Big Pot courts Ontario sellers

Regulatory scrutiny is major hurdle

TORONTO • A number of cannabis retailers backed by major licensed producers have entered into agreements with winners of Ontario’s retail lottery in an attempt to gain access to Canada’s largest market come April 1, when 25 brick-and-mortar cannabis stores are expected to open across the province.

But the nature of those agreements, and whether they will survive regulatory scrutiny, remains unclear.

The Alcohol and Gaming Commission of Ontario (AGCO) — in charge of regulating cannabis retail in Ontario — has laid out strict ownership rules that bar the 25 individual lottery winners from entering into any kind of revenue-sharing agreements with outside entities that would result in the winners ceding control of stores.

Yet, the “vast majority” of lottery winners, mostly sole proprietors with no previous retail experience, have already entered into some kind of commercial agreement with an existing cannabis operator, according to a number of lawyers who have been crafting these agreements to comply with AGCO rules.

High Tide Inc., a Calgarybased cannabis retail chain backed by Aurora Cannabis Inc., has entered into two separate agreements with lottery winners in Ontario.

The first agreement, announced this month, involves the “acquisition of a minority interest in the winner and the option to acquire a greater interest in the future,” according to a news release put out by the company. The second agreement merely states High Tide has been “selected to assist with the establishment and operation of a retail cannabis store by a second winner.” No details on what that “assistance” entails were provided.

Last December, after Ontario announced its 25-store retail plan, Aurora invested $10 million in High Tide. Another licensed producer, FSD Pharma, also has a minority stake in High Tide. Under AGCO rules, licensed producers are barred from the retail system.

“I have honestly never seen anything so silly in my entire legal career,” said Eric Foster at law firm Dentons LLP, who is involved in helping a number of lottery winners enter into agreements with outside entities.

“I have a challenge understanding why some arrangements are acceptable to the AGCO and why some aren’t. I know that a number of winners have received very nasty letters from the AGCO threatening to disqualify them because of the retail structures they have proposed,” Foster said.

So far, the AGCO has disqualified one lottery winner under rule 2(b), which states that winners are “not permitted to change their applicant type, ownership and/or corporate structure in such a way that would result in a change of control.”