from the Health Canada
website, updated as of May 20, 2016.
8 Statistics obtained from Tweed 2014/15 Annual Review.
9 Aphria, founded by two agri-business experts, was one of
Canada's first marijuana companies to produce marijuana in a
greenhouse, located in Leamington, Ontario, to reduce lighting
costs of traditional indoor facilities.
10 Statistics obtained from the Health Canada website, updated as
of May 10, 2016.
11 See: http://business.financialpost.com/news/agriculture/canadian-marijuana-stocks-jump-as-liberal-wins-signals-legalization-on-the-table
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