POT GOES BAY STREET
Corporate suits are taking control of Canada’s cannabis industry as legalization nears
On a grey Friday morning early last month, the mayor of Niagara Falls, Ont., took the stage to deliver the welcoming address at the Grow Up Cannabis Conference and Expo, one of the bigger industry events that have sprung up around Canada’s burgeoning marijuana sector.
Sporting a tie with what he described as “green flowers,” Jim Diodati warmed up the audience with an anecdote about how as a politician he had braced for the “moment of truth,” when he would be asked by the press if he had ever smoked marijuana (he had experimented once upon a time, he told a reporter, but was no longer a user).
But the mayor also made an observation about the crowd that had gathered in his city to network and learn more about the business of cannabis.
“I thought I was going to see a little more grunge today,” Diodati said. “And I can’t get over the suits I’ve seen.”
It’s a feeling that many in the potentially lucrative and soon-tobe legalized world of recreational cannabis might echo.
The federal government’s July 2018 target for legalization has attracted professionals of all stripes looking to cash in on a market that Deloitte has estimated could be worth more than $22.6 billion.
At the Grow Up conference, for example, there were nearly 100 exhibitors offering up technical know-how to attendees, including booths set up by headhunters looking to help rapidly growing licensed producers find the right staff, security experts selling technology to protect crops, and an army of lawyers to help producers navigate rules that are still being written.
Among the latter were representatives of Bay Street firms giving talks with titles like “Complex Legal Issues That Raise Heads in Cannabis Deals” and “Protecting Your Intellectual Property During The Cannabis Boom.”
Big financial players are circling, too. Just last week, the industry received perhaps its biggest vote of corporate confidence when U.S.based Constellation Brands Inc. — maker of Corona beer — struck a deal to buy a nearly 10-per-cent stake in Canopy Growth Corp., Canada’s largest licensed producer of marijuana, for $245 million, a transaction some believe is the first in a wave of such investments.
The corporate influx, however, is not coming without some hard feelings, as the edgier — and even sometimes outlaw — elements of a decades-old counterculture are elbowed aside.
Those elements include dispensaries, which are illicit in the eyes of the federal government and currently operate in a legal grey area; skilled growers, who may find themselves sidelined by criminal records acquired while perfecting their craft; and even small cannabis businesses, which could get squeezed out by bigger players with deeper pockets.
“It’s like cultural appropriation of cannabis culture, which people would laugh at,” said Jodie Emery, a cannabis activist and owner of Cannabis Culture, a brand that includes a magazine and dispensaries. “People think that it’s just a couple of stoners around the country who like to get high once in awhile, but it’s not. There’s a massive industry and a culture. We have music and art and symbols and history.”
Emery and her husband, the socalled Prince of Pot Marc Emery, have faced arrest and drug-related charges. She said when she first got into the cannabis culture in Vancouver in 2004, good news about the industry was scarce and getting your hands on the drug could be “pretty difficult.” Now, she sees government and big producers squeezing out those who have championed and built up the industry.
“It’s very sad to see that a lot of big money interests have been moving into the cannabis industry without any regard or respect for the suffering that got us here.”
One example was a series of raids carried out on dispensaries in Toronto last year, an operation dubbed “Project Claudia.”
“It was a major shift, because suddenly, the activists and the patients and the advocates who had sacrificed relentlessly for years, were suddenly the target again,” Emery said. “A lot of people in the industry are desperately trying to find a way to go legal, and of course it’s nearly impossible if you don’t have the money and the connections.”
The question of who gets to go legal is one that could be decisive for many in the grassroots community.
Canada’s regulations for medical cannabis — a licence under which may allow a producer to supply the recreational market, at least according to the Liberal government’s tentative legalization law — require security clearances for the senior persons in charge of a grow-op. The application for security clearance, however, involves a criminal-record check, something that many who have been involved with marijuana growing cannot pass.
And it’s not just an issue at the executive level.
