It’s not often that a handful of Canadian stocks get the attention of Barron’s, the venerable newspaper that, for the most part, covers US financial information and market developments.
But not only did Canada’s cannabis stocks get attention, they got the close scrutiny of a major feature. As the newspaper pointed out, the US$30 billion capitalization the industry currently enjoys already approximates half the market capitalization of the country’s gold stocks. Leading the pack are Canopy Growth, the largest cannabis company in the world; Aurora Cannabis Inc., Aphria Inc. and MedReleaf Corp.
To be sure, the article’s focus suggested that the stocks were overvalued. But a thorough read also reveals the industry’s remarkable potential in the first industrialized country to legalize cannabis at the federal level. “The legalization of cannabis is bigger than the end of Prohibition,” says Vancouver-based James Munro of McMillan LLP. “It’s more akin to grain becoming legalized and regulated.”
The potential for legal work also looms large. And Canada’s lawyers have not been asleep at the wheel. “Our job is to help clients turn the challenges into opportunities, to break new ground and to grow a brand new industry,” Munro says.
The cannabis industry, it turns out, is a complicated business, with political and moral overtones, perfectly suited for the skills of the profession. To understand what’s involved from both a legal and business perspective, consider that key questions, even ones as simple as whether producers can assign their licenses, remain unanswered. From a regulatory perspective, consider that over the years Health Canada has approved but 94 of the 1665 applications for cannabis-related licenses. Ontario has garnered more than 51 of these licenses, followed by B.C. with 20, Quebec (6), Alberta (5), Saskatchewan (4), Nova Scotia (3), Manitoba and New Brunswick (2 each) and Prince Edward Island (1).
“It’s a high-risk, high reward practice,” says Ranjeev Dhillon, the Toronto-based co-head of Bennett Jones LLP cannabis practice, who has been involved in the industry for the last five years. “But no one predicted it would get this big this fast.”
So much so that Canada boasts more than 90 publicly-listed cannabis companies. “The four companies on the TSX alone have a $14 billion market cap,” says Mark Trachuk, the Toronto-based chair of Osler, Hoskin & Harcourt LLP’s corporate practice group. “Cannabis companies are on everyone’s radar, although they started from nothing just 18 months ago.”
To some extent, however, there is a “seen this before” feeling among some lawyers. “From a legal perspective, cannabis will have many of the aspects of mining, oil and gas, life sciences, and even high tech,” says Trachuk’s Toronto colleague Michael Watts. However that may be, medical marijuana has been legal since 2001, when the feds allowed prescription sales. Between 2015 and 2017, the number of patients resorting to cannabidiol (CBD), one of the plant’s active ingredients, to soothe pain — and particularly pain from cancer — rose from 23,950 to 201,398. And those were just the registered users, whose numbers are estimated to rise to over 400,000 by 2024.
At press time, legislation legalizing recreational cannabis looked like it would be coming into force in September 2018. Casual users will be getting their highs from tetrahydrocannabinol (THC), one of weed’s many active components. Beacon Securities has estimated that retail sales in Canada, where recreational cannabis use ranks among the highest in the world, will land in the C$7 billion to C$12 billion range in annual sales.
A preponderance of these revenues are expected to come from encroachment on Canada’s $7 billion black market. The experience in California suggests that’s not unrealistic: a 2016 study from ERA Economics has estimated that suppliers there sold US$1 billion worth of cannabis to legal users and US$20 billion to
Canada’s most significant cannabis producers began as medical marijuana producers. And that’s where many analysts say the real growth lies, especially on the international front. They point to places like Germany, where pharmacists can prescribe health-insurance covered cannabis, and to the ever-expanding research that portends new markets on the medical side. For example, the World Doping Agency recently removed CBD from its list of banned substances, opening the door for companies like US-based Corix Bioscience Inc. to explore the sale of THC-free CBD products to athletes dealing with pain and inflammation issues. “Canada is a first mover here, so the international opportunities are significant,” Dhillon says. “The European market in particular is fuelling a lot of growth.”
Weed mania, then, has spread throughout the Canadian economy. Quebec, Ontario, Prince Edward Island, Nova Scotia and New Brunswick governments have appropriated retail sales of recreational marijuana to themselves, with the remaining provinces allowing private sector retail distribution.
In the public sector, Gatineau-based Hydropothecary Corp. has signed a five-year, 200 metric ton supply deal with Société Québécoise du cannabis, the newly formed sister to the provinces liquor distributor, Société des alcools du Québec. The Liquor Control Board of Ontario, meanwhile, has announced the location of its first 40 stores in 14 cities, and anticipates that it will have 150 standalone marijuana stores by 2020.
In the private sector, Shoppers Drug Mart has signed four deals to ensure an adequate supply of medical cannabis. On the recreational side, Second Cup has entered a strategic alliance with National Access Cannabis, a marijuana clinic, that will see some of the chain’s coffee shops converted to cannabis dispensaries and pot lounges in provinces, like British Columbia, that will allow licensed private businesses to do so. And Phil Fontaine, a former national chief of the Assembly of First Nations and politician who is now CEO of Indigenous Roots, a medical marijuana company operated by First Nations, has stated publicly that cannabis businesses represent “tremendous” and “unique” potential for Indigenous peoples.
