There's no doubt about it — it is still a criminal offence in Canada to possess and distribute marijuana for recreational purposes. While legal for medical purposes under certain circumstances, marijuana remains an illegal Schedule II drug under the Controlled Drugs and Substances Act (the CDSA).1 The Liberal government has made clear its intention to expand the legal framework to allow for recreational access to marijuana under new legislation. Further to that intention, Bill C-452 was introduced in the House of Commons recently, providing long-anticipated insight into the direction the legal framework for recreational marijuana is headed. From a business perspective, the opportunities are plentiful. However, without the proper information, the risks could be too.
Current State of the Law
The law regulating access to marijuana and the sale of marijuana and related goods in Canada is complex with federal, provincial and municipal laws intersecting to regulate the market. At the federal level, marijuana has been regulated by the CDSA since 1996. The current legal landscape makes marijuana available for medical purposes through a tightly regulated system. After repeals of several different sets of regulations, the current Access to Cannabis for Medical Purposes Regulations (the ACMPR)3 came into force on August 24, 2016. The ACMPR allows medical patients to access marijuana through a licensed producer, by producing limited quantities for personal use, or by designating someone else to produce limited quantities for them. While the ACMPR provides a legal framework for medical patients and the producers that supply them, recreational production and sale of marijuana remains illegal.
Municipal laws can augment provincial and federal laws by regulating matters that fall under their jurisdiction such as business licensing, land use and public order. The City of Vancouver, for example, has passed a number of business license and land use bylaws allowing marijuana dispensaries to obtain special business licenses in certain geographic areas. A 100% increase in the number of marijuana-related businesses in the city from 2013 to 2015 and the lack of a clear regulatory framework are cited as reasons for passing the regulations.4 It's important to note that the City of Vancouver does not have the jurisdiction to legalize the business of selling marijuana and related goods for recreational purposes. While these bylaws are a proactive step towards licensing the businesses in this market, they do not support business owners operating in the non-medical marijuana and related goods market and the bylaws are broadly worded to apply to businesses that "advocate for the use of medical marijuana." We expect to see other Canadian cities drafting local bylaws in anticipation of the new legislation.
Task Force Report's Recommendations for Legalization of Marijuana
The Task Force on Cannabis Legalization and Regulation (the Task Force) published a report in December 2016 setting out a number of recommendations for the federal government to assist it in regulating greater legal access to marijuana. While the recommendations in the report are not law, they offer significant insight into the direction that the law might go. The Task Force made a number of recommendations relating to the marketing of marijuana and related products, including:
- setting a national minimum age of 18 for purchasing marijuana;
- creating a comprehensive list of advertising and packaging restrictions similar to the restrictions on promotion of tobacco products;
- creating labelling requirements;
- creating a tax regime that includes equitable distribution to provinces and territories;
- creating limits on the density and location of storefronts; and
- creating oversight and approval from local authorities.
A number of the Task Force's recommendations have been adopted in Bill C-45. For example, Bill C-45 prohibits any promotion, packing and labelling of cannabis that might appeal to young persons and defers to the provinces to enact laws relating to distribution and retail. Readers considering starting a business under this new legal framework should be aware of the strict liability imposed on management. The Bill provides that directors, officers, agents and mandataries who direct, authorize, assent or acquiesce to any violation of the legislation will be held liable for violations and that no due diligence or mistaken belief defences will be available to them. Another interesting aspect of the Bill is the requirement it imposes on corporations to disclose information about shareholders and controlling members. Bill C-45 will not create a legalized recreational marijuana market overnight — the government anticipates that regulated access to recreational marijuana will not occur before July 2018.
Current and Future Opportunities
The potential created by impending legalization of recreational marijuana opens up a number of doors for investment and business purposes.