Trina Fraser, a lawyer at Brazeau Seller LLP who has acted for companies seeking to become licensed medical marijuana producers, noted LPs must abide by rules mandating that a “responsible person in charge,” someone with security clearance, be present when people without a clearance step inside rooms containing cannabis. Because of this, she said some licensed producers are trying to clear all their employees.
“They’re just saying, ‘This is ridiculous, I can’t appoint a managerial person to be physically present all day long in every single grow room, trim room, vault, whatever, that there’s cannabis present to just stand there and watch people,’” Fraser said. “It’s costly and it’s logistically very cumbersome.”
That could effectively prevent even more people with a history in the industry from getting jobs.
“I’m worried a bit about how this industry’s going to be able to grow when they keep locking out so many people from the culture and the community and industry — and locking them up,” Emery said.
The structure of the industry is another contentious issue, especially Ontario’s plan to limit recreational sales to governmentowned stores.
“In our opinion, creating a government monopoly is the wrong approach,” Mackie Research Capital analyst Greg McLeish said in a September note. “Industry proponents that have been leading the fight to get recreational marijuana legalized have been totally excluded from the retail distribution channel . ... Recreational consumers want to be buying from knowledgeable ‘bud’ tenders, not LCBO employees that lack an understanding of the cannabis culture.”
Cam Battley, executive vice-president at Aurora Cannabis Inc., echoed those sentiments, saying the Ontario government should rethink its plan and allow small businesses and entrepreneurs to share in the benefits.
It “makes no sense to me … to box out the people who have that knowledge and expertise,” Battley said. “I would bring those people into the light of legitimacy.”
One thing that is certain is that the corporatization of Canada’s marijuana industry will only accelerate as the money flows in.
Even Canada’s big banks, which have been reluctant to engage with the industry in part because marijuana is illegal at the federal level in the United States, have begun testing the waters.
According to a recent report from Bloomberg News, Bank of Montreal and Toronto-Dominion Bank have provided business accounts for at least 21 cannabis companies.
The Constellation deal could also be a game changer.
Jamie Nagy, co-head of Canadian mergers and acquisitions at Canaccord Genuity, said that until it went through, outsiders with deep pockets, such as those in the liquor, pharmaceutical and tobacco businesses, had been waiting for the regulatory picture to become clearer. “When they kind of pull the trigger, they’re going to want to know who the winners are already,” Nagy said prior to the Constellation news. “Big Pharma can always buy developing drug companies a heckuva a lot cheaper, but they purposely wait for them to get approved and spend a lot more.”
Now, however, the game may be afoot. Nagy says the deal itself would likely push competitors to speed up their research and perhaps increase their risk tolerance.
On the consumer level, marijuana is changing, too.
Robin Ellins, one of the proprietors at the Friendly Stranger, a 23-year-old cannabis culture store in Toronto that sells pipes and bongs (but not marijuana), has seen his clientele change, as cannabis has become less taboo. Customers have gone from younger and scared of their parents to people who are older and parents themselves.
But Ellins sees the suits as a necessity. “This is big business we’re talking about and everybody’s trying to figure out how to cash in on it . ... It’s kind of a Wild West.”
Ellins, though, is understanding of Toronto’s crackdown on illegal dispensaries, as he says recent years have been “frustrating” for the Friendly Stranger, which has been taking care not to break the existing laws. “There’s thousands of players in this industry that have been in it the same as us, for a long time, but they ’re on the other side of the fence and they ’re doing things that are technically illegal at this stage,” he said.
Ellins also has concerns about the federal government off-loading pot retail onto the provinces, as well as the industrial-sized preference for growing.
“They’re really making it like Big Tobacco, which is not the way to do it,” he said. “It needs to be more like craft beer.” “I’m just hoping that, down the road, they see fit to include the people in the industry who got it here in the first place.”
It’s very sad to see that a lot of big money interests have been moving into the cannabis industry without any regard or respect for the suffering that got us here.