How Canada’s heavy reg­u­la­tory con­trol could jeop­ar­dize the coun­try’s ‘first-mover’ sta­tus

Windsor Star - - FP WINDSOR - VAN­MALA SUB­RA­MA­NIAM Fi­nan­cial Post vsub­ra­ma­[email protected]­tion­al­post.com Twit­ter.com/Van­malaS

Green Growth Brands Ltd., a U.S.-based cannabis re­tailer with a large foot­print in Ne­vada, was all geared up to en­ter the On­tario mar­ket un­til an un­ex­pected an­nounce­ment in mid-De­cem­ber by the province placed a dras­tic cap on the num­ber of re­tail li­cences is­sued for pot shops.

Cit­ing sup­ply con­cerns, the pro­vin­cial gov­ern­ment changed its rules from hand­ing out more than 1,000 promised li­cences to a mere 25, which are be­ing be cho­sen us­ing a lot­tery sys­tem.

“We had hoped to have 25 stores in Toronto. But now, I don’t know if we’re even go­ing to be in On­tario,” said Peter Hor­vath, chief ex­ec­u­tive of Colum­bus, Ohio-based Green Growth Brands. “We have the where­withal to ex­e­cute and gen­er­ate tax rev­enues for the province. I’m not sure this was the best fidu­ciary move for them.”

But the changes to On­tario’s re­tail sys­tem are much in line with the fed­eral gov­ern­ment’s over­all ap­proach to le­gal­iz­ing cannabis, which ex­erts heavy con­trol over the pro­duc­tion and dis­tri­bu­tion of cannabis.

“This is about as reg­u­lated a mar­ket­place as you’re go­ing to find,” said David Phillips, for­mer pres­i­dent of the On­tario Cannabis Store, the province’s sole on­line re­tailer and whole­saler. Those re­stric­tions are not nec­es­sar­ily pos­i­tive say Hor­vath and a num­ber of in­dus­try in­sid­ers who ar­gue that the level of gov­ern­ment con­trol and in­ter­ven­tion in the cannabis land­scape, cou­pled with the shift­ing po­lit­i­cal cli­mate south of the bor­der in favour of fed­eral le­gal­iza­tion, will slowly erode Canada’s cur­rent place at the top of the cannabis leader­board.

“It’s prob­a­bly fair to say that Cana­dian op­er­a­tors are be­ing ham­strung by pol­icy,” said Ge­orge Allen, pres­i­dent of Acreage Hold­ings, a U.S. cannabis in­vest­ment com­pany listed on the Cana­dian Se­cu­ri­ties Ex­change. “I re­spect what my peers in Canada have built in terms of foot­print and scale, but in terms of its rel­e­vance to the U.S. mar­ket, es­pe­cially once we’re fed­er­ally le­gal­ized, they might as well be grow­ing toma­toes.”

The term “first-mover” is fre­quently used in ref­er­ence to Canada’s cannabis in­dus­try. In­deed, the coun­try was just the sec­ond — af­ter Uruguay — to le­gal­ize cannabis on a na­tional level for recre­ational use. Al­most ev­ery cannabis com­pany, no mat­ter where it is head­quar­tered, that in­tends to raise money on pub­lic mar­kets lists it­self on a Cana­dian ex­change. Fur­ther­more, the largest cannabis com­pa­nies — Canopy Growth Corp., Aurora Cannabis Inc., Til­ray Inc., and Aphria Inc. — are Cana­dian and they are al­ready carv­ing out foot­prints and recog­ni­tion for them­selves in Europe, South Amer­ica and even Africa.

But cannabis in­dus­try play­ers that strad­dle in­vest­ments north and south of the bor­der are acutely aware of the dif­fer­ences be­tween dif­fer­ent in­di­vid­ual U.S. states and Canada when it comes to the le­gal­iza­tion of cannabis.

Afzal Hasan, pres­i­dent of Ori­gin House, a cannabis prod­ucts and brands com­pany reg­is­tered in Canada but op­er­at­ing mostly out of Cal­i­for­nia, said Canada’s ap­proach re­flects a set of reg­u­la­tors who are “in­ex­pe­ri­enced” with cannabis.

“I don’t mean that in a neg­a­tive way. But the oner­ous re­stric­tions and the reg­u­la­tory sit­u­a­tion that has a mo­nop­o­lis­tic tint to it is what might set us back,” he said, cit­ing the re­cent changes to On­tario’s re­tail sys­tem as an ex­am­ple. Allen said U.S. com­pa­nies started de­vel­op­ing an edge over their Cana­dian coun­ter­parts af­ter the Toronto Stock Ex­change’s de­ci­sion in Fe­bru­ary 2018 to not list cannabis com­pa­nies with ex­po­sure to the U.S. over con­cerns the plant was still a banned Sched­ule 1 sub­stance in the U.S. The TSX rule meant Cana­dian com­pa­nies could not set up shop down south, while U.S. com­pa­nies could con­tinue to op­er­ate freely in Canada. “That must have hit Cana­dian cannabis com­pa­nies hard,” Allen said. “But for us, that was the best de­ci­sion they could have made. It al­lowed us to op­er­ate com­pletely un­fet­tered by a lot of cap­i­tal­ized com­peti­tors.”

