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HIGHLIGHTS
  1. Applying to the second Ontario cannabis retail lottery on Aug. 7 requires, among other things, a $250,000 letter of credit
  2. Alterna Savings, one of the few financial institutions willing to provide that letter, says it cannot take on any more customers after accepting nearly 1,000
  3. “Well over 100” potential applicants “are currently frozen out of the process and ineligible” as a result of this issue, lawyer says

With nearly a week left before Ontario begins accepting submissions for its second cannabis retail lottery, the window to enter might already be effectively closed.

In order to qualify for the Aug. 20 draw, applicants must provide a letter from a bank proving they have at least $250,000 available to operate a potential store. However, most of Canada’s largest banks consider cannabis retail too risky to issue those letters themselves and, earlier this week, Alterna Savings – one of the few financial institutions willing to work with lottery applicants – said it could not take on any more lottery-related clients.

“It is one of those situations where if you are just starting the process now, the time really isn’t there to get it completed by the [August] 7th and get the submission in, because it is a time-intensive process,” Rob Paterson, CEO of the Ottawa-based credit union, said in an interview.

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“The timeline between now and the seventh, it is basically out of time to be able to get it all done and to meet all the requirements [the Alcohol and Gaming Commission of Ontario] put in the application process."

Alterna is working with close to 1,000 aspiring Ontario cannabis retailers, Mr. Paterson said. Canada’s most populous province is raffling off the right to apply to the AGCO for one of 42 pot store permits, after using a similar process to allocate its first 25 cannabis retail licences earlier this year.

More than 17,000 expressions of interest were submitted in the first lottery. For the second draw, higher submission requirements – the letter of credit is five times larger than the $50,000 required in round one, and round-two applicants must also secure a suitable retail space in advance – have lowered expectations for the total number of submissions.

“A lot of people were looking at [the requirements] and thinking that would reduce the amount of applicants coming in, we did though notice we were still getting a lot of inquiries,” Mr. Paterson said.

Alterna hired additional full time staff and reassigned others to handle the deluge, he said. The “influx” came last week, said Mr. Paterson, after customers of other banks who previously thought they could obtain the required letter from their existing banks were informed they could not.

As Cannabis Professional reported last week, some private cannabis retailers have contacted several applicants with offers to help with the letter of credit, and partner with them should they win. Following the first lottery, many of the 25 winners struck multimillion-dollar deals with corporate cannabis brands for branding rights to their stores.

The “huge volume” of applicants being referred to Alterna directly from Canada’s top banks has since abated, Mr. Paterson said, though “it has definitely been more than we were expecting.”

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Chad Finkelstein, a lawyer with Dale & Lessmann LLP who works with several cannabis retailers, said on Twitter that Alterna closing its doors “effectively ends the ability of most in Ontario to satisfy the retail lottery banking criteria in advance of the August 7 application date.”

In an interview, Mr. Finkelstein said “between lottery applicants, or brands we work with who had a network of potential lottery applicants, there are well over 100 potential retail partners I am aware of who are currently frozen out of the process and ineligible as a result."

“I do not know whether the provincial government thought they had bank participation, and the banks backed out, or whether the banks didn’t know their participation was required until after the lottery was announced," Mr. Finkelstein said.

Mr. Paterson said some of Canada’s major banks were “briefly” willing to deal with individual cannabis retailers, but he and various other industry observers have heard reports of predatory pricing practiced among the larger banks when dealing with cannabis-related small-business clients.

Alterna does not engage in predatory pricing, Mr. Paterson said. “We are just maintaining normal, standard rates and terms for banking services, we are not looking to hold them hostage.”

Requests for details on their cannabis retail policies were sent to BMO, CIBC, TD, RBC and Scotiabank. Three of Canada’s five largest banks declined to comment.

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Scotiabank spokesperson Doug Johnson said the bank works with “Canadian industry participants on a case-by-case basis, provided they meet our credit and risk appetite guidelines,” without elaborating on how those guidelines apply to cannabis retail. CIBC spokesperson Crystal Jongeward also said cannabis opportunities are evaluated “on a case-by-case basis.”

Asked whether the AGCO gauged bankers’ willingness to provide letters of credit before making them a mandatory element of the lottery application, spokesperson Ray Kahnert said the provincial regulator “did speak with banking institutions both before and during the process [and] we were told many letters of confirmation have been provided.”

“We recognize that not all those who wish to participate in this second lottery will be able to,” Mr. Kahnert said, “but we do not anticipate any shortage of applications.”

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