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HIGHLIGHTS
  1. No threshold in lottery to prevent mom-and-pop applicants
  2. Lottery winners must provide $50,000 letter of credit with strict drawdown rules
  3. Large companies could benefit from franchise rules

The lottery being held next week to pick Ontario’s first 25 cannabis retailers will be open to anyone able to produce a $50,000 letter of credit, the Alcohol and Gaming Commission of Ontario announced Wednesday. Rather than adopt a capitalization threshold to prevent mom-and-pop applicants crowding out larger cannabis players, as some had predicted, the AGCO has left the playing field open to small businesses.

The only potential impediment to small businesses entering the lottery are the strict drawdown rules for the letter of credit. If a lottery winner doesn’t have its store up and running by April 1, the AGCO will draw down $12,500 from the letter of credit. Two weeks later, the AGCO will take a further $12,500. If the license holder isn’t selling cannabis by the end of April, the AGCO will take the last $25,000.

“Potential applicants who are not committed to opening a cannabis retail store on April 1, 2019, should not participate in this lottery,” the AGCO said in a statement on Wednesday.

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The Jan. 11 lottery, which is being overseen by KPMG, follows the provincial government’s decision in December to issue only 25 licenses for the start of bricks and mortar marijuana sales in Ontario. The 25-license cap is set to remain in place until next December, although it could be lifted earlier. Would-be retailers will be able to submit expressions of interest between Jan. 7 and Jan. 9, and the winners will be announced on the AGCO website within 24 hours of the draw.

No Licensed Producers are allowed to apply. Moreover, companies (and their affiliates) are limited to winning only one license. A company can submit up to five applications, one for each geographical zone in the province. But as soon as one expression of interest is drawn, the rest of their applications will be thrown out.

“I have no idea from this how they're going to decide which is the first region they draw from,” said Chad Finkelstein, a lawyer at Dale & Lessmann LLP in Toronto. “That's the biggest question, because there's some strategy in that. You've got to decide, ‘Do I submit? Do I make my franchisee submit?’ And you can't know that until you know how they determine which is the first region that is drawn from."

While the AGCO has chosen to leave the playing field largely open to small business, large companies may still have an advantage due to franchising rules. Individual companies and their affiliates (firms that are more than 10 per cent owned by a parent applicant) are limited to winning one license. Ontario’s regulations, however, don’t appear to place a cap on independently owned franchise stores.

"The advantage the larger players have is they've got a larger network of friendly parties who can submit applications. They've got themselves and their affiliated company... they also have franchisees. There's no limit here on the number of licenses that will be issued per brand," said Mr. Finkelstein.

"These [licenses] are non-transferable, but that doesn't mean that you can't become a franchisee later. So if I apply as Chad's Weed Store, and I get selected, there's nothing that stops another company from approaching me and saying, 'now will you become a franchisee of ours?' And that could happen up to 25 times," Mr. Finkelstein added.

The 25 companies selected in the lottery will have five business days to submit a non-refundable $6,000 fee and the $50,000 letter of credit.

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