How Big Cannabis is pursing a back door into Ontario’s retail pot regime
February 15, 2019

A number of cannabis retailers backed by major licensed producers have entered into agreements with winners of Ontario’s retail lottery in an attempt to gain access to Canada’s largest market come April 1, when 25 brick-and-mortar cannabis stores are expected to open across the province.

But the nature of those agreements, and whether or not they will survive regulatory scrutiny, remains unclear.

The Alcohol and Gaming Commission of Ontario (AGCO) — the provincial body in charge of regulating cannabis retail in Ontario — has laid out strict ownership rules that bar the 25 individual lottery winners from entering into any kind of revenue-sharing agreements with outside entities that would result in the winners ceding control of their cannabis stores.

Yet, the “vast majority” of lottery winners, most of whom are sole proprietors with no previous retail experience, have already entered into some kind of commercial agreement with an existing cannabis operator, according to a number of lawyers who have been charged with crafting these agreements to comply with AGCO rules.

High Tide Inc., a Calgary-based cannabis retail chain backed by Aurora Cannabis Inc., has entered into two separate agreements with lottery winners in Ontario.

The first agreement was announced earlier this month, and involves the “acquisition of a minority interest in the winner and the option to acquire a greater interest in the future,” according to a news release put out by the company.

The second agreement merely states that High Tide has been “selected to assist with the establishment and operation of a retail cannabis store by a second winner.” No details on what exactly that “assistance” entails were provided by the company.

“We have big, big expansion plans into Ontario, and we want to do it as quickly as possible. I can tell you that we have 20 leases tied up in Ontario in great locations, but I’m not prepared to comment on the terms and conditions of these agreements,” Raj Grover, President and Chief Executive Officer of High Tide told the Financial Post.

High Tide has eight locations across Alberta, selling smoking accessories and cannabis lifestyle products under the banner of its retail chain “Canna Cabana.” Last December, after the Ontario government announced their 25-store retail plan for the province, Aurora invested $10 million in High Tide. Another licensed producer, FSD Pharma, also has a minority stake in High Tide.

“Our biggest intention in striking these deals is to help the winner successfully navigate the retail business. We just want to help,” Grover said. He would not elaborate on whether FSD Pharma or Aurora have had any say in the deals being struck between High Tide and the lottery winners.

Under AGCO rules, licensed producers are barred from participating in the retail system — Ontario Premier Doug Ford has repeatedly said that he wants to see small businesses benefit from cannabis legalization, which was presumably the rationale behind conducting a lottery in order to select retail operators.

“I have honestly never seen anything so silly in my entire legal career,” said Eric Foster, Partner at law firm Dentons LLP, who is currently involved in helping a number of lottery winners enter into agreements with outside entities.

“I have a challenge understanding why some arrangements are acceptable to the AGCO, and why some aren’t. I know that a number of winners have received very nasty letters from the AGCO threatening to disqualify them because of the retail structures they have proposed,” Foster said.

So far, the AGCO has officially disqualified one lottery winner — Gary Hatt — under rule 2(b) of the lottery regulations, which states that winners are “not permitted to change their applicant type, ownership and/or corporate structure in such a way that would result in a change of control.”

According to the AGCO, eight out of the 25 winners have been approved for public notice, meaning that their retail licence applications have passed the provincial body’s first round, and they have 15 days to display a notice on their storefront to inform residents of a proposed cannabis store in the area.

One of those eight winners has entered into an agreement with Alberta cannabis retail chain Spiritleaf, which would, subject to AGCO approval, allow them to open a store in downtown Kingston, Ont.

“We sought out the lottery winner to provide branding support and service to them. We want to help them be successful, that’s all I can really say,” Darren Bondar, president and chief executive officer of Spiritleaf told the Financial Post.

Spiritleaf too, has financial ties to a major licensed producer — Oakville-based Newstrike Brands Ltd., whose retail brand UP Cannabis in known for its affiliation with iconic Canadian band The Tragically Hip. If the Kingston location is approved by the AGCO, UP Cannabis plans to open an “experiential hub” within the store, which the company says would be designed to “complement existing Spiritleaf design elements and provide education about cannabis.”

“We don’t have any financial ties to the lottery winner,” Jay Wilgar, CEO of Newstrike, told the Financial Post. “We have a minority ownership position within Spiritleaf and the idea behind the experiential hub is we want consumers to be able to recognize an UP Cannabis product.”

To date, 16 Retail Store Authorization (RSA) applications have been submitted according to the AGCO, the second major hurdle in the process to get a cannabis store open. The province is gunning for April 1 as the date where 25 stores will be fully operational, but Foster is skeptical that any lottery winner will be able to meet that timeline.

“Communicating with the AGCO on what kind of commercial agreements are acceptable or not, has been like getting water from a stone,” Foster said.

“I understand the logic behind this lottery system, but the process has not served the public interest. There’s very little chance that in six weeks, we will have stores up and running in Ontario.”

Written by: Vanmala Subramaniam
Source: Financial Post