Ottawa opens up cannabis industry to people, seeds from previously illicit market

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The federal government has set the final rules for the cannabis market in Canada, allowing people who worked in the illegal trade to join the new industry and giving producers the right to grow marijuana from seeds that originated in the illicit market.

The official regulations, unveiled on Wednesday, confirm the government’s effort to create a relatively broad industry of legal cannabis growers and create new sources of competition for the existing group of licensed medical marijuana producers.

At the same time, the government announced that it will start collecting more detailed data on investors in privately held cannabis producers as part of its effort to prevent organized crime from infiltrating the industry. Still, the new measure fell short of a past government commitment to request greater disclosure from publicly traded companies, explaining that they are already subject to securities regulators.

The new regulations will shape the market for legal cannabis that will open across Canada on Oct. 17. The government had telegraphed its intentions for the rules earlier this year, meaning the official announcement did not shock the industry.

Despite an expected initial supply crunch, federal officials said they are confident Health Canada has increased its licensing of enough medical marijuana companies over the past year to meet the demand for recreational products.

Easing the rules for new producers, Health Canada has lifted a provision under which licensed growers could only obtain their “starting materials,” such as seeds and clones, from existing licensed producers or foreign legal sources. The change means that seeds and strains that were popular on the illicit market will now be able to find their way into government-run and government-regulated stores.

“There is essentially no limit on where applicants can get their product from,” said Deepak Anand, vice-president at consulting firm Cannabis Compliance Inc.

Health Canada also confirmed that it will continue to screen key personnel at licensed companies in the cannabis industry, while noting that past convictions related to cannabis offences will not disqualify individuals from getting authorization to work in the sector. These assessments will be done on an individual basis.

Ian Dawkins, a Vancouver-based cannabis consultant and president of the Cannabis Commerce Association of Canada, which represents small growers and dispensaries, said allowing these people into the industry, as police chiefs have recommended, will be key to the success of legalization.

“Realistically, the kind of people that are at risk of being kept out of the market for low-level trafficking or possession offences are exactly kind of people you need to be participating in a legal market to make it work,” Mr. Dawkins said.

An independent mechanism for appealing a failure to achieve a security clearance was not included in the new federal rules, but a court case will likely arise over this issue and could create such an appeal process, he added.

In 2016, just over half the criminal drug offences across the country – 55,000 – were related to cannabis, with three-quarters of those charges for possessing, not trafficking, the drug. Non-white and low-income Canadians have been disproportionately prosecuted and harmed. Amid sustained public pressure, the Liberals have signalled they are considering pardoning those convicted of these low-level crimes.

Don Briere, who runs one of Canada’s biggest chains of illegal cannabis dispensaries, with 20 locations across Western Canada and Ontario, said he plans on applying to become a licensed grower, processor, nursery operator and retailer. Mr. Briere, who was sent to prison for heading B.C.’s largest network of cannabis grow operations in the 1990s, said he has no problem suing the government if he is shut out of joining the legal sector.

“If they don’t treat us fairly, then we’re going to file Charter challenges,” said Mr. Briere, who estimates that his Weeds Glass and Gifts empire nets about $4-million in annual profit from roughly $25-million in gross sales.

Ottawa has also faced political and public pressure to exercise greater control and screening over investors in the legal cannabis market. Under the new regulations, privately held producers will have to disclose more information on their “key investors,” such as whether they have direct or indirect control over the company.

“This may be someone who owns a majority of shares in the company or someone who has loaned a significant amount of money to the licensed holder and who is in a position to call in the loan, which would have an adverse impact on the operations of the licensed holder,” a senior federal official said at a background media briefing.

The industry is still waiting for clarification from the government on its plans, including how it will apply the new rules on a case-by-case basis. Mr. Anand said the new disclosure rules close a loophole that was used by some companies to shield the identity of their investors through a holding company.

“It’s very significant,” he said. “You can’t really get around the system.”