The tim­ing is ripe for com­pa­nies such as Acreage to gain ground in the U.S., a mar­ket 10 times big­ger than Canada. It is widely ex­pected that the STATES (Strength­en­ing the Tenth Amend­ment Through En­trust­ing States) Act, a bi­par­ti­san bill crafted by sen­a­tors Cory Gard­ner and El­iz­abeth War­ren, will pass in 2019, paving the way for cannabis com­pa­nies to ob­tain a full range of fi­nan­cial ser­vices from big fed­er­ally reg­u­lated banks such as Bank of Amer­ica Corp. and Gold­man Sachs Group Inc., while erod­ing the stigma main­stream in­vestors have in touch­ing the pot sec­tor. “Canada is one-tenth the size of the op­por­tu­nity here in the U.S. and we all know the prize is here,” said Acreage chief ex­ec­u­tive Kevin Mur­phy in a re­cent in­ter­view with CNBC’s Jim Cramer. “Big in­vest­ment and big con­glom­er­ates are go­ing to start com­ing back to the U.S.” But the TSX re­stric­tion and the drive to­ward le­gal­iza­tion in the U.S. are just a cou­ple of the prob­lems Cana­dian cannabis com­pa­nies face in main­tain­ing their first­mover ad­van­tage. An­other key one, Hasan be­lieves, is not act­ing quickly enough to al­low a wide range of prod­ucts across a less re­stric­tive re­tail regime. “Just to be clear, we’ve only had this pseudo-med­i­cal sys­tem that had mailorder de­liv­er­ies,” he said. “We’ve never had real re­tail and prod­ucts with sub­stan­tial dis­tri­bu­tion like ed­i­bles and vape pens.” Hasan con­trasts in­di­vid­ual pro­vin­cial mar­kets such as On­tario to Cal­i­for­nia, where thou­sands of dis­pen­sary chains and in­de­pen­dent dis­pen­saries flour­ish, of­fer­ing what he claims is the “largest va­ri­ety” of pot prod­ucts that ex­ists glob­ally. Canada, un­like many states in the U.S., has also heav­ily re­stricted mar­ket­ing and ad­ver­tis­ing rules, which are much more sim­i­lar to to­bacco than al­co­hol.

“It’s a hand­i­cap, more so for the smaller com­pa­nies, than us,” said Bruce Lin­ton, chief ex­ec­u­tive of Canopy Growth. “We knew from Day One how touchy the gov­ern­ment was about be­ing al­lowed to ad­ver­tise so we did as much as we could pre-le­gal­iza­tion to get our Tweed brand known.” Canopy’s ef­forts in­cluded dis­play­ing the Tweed brand on bill­boards and host­ing con­fer­ence and events — all le­gal mar­ket­ing ac­tiv­i­ties as long as they did not por­tray con­sum­ing pot as a life­style. But as the world’s largest cannabis com­pany by mar­ket value, Canopy Growth, per­haps un­sur­pris­ingly, sees Canada’s reg­u­la­tions as “ap­pro­pri­ate,” en­abling the com­pany to be very suc­cess­ful in mar­kets such as Europe, where reg­u­la­tory re­stric­tions to­ward the med­i­cal cannabis sec­tor are just as strin­gent, if not more so.

“We are well-gov­erned and well­struc­tured and that means that the Euro­peans will trust us, the South Amer­i­cans, Aus­tralians, they ’ll all want to do busi­ness with us,” Lin­ton said.

Of course, the way in which pot is reg­u­lated in the U.S. is not with­out its flaws, cau­tions Hor­vath. For ex­am­ple, in set­ting up Wash­ing­ton’s le­gal cannabis regime, state reg­u­la­tors cre­ated three tiers of pro­duc­ers based on the square footage of each farm in or­der to avoid a sit­u­a­tion where a few large pro­duc­ers dom­i­nate the mar­ket. But as reg­u­la­tors kept ex­pand­ing the max­i­mum farm size, big­ger pro­duc­ers that could source cap­i­tal ended up swal­low­ing smallscale grow­ers. Now, Wash­ing­ton is fac­ing a sup­ply glut of weed, and prices have dra­mat­i­cally plunged. These mo­nop­o­lis­tic “ten­den­cies,” as Hasan calls them, also ex­ist in mul­ti­ple Cana­dian prov­inces. For ex­am­ple, Man­i­toba’s re­tail cannabis sys­tem had more than 100 ap­pli­cants vie for just four li­cences, two of which were awarded to part­ner­ships with a con­nec­tion to Canopy Growth (one di­rectly with Win­nipeg-based Delta 9 Cannabis Inc. and one be­tween a small in­de­pen­dent Man­i­toba com­pany, B.O.B. Head­quar­ters, and Canopy Growth-owned Tokyo Smoke). “When I see mar­kets like Man­i­toba, and the num­ber of re­tail li­cences that were is­sued, and I see that they all went to the big boys, that kind of stuff doesn’t sit well with me,” Hasan said.

“I’d like the Cana­dian gov­ern­ment to know that from our per­spec­tive, they’re only go­ing to meet their goal of com­bat­ing or­ga­nized crime if we truly have a free mar­ket for cannabis.”


Canopy CEO Bruce Lin­ton says the owner of pot brand Tweed sees Canada’s reg­u­la­tions as “ap­pro­pri­ate” but smaller com­pa­nies are strug­gling with the tighter re­stric­tions.

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