Ground Entry to the Market
Assuming full legalization, certain forecasts have pegged the potential Canadian marijuana market size to reach nearly $23 billion.5 When looking at sales alone, Canada's market value could range anywhere from $5-8 billion, a figure that is on par with the size of Canada's spirit and wine markets. The potential for new businesses is accordingly substantial and many businesses are hedging their bets by getting market-ready before the legislation is finalized. If the speed at which the Colorado marijuana industry reacted to legalization is any indication, things will move extremely rapidly once the Canadian legislation is introduced. In order to get a jump start on competitors, investors and businesses should turn their minds to the specifics of their market entry strategy. Customer identification, business integration and product differentiation should all be considered when developing a plan to enter the market.
Marijuana companies have already been publically listed and traded in Canada since the introduction of the MMPR. With full legalization impending, the number of market entrants will undoubtedly increase. For the time being however, the highly-regulated structure of Canada's medical marijuana industry allows for only a limited number of producer licenses that can be issued under the ACMPR (currently 38).6 This allows for an industry comprised of specialized and sophisticated issuers, which are better-positioned to attract investment and capitalization.
While some volatility in marijuana stock values is expected until the legislation comes into force, there are certainly some fruitful opportunities to invest in existing issuers listed on the TSX, TSXV, and CSE. In 2016, medical marijuana companies raised $466 million on Canadian capital markets.7 In addition, there has been a recent flurry of M&A activity in the industry. For example, Canopy Growth Corporation, possibly the largest marijuana company in Canada, is the successor of a marriage between Tweed Marijuana Inc. and Bedrocan Cannabis Corp. in June 2015.8 On February 1, Canopy acquired another producer, Mettrum Health Corp., which itself had just acquired Bodystream Cannabis Clinic Network in January. The opportunities for expansion and consolidation in the industry will continue to grow, as many players look to establish a dominant market position ahead of the new legislation. As always, thorough research and due diligence into potential investment targets will be crucial, especially given the increased scrutiny that marijuana-related businesses will, and have already started to, attract from the Canadian Securities Administrators.9
The International Market
With Canada looking poised to be the first industrialized country to fully legalize marijuana, the opportunities for foreign stakeholders are enticing. Firstly, research and development is an ever-growing subsection of the marijuana industry. Cannabis-based pharmaceutical research has received significant attention in recent years. Without legalization, however, U.S. and other international companies may be unable to freely undertake, and raise capital for, their research activities. They may soon look to Canada as the epicentre in which to pursue groundbreaking research and development, given the political support. In fact, one of the Task Force Report's recommendations was for the federal government to subsidize cannabis-based pharmaceutical research, which would create even more favourable conditions for international stakeholders.
Other trends to watch out for will be international partnerships and exclusive agreements for the supply and distribution of marijuana to other countries. As other nations look towards legalization, existing licensed producers in Canada may see a windfall in terms of export potential. Having the cultivation resources and infrastructure already in place, Canadian producers may be sought after for the supply of marijuana. This, coupled with the expected Canadian legalization, could see existing Canadian companies expanding their operations, both in terms of size and geographic reach.
The Canadian marijuana industry is certainly one to watch in the coming year. The recently introduced Bill C-45 provides insight into a new market that promises to generate profitable business prospects across various industries, both directly and indirectly related to the sale of marijuana.
*At the time this article was written, Sheene Josan was an associate in BD&P's Commercial Transactions Group.
1 SC 1996, c. 19
2 Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts, 1st Sess, 42nd Parl, 2017 (first reading 13 April 2017)
5" Recreational Marijuana: Insights and Opportunities" Deloitte, online: 2016 < https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/Analytics/ca-en-analytics-DELOITTE%20Recreational%20Marijuana%20POV%20-%20ENGLISH%20FINAL_AODA.pdf >.
7 Sunny Freeman, "Why smaller banks take bigger slice of the growing medical marijuana business", Financial Post, online: January 30 2017, < http://business.financialpost.com/news/fp-street/why-smaller-banks-take-bigger-slice-of-the-growing-medical-marijuana-business >.
8 Jocelyn Aspa, "Canadian Marijuana Stocks", Cannabis Investing News, online: February 22, 2017 < http://investingnews.com/daily/resource-investing/agriculture-investing/cannabis-investing/canadian-marijuana-stocks/ >
9 See CSA Staff Notice 51-342: Staff Review of Issuers Entering into Medical Marijuana Business Opportunities.
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