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Report on Business Cannabis Professional Ontario retail lottery 2.0: A tightened process should benefit applicants, and brands

Here we go again.

After weeks of rampant speculation, the Ontario government announced Wednesday that it would allow 50 new cannabis retail stores to be licensed in the province.

It was only last fall that the provincial Conservative government pivoted away from the former Liberal government’s model of publicly owned and operated cannabis retail stores, and declared that these stores could be privately owned. A flurry of deal activity ensued across the province, including the development of retail brands, the creation of strategic joint ventures, the signing of untold numbers of leases and the entering into of franchise agreements. Then, in mid-December, the government announced that the number of cannabis retail stores would be capped at 25 due to a national shortage of pot, and those lucky few would be selected in January by way of a random lottery with no pre-qualification for eligibility.

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That lottery process has now come and gone, and most of the selected winners have opened their stores for business, many with the brand-licensing and consulting support of third-parties that have experience in the industry. Cannabis supply has improved, and a new lottery process is upon us.

A separate column could be devoted to assessing the merits of the first lottery, or of a lottery at all, or a system of capped licences, but it is safe to say that the new lottery rules reflect an attempt at balancing the province’s stated policy objectives of private ownership with the lessons learned from the earlier licensing experience.

The cannabis industry can be volatile and unpredictable, and it is ill-suited for businesses and entrepreneurs who lack the patience to manage and adapt to frequent changes. Government bodies are no different, and the process for issuing the new round of licences reflects a desire to help the industry grow rather than act as an obstacle to it.

First off, the introduction of pre-qualification requirements for lottery eligibility should be seen as positive. After all, if the policy objective is a private-sector approach then it’s good to have criteria which identify people most able to build, open and operate stores, and sell one of the most highly regulated consumer products in Canada.

Now about those criteria. The following is an overview of the key rules of the new Ontario cannabis retail store lottery process:

  • 50 new stores will be permitted across the province, including 8 on First Nations reserves;
  • Expressions of interest to participate in the lottery must be submitted between August 7, 2019 and August 9, 2019;
  • The lottery will take place on August 20;
  • Applicants must be able to demonstrate that they have secured retail space which they can occupy as of October, 2019;
  • Applicants must have confirmation from a bank that they have the financial capacity necessary to obtain $250,000 in capital;
  • Applicants must have confirmation from a bank that they have the financial capacity necessary to obtain a $50,000 letter of credit. That letter of credit will have to be provided within five business days of being selected in the lottery;
  • Lottery winners from the first round of licensing earlier this year are ineligible to participate, but those who were on the wait-list are not;
  • Winners will be selected with a view to selecting those who are able to demonstrate an ability to open a store by October 2019;
  • If the government elects to employ a lottery process for the next round of licensing, those who are wait-listed in the upcoming second round may be given priority in that allocation.

There are no other specified merit-based qualifications for determining winners. If the leasing and financial criteria are in order, then that person is eligible to be randomly selected in the lottery. There does not appear to be any restriction on multiple applicants using the same store address. This means that retail brand owners who have already signed leases might ask parties close to them (employees, friends, family, licensees, franchisees) to all submit for one of those locations. If that person wins, the lease would be assigned or sublet to them. But since applicants need to declare to the AGCO in early August that they have the right to occupy the premises as of October, this will require immense cooperation from landlords who may need to pre-approve multiple potential tenants for the same space.

In most other respects, retail lottery 2.0 follows the same rules as version 1.0, including that licensed producers of cannabis are precluded from participating, allocations of licences within specified geographic regions, no person can apply more than once per region, and lottery wins and licences are non-transferable.

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While the new eligibility criteria likely narrow the pool of lottery applicants, cannabis retail brands will certainly compete to enter into arrangements with the winners to provide operational support and brand licensing, which helps to get recognizable names on signs and storefronts. This is a good thing: If the last lottery is any indication, many winners have little-to-no experience in retail store operation or the cannabis industry at large. Receiving operational support from an industry which has developed systems and standards leads to better-run establishments, and brand name recognition among consumers daunted by a new cannabis retail marketplace is invaluable.

To that end, the strategy for navigating the new lottery differs from the last time around. Earlier this year, it was a free-for-all for brand owners to identify lottery winners. Now, the alignment between brand-owning tenant and lottery applicant needs to take place before the lottery even occurs if those brand owners want to tie their leases to ultimate winners. This may lessen, though by no means eliminate, the all-out bloodbath from earlier this year, when those brand owners competed with each other to lock down one of the 25 winners as retail partners. And, given the nature of support that these deals entail, the intersection of the lottery with franchise laws is virtually unavoidable.

Chad Finkelstein is a partner at the law firm of Dale & Lessmann LLP in Toronto. He provides legal support to cannabis retail brands and store owners, including those who participated in the first AGCO cannabis lottery. He can be reached at cfinkelstein@dalelessmann.com or followed on Twitter at @ChadFinkelstein.

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