Canada: Surviving And Thriving In The Post-Legalization Cannabis Industry

Canada has rounded the final bend and is on the home stretch in the race to be the second country to legalize recreational cannabis at a national level.

As October rolls closer, new companies and licensed producers (LPs) continue to emerge. While M&A activity is set to continue in the short term, the rate at which it happens remains to be seen as larger companies might look to grow through means other than acquisition. And of course, not everyone will prosper in this new environment: Those that do will be the ones who are comfortable working in a highly regulated industry and who are executing on business plans that differentiate them from their competitors.

Frontierland for Compliance and Governance

The sector is quickly evolving: Certain financial institutions are breaking ground by participating in deals, insurers are reimbursing patients for medicinal use of cannabis, and established retailers are entering or signaling their entry into the sector. Real estate companies are in the mix too, by renting or considering renting space to cultivators or retailers. Add to this the fact that Canada's first-to-federally-approve market status for recreational use has stirred significant interest outside of Canada. The risk profile is appealingly low to invest in, launch in, export from, or import into a regulated and stable political environment like Canada.

Early entrants had the luxury of ramping up under different laws, negotiating contracts and securing retail space, forcing late entrants to work harder to set themselves apart.

As of July 2018, Canada has 112 LPs1 and the government has announced there will be no limit on the number of licences it approves, meaning the market may at some stage be faced with a glut of LPs. Not all will survive. Smaller companies with little financial backing or those who are late to the game will need to work especially hard to establish themselves as significant players. Early entrants to the market had the luxury of ramping up under different laws, negotiating contracts and securing retail space, forcing late entrants to work harder to set themselves apart and find their niche. With many interested investors, and the market becoming crowded with LPs, cannabis companies who want to thrive will need to execute an effective business strategy in what will be not only an uncharted (for recreational cannabis) but a highly regulated industry.

Differentiation is critical. Businesses will need to be creative in distinguishing themselves while staying aligned with marketing and advertising compliance. Hefty restrictions on retail sales, packaging and labelling and promotion means companies need to think beyond simply selling their product to provincially operated stores, like the Ontario Cannabis Store (OSC) in the province of Ontario—the sole cannabis retailer in the province. A clear, defined and well-thought-out business plan that speaks both strategically and pragmatically to driving revenues and keeping an eye on expenses and regulation, will be vital to industry longevity.

Part of that execution includes giving close considerations to things like intellectual property (IP), advertising and promotion in a highly restrictive environment, and leveraging trademarks and branding. Trolls and squatters are emerging, as they spot the opportunity to use IP to block market access. An integrated IP strategy that dovetails business strategy is vital to a company's quest to make its mark in the industry. The race is on for both LPs and companies in the supply chain to seek patents and register trademarks, the latter given imminent changes to the Trademarks Act making it easier for businesses to do so.2

Those investing in this sector will want to be mindful of a few issues that reared their heads in the Cannabis Regulations, published on July 11 and coming into force on October 17. The first is that LPs will need to maintain a record of key investors and provide a report to Health Canada on an annual basis. A key investor is defined broadly as a person who exercises, or is in a position to exercise, direct or indirect control over the LP by providing either money, goods or services, or by holding an ownership interest, right or interest in or in respect of a business operated by the LP. The second is that security clearance requirements may capture officers and directors of corporations that invest in LPs, if the investor corporation exercises or is in a position to exercise control over the LP. There is an exemption for investments in LPs that are publicly traded.

And as we have discussed, compliance and governance needs to be top of mind, impacting procedures and policies of LPs, their employees, officers and directors and investors. Good compliance and governance policies, solid employment, confidentiality and other agreements protecting the LP's rights and evolving the LP by incorporating current corporate best practices will be key to effective ongoing management of the company.3

Drawing Outside the Lines

With provinces in charge of setting their own rules for the distribution and sale of cannabis, companies may have to think outside the box when it comes to interprovincial trade. For example, if a late entrant to the Ontario market has weak sales or is unsuccessful in selling their product to the OSC for retail sale, it might encounter hurdles if its plan B was to cross the border and enter into a deal with a retailer in a neighbouring province. This is where having a defined strategy, for example, by focusing on alliances, joint ventures, M&A, other corporate/commercial agreements or import/export of cannabis for medical use, might assist in differentiating from other LPs.4

While there is no certainty as to when federal legalization in the U.S. might happen, companies in the sector with a strong understanding of the current state of legalization will be well positioned if the status quo changes.

And when it comes to international borders, while there is no certainty as to when federal legalization in the United States might happen, companies in the sector with a strong understanding of the current state of legalization will be well positioned if the status quo changes. Companies should consider how potential federal legalization in the U.S. would align (or not) with their business strategy—considerations that will give them the jump on the competition in the event of changes to current U.S. federal policy.

Conclusion

As is true at the outset of any new industry, the onset of legalization will be followed by missteps and recalibrations. But with hungry investors and multiple market entrants in Canada, the new industry brings with it a wave of complexity. Businesses need to be conscious of their legal obligations in all aspects with the ultimate goal of creating a strategic business plan that will thrive in post-legalization Canada.

Footnotes

1 See https://www.canada.ca/en/health-canada/services/drugs-medication/cannabis/licensed-producers/authorized-licensed-producers-medical-purposes.html.

2 See " A Flower by any Other Name: Cannabis Trademarks and Branding."

3 See " It's Time for Cannabis to 'Grow-Up'."

4 Import and export of cannabis is restricted to medical use or scientific research. Import and export for recreational use is prohibited.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions