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Some cannabis retailers could be shut out of operating multiple stores in Ontario as a result of new grower ownership limits issued on Thursday.
The province’s regulations say a cannabis retailer can’t be more than 9.9 per cent owned by a producer if it wants to operate more than one store. That means, for instance, that Alcanna Inc., which is 25 per cent owned by grower Aurora Cannabis Inc., would have to overhaul its ownership structure in order to run shops in Ontario.
Tokyo Smoke, which is 100 per cent owned by grower Canopy Growth Corp. and has opened cannabis stores in other provinces, would also have to either revamp its structure or abandon retailing if it wanted to go ahead with its plan to open a chain of stores in Ontario.
The industry has been waiting for more clarity on whether companies owned in part by producers – affiliates – can open more than one store. The unveiling of these regulations comes three months after the new Ford government said it would overhaul the way recreational cannabis was going to be sold in the province.
Lawyers are closely reading the new rules and devising ways their clients could restructure their businesses or create new corporate structures to get a bigger slice of the market without breaching the regulations.
One route could be a franchising model, says Chad Finkelstein, a lawyer at Dale & Lessmann LLP in Toronto. Other options, he says, include being a lender – as long as there isn’t an option to convert that debt into shares or receive stock on default – or charging service fees for use of trademarks. Or growers might also be able to enter into a limited partnership arrangement with another company that would actually operate the stores.
“Lawyers are definitely looking for every angle in how to interpret these new laws,” he added. “It’s all hands on deck.”
Cannabis retailers have been racing to lease space for their stores in Canada’s largest province without knowing details of the rules. The new rules provide them with some guidance, although municipalities still have until Jan. 22 to ban stores.
Ontario said Wednesday that cannabis must be sold in standalone stores, essentially shutting out pharmacies and grocery stores from selling recreational cannabis within their existing outlets.
Canopy is looking at a franchising model, co-CEO Bruce Linton suggested to analysts Wednesday before the regulations were released. Franchise stores are wholly owned by their independent operators, not by the company itself. And franchisors have control over a franchisee’s method of operations as opposed to the franchisee itself.
“We would be quite fine with the locations which we have under – I’ll call it control – that they became franchises,” Mr. Linton said. “They are operated by others, but they carry our brand because really, for us, retail does give you a little bit of torque.”
Mr. Linton said Canopy wants to have stores in order to get access to customer data. Besides franchised stores, Canopy believes it will be able to run a store at each of its four Ontario production sites, he said. The Ontario regulations say each licensed producer can have one store at each facility.
Edmonton-based Alcanna, the former Liquor Stores N.A. Ltd., plans to create a separate company in Ontario to comply with the regulations, CEO James Burns said.
“I don’t think we’ll have any difficulty at all in getting a structure for the Ontario cannabis business, which will be a separate entity that will comply with the rules.” Aurora would not have more than 9.9 per cent of the new Ontario structure’s ownership even though it controls 25 per cent of Alcanna in all, Mr. Burns said.
There’s still uncertainty.
The definition of “affiliate” in section 2 suggests that growers could hold a stake of no more than 50 per cent in non-voting shares of a retailer and control of voting shares of up to 9.9 per cent. But section 7 states that a corporation wouldn’t be issued a retail license if growers or their affiliates own more than 9.9 per cent.
“There’s a bit of a contradiction there to the tune of about 40 per cent,” Mr. Finkelstein said. “It doesn’t matter if it’s voting shares or non-voting shares, if an LP owned any shares that amount to more than 9.9 per cent then the company applying for a license will not get one.”
Retailer Spiritleaf, which is owned by Inner Spirit Holdings, conforms with the Ontario rules because its stores already are franchised, each one owned by a different operator, said Dave Marino of Marino Locations Ltd., which advises Spiritleaf on retail sites. As well, Spiritleaf complies with the regulations because its parent, producer Newstrike Brands Ltd., owns less than 9.9 per cent of Spiritleaf, he said.
On Wednesday, Ontario published a news release that said cannabis retailers will be allowed to operate no more than 75 stores each. The province said cannabis stores have to be at least 150 metres from a school; the shops can be open daily from 9 a.m. to 11 p.m. Ontario will start accepting retail applications on Dec. 17. Physical stores can start operating by April 1 in Ontario while currently recreational cannabis is only sold online by the government through its Ontario Cannabis Store.