Canada: Former black market dealers, established cannabis retailers gearing up for Ontario lottery

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A host of applicants — from former grey market dealers to cannabis culture enthusiasts to established cannabis retailers with operations in other provinces — are hoping to get lucky this week as Ontario holds a lottery to determine who will be awarded the province’s highly coveted first tranche of 25 cannabis retail licences.

“I can tell you, for people like us who have been operating in the cannabis community for decades now, this lottery system is great. It doesn’t discriminate,” said one former Toronto-based dispensary owner, who declined to be named. “I’ve followed all the rules — I shut down my online dispensary on Oct. 16, and I’ve been talking to retailers in other sectors who are interested in partnering up with me if I get a licence.”

The lottery draw, which will take place on Jan. 11, does not necessarily guarantee that winners will be eligible to open a cannabis store come April. Rather, those picked will be able to apply for Retail Operator Licences, which will be awarded subject to a “full due diligence process” conducted by the Alcohol & Gaming Commission of Ontario to assess whether the applicant can “carry on business in accordance with the law.”

“We don’t yet know the nitty gritty details of what the AGCO wants to know in order to hand out a Retail Operator Licence. But they essentially want to be sure that those who win the lottery have the financial wherewithal to open a store come April 2019 and run it successfully,” said cannabis lawyer Trina Fraser, partner at Brazeau Seller Law.

Fraser added that those successful in the lottery will be subject to a thorough background check, including scrutiny of tax returns and financial statements associated with past businesses.

James Jesty, president of The Friendly Stranger cannabis accessories store that has been operating in downtown Toronto for over a decade now, says his company has added an additional nine retail locations across Ontario through a recent acquisition of pot paraphernalia chain Happy Dayz in preparation for retail sales in the province.

“Happy Dayz has locations in different regions of Ontario so we are prepared to be in any region that we have leases for, if we are successful in the lottery,” Jesty said.

Each applicant can submit only one Expression of Interest application, which are due by Jan. 9, but can list up to five municipalities in which they intend to open stores on a single application.

If chosen via the lottery system, and subsequently approved for a Retail Operator Licence, applicants will only obtain a single Retail Store Authorization, meaning that they will only be able to open one store in a chosen region.

“The idea is that 25 stores spread across the province will have 25 different owners. Even if you’re affiliated in some way with an applicant that won the lottery, you won’t be able to obtain a licence,” Fraser explained.

For the owners of Cannabis and Coffee, a coffee shop located in one of the busiest intersections of downtown Toronto, the one-applicant-one-store rule has deterred them from applying to be part of the retail system altogether.

“If we apply and we don’t win, will that disqualify us from partnering up with one of the winners? They have strict rules on affiliation. We’re not sure,” said Gordon Weiske, public relations manager at Cannabis and Coffee.

“We obtained this lease in March 2018, because we planned, down the line to turn this into a cannabis store. We were excited with (Ontario Premier Doug) Ford’s first announcement saying there’ll be thousands of stores, but this 25-store lottery system is very confusing,” Weiske told the Financial Post.

What the coffee shop owners plan to do instead is make their location available to anyone who wins the lottery. “If they win, we are here to talk, we want to make our store available, we’re at a great location,” Weiske said.

It will cost each applicant $75 to submit an EOI, but significantly more if they are selected for a licence.

For instance, each of the 25 licence holders, once chosen, will have to submit a $50,000 Letter of Credit which will be drawn on if they are not able to meet the April 1, 2019 deadline, according to the AGCO. Additionally, licence holders will have to pay up to $10,000 in non-refundable fees to obtain a Retail Store Authorization.

The province has said that their decision to award just 25 licences to potential retail operators, as opposed to an unlimited number, which was the Ford government’s original plan, stems from a “severe supply shortage” of cannabis in Ontario.

But some in the industry have expressed misgivings at the selection process.

“We don’t really understand why Ontario chose to use a lottery system to select operators. Shouldn’t they select the best retail operators?” said Peter Horvath, CEO of Green Growth Brands, an American cannabis retailer that recently announced plans to launch a hostile takeover of Aphria Inc., one of the largest cannabis producers in Canada.

Horvath said Green Growth had planned to open up to 25 stores in Toronto, but is now unsure as to whether they are going to even have a presence in Ontario at all.

“It’s probably the most fair way to do it, but the unfortunate part of the system is that we have 25 years of retail experience behind us, and we have as much chance of getting a licence as someone with no retail experience,” Jesty said.

A number of other provinces have either announced or conducted a similar lottery process for selecting cannabis retailers.

Manitoba awarded four retail licences through a non-lottery application process in early 2018, but has since said that it plans to conduct a lottery for additional licences. Saskatchewan conducted a lottery process in June 2018 and awarded 51 permits to potential store operators across the province.

“This isn’t something new to us. We went through a lottery process in Saskatchewan and were awarded licences there. Ostensibly, the lottery system helps create a sense of fairness and equality,” said Andrew Gordon, executive vice-president of Kiaro, a Vancouver-based retail cannabis brand, that is participating in the Ontario lottery.

Licensed producers such as Canopy Growth Corp. and Aurora Cannabis, however, have been shut out of Ontario’s retail game for now, according to provincial rules which bar licensed producers from entering the first lottery round.

“But this is just the first stage of the rollout. Once supply picks up, which I’m sure it will, you’re going to see a lot more players get involved in Ontario,” Gordon predicted.

The lottery winners will be announced by the AGCO on Jan. 12 and will have two days to submit applications to obtain a Retail Operator Licence.

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