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Report on Business Cannabis Professional Cannabis companies chasing Ontario retail lottery applicants in advance

HIGHLIGHTS
  1. Ontario holding second cannabis retail lottery for 42 potential stores
  2. Existing retailers signing deals with lottery participants before the draw
  3. Some aspiring retailers moving to micro-cultivation in empty stores

Hunting season is starting early ahead of the second Ontario cannabis retail lottery set for next month.

After 25 mostly first-time entrepreneurs won the right to apply in January for the first recreational pot store permits in the province, existing cannabis companies tracked down individual winners and launched multimillion-dollar bidding wars over the right to brand their stores. Now, as Ontario prepares to raffle off the right to apply for another 42 cannabis retail licences on Aug. 20, Trina Fraser says many of the businesses that failed to find a deal after the first lottery are getting a head start on round two.

“It is starting earlier [and] it involves more people this time,” Ms. Fraser, who leads the CannaLaw practice for Brazeau Seller Law in Ottawa, said in an interview. “In the first go-around the frenzy didn’t start until after the lottery, so it was restricted to those 25 winners but, at this point, the interest is there with respect to anybody who is saying they are going to apply and they have the ability to apply.”

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“There has already been a handful of entrants over the past week who have said to me they are looking at these types of offers and are thinking of signing deals in advance of even entering the lottery,” Ms. Fraser said.

In hopes of avoiding a similar outcome to the first lottery, where the winners had little if any previous retail or cannabis experience (a family therapist, and a tow truck driver were among the winners, for example), the Alcohol and Gaming Commission of Ontario (AGCO) is imposing stricter requirements for participants in the second lottery. Entrants must submit a bank letter proving they have access to at least $250,000 in capital and secure access to a suitable retail space in order to be included in the draw.

More than 17,000 expressions of interest were included in the first lottery, though Ms. Fraser expects no more than a few thousand will make the cut for round two. While the lower expected number of entrants vying for nearly twice as many licences dramatically increases the odds of winning, Lucas Mccann says many aspiring Ontario pot sellers are abandoning their plans.

“People are crushed, people are so crushed with this round,” Mr. McCann, chief science officer for cannabis regulatory consulting firm CannDelta, said in an interview. “Probably about half a dozen out of the two dozen [retail clients] we originally had are the ones with access to that kind of capital and resources who have the option left to go do this [but] a lot of them have given up hope and are not going to move forward.”

CannDelta, which mostly assists companies applying for Health Canada cultivation licences but does some retail consulting as well, submitted an entry in the first lottery and landed up 19th on the waiting list for the Toronto region.

“We saw everyone scramble after the first round,” Mr. McCann said. “Even being number 19 on the waiting list, we were approached with an exclusivity agreement should the five winners in Toronto and the 18 others ahead of us on the waiting list all somehow get disqualified.”

“Some of our clients have decided to pivot and just start a micro-cultivation facility,” Mr. McCann said, adding he has spoken to three businesses thus far about converting planned retail spaces into growing facilities. “It is a much surer bet as well, if you submit a strong application and you’ve got good security measures in place, then that is a slam dunk versus a retail space.”

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There is also no guarantee that any deals signed with lottery entrants in advance will pass regulatory scrutiny should any of those entrants end up winning the draw. Matt Mauer, vice-chair of the cannabis law group at Torkin Manes LLP, said he has “heard discussions about whether it makes sense to establish some sort of framework with people before they even go into the lottery.”

“The issue with that,” Mr. Mauer said, “is that if you have anyone who has lived through that AGCO application process, they will tell you [regulators] were incredibly particular with what they would allow and what they would not and they also would not tell you what would be allowed and what wouldn’t be until you actually submitted something and they reviewed it and either gave it a thumbs up or thumbs down.”

“There were a lot of people going to them and asking if they could do a licencing agreement and the AGCO would say we don’t give legal advance, you do what you’re going to do and we will tell you if it is okay [and] what ended up happening was, it was a little bit of trial and error but if you get too many errors you just get disqualified and that is the end,” Mr. Mauer said.

Retailers are less motivated to get involved in bidding wars over the second lottery in part because those licences are proportionately less valuable than in the first round, Mr. Mauer said, though some are more concerned about running afoul of undefined rules.

High Tide, the Calgary-based parent company of Smoker’s Corner and Canna Cabana, “has been approached” about signing some pre-lottery agreements with Ontario entrants, CEO Raj Grover said.

“But our reading of the rules for this lottery explicitly would not allow [us] to pre-negotiate any deal with a lottery winner which could cause them to be considered affiliates of High Tide and automatically eliminate both High Tide and the potential winner from the lottery.”

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Inner Spirit Holdings, which currently has 19 franchised Spiritleaf cannabis retail stores open across Canada, has “been working with its franchise partners to prepare and apply for many locations that it has secured throughout the Ontario region,” spokesperson Heidi Gammuac said via e-mail. “Spiritleaf has secured 20 locations across Ontario in anticipation of the next lottery.”

Requests sent to other major cannabis retailers Starbuds, National Access Cannabis, Fire & Flower and Alcanna were not returned, but Ms. Fraser expects deal-making activity to accelerate over the next two weeks before the AGCO will begin accepting expressions of interest on Aug. 7.

“All the initial conversations after the round two lottery was announced were basically saying ‘once the lottery happens and you have winners who retain you please keep us in mind because we will want to present something to them’, it was all in anticipation of the results,” Ms. Fraser said. “Now that this is starting to happen, I am wondering if some of those companies are now starting to think ‘oh crap, we better not wait, because a good chunk of that list of 42 might have already signed a deal with someone else.”

“Everybody kind of came off that frenzied furore that happened in the week after the first lottery,” Ms. Fraser said, “but I don’t think anybody wants to go through that again.”

While 42 general retail licences will be made available in the next lottery, another eight licences will be issued to First Nations in a separate process that will involve allocation on a first-come, first-served basis to those who have the approval of band councils, bring the potential total to 50 new stores due to open as soon as October.

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