The upshot is that much more than the regulatory arena will engage lawyers. That’s because certainty in virtually all areas of cannabis-related law is at a considerable premium for practitioners and clients alike. The uncertainty assures that the demand for legal advice will not abate soon. Indeed, the University of Ottawa has already announced cannabis law-related courses in both languages for its 2018-19 curriculum. No surprise, then, that a host of Canadian law firms have set out to make a name for themselves in this burgeoning industry. “The opportunities for lawyers are limitless, engaging everything a law firm can offer,” says McMillan’s Munro. “But it all depends on the degree of commitment that a law firm makes to the industry.”
Munro believes that “the world is watching” to see how Canada implements cannabis liberalization. “If your investment thesis is that this is a world-wide movement, Canada is the perfect sandbox for perfecting your product,” he says. “The only other comparable is Uruguay and that puts Canadian law firms on the global stage with a once-in-a-generation opportunity.”
The sandbox, it appears, is already in play. Canada’s capital markets look like they might be as tempting a venue for US and international cannabis companies as they have historically been for mining companies. “We incorporated and listed our company in Canada largely because of the liquidity the Canadian cannabis market offers,” says Jim Pakulis, who has been involved in the medical cannabis business in the US for at least a decade and is currently the president of Lifestyle Delivery Systems Inc., a California-based medical vertically-integrated cannabis producer.
Similarly, Canadian companies are expanding worldwide. PharmaCielo Ltd., for example, is a global company privately held and headquartered in Canada that produces marijuana through a Colombian subsidiary. “Canada was selected as the ideal country in which to headquarter our global parent based on its high standards of financial accountability and regulatory oversight,” says the company’s website. “Additionally, Canada is lauded for its leadership in having established an innovative and highly regulated national medical cannabis industry.”
According to David Gordon, who sits on the PharmaCielo’s board and is managing partner of public relations firm Cohn & Wolfe’s Toronto office, it’s all about reputation. “The word internationally is that if Canada does something well and experiences it well, perhaps others should look at it,” he says.
Sweden is one place where investors have taken a long look. In January 2018, Aurora and Canopy Growth were among the top 10 most traded shares on Nordnet, a Scandinavian online broker bank headquartered in Stockholm.
The expectation is that regulatory, capital markets, mergers and acquisitions (M&A), and intellectual property (IP) will be the legal practice areas most fully engaged. But the reach of the industry is almost limitless.
Advertising and marketing is tightly regulated. The prospect of workers coming to the job high presents new challenges for labour and employment specialists. Protecting IP in the cannabis setting has its own unique twists. Leasing and franchise lawyers will have their hands full as commercial landlords and franchisees decide whether to permit cannabis-related businesses or uses on their premises or among their franchisees. Commercial real estate practitioners will be dealing with the enormous demands for space required by producers and retailers.
The insurance industry will have to re-assess risk and perhaps reformulate its health coverages to take into account the increasing number of Canadians who may seek CBD treatment (Sun Life has recently added medical marijuana to its employee benefit plan offerings); and immigration lawyers will be affected as they ponder the impact of pot-smoking Canadians seeking entry to the US, where federal law still prohibits marijuana use.
Even criminal and constitutional counsel will find fodder as new offences hit the books at both the provincial and federal level and the usual squabble over the division of powers emerges. The proposed bifurcated jurisdiction envisions the the feds, largely through Health Canada, maintaining jurisdiction over licensing, product approval, marketing and criminality, with much of the rest of the regulation remaining in the provinces’ bailiwick.
The upshot is that even municipal law is engaged. “So far the rules formulated by the provinces have been aimed mostly at distribution, and very little at production,” says Mylany David in Langlois lawyers, LLP’s Montreal office. “Consequently, confusion reigns everywhere in the absence of guidelines for municipal zoning regulations — and zoning issues are just the tip of the iceberg.”
The situation, David explains, is similar to the land use planning chaos that existed regarding wind farms some 15 years ago. However that may be, Langlois has prepared for the onslaught by creating a team of 15 lawyers who work together on cannabis issues.
At this point at least, the regulatory aspects dominate. As Wendy Hulton in Dickinson Wright LLP’s Toronto office points out, the route to a modicum of regulatory certainty for natural health products (NHP) — far less controversial than cannabis — was a tortuous one. It spanned the decade from 2001, when the first NHP draft regulations were formulated, to 2010, when HC announced how it would implement the Natural Health Products Program Advisory Committee’s recommendations regarding core issues such as standards of evidence, good manufacturing practices, and compliance and enforcement. “It took at least 10 years before HC got it right, and NHP regulation is still evolving,” Hulton says. “Meanwhile, there were lots of ups and downs and sideways, and I think cannabis will be a similarly wild ride.”
If cannabis follows the regulatory path of NHPs, it will be a while before the kettle builds up steam, but when it does, the whistle will be a loud, exponential one. By way of example, HC approved only 1,131 NHP product licenses and 145 site licenses in the period from 2001-2005, more than doubled that amount to 2,391 product licenses and 473 site licenses in 2006, and more than doubled the ante again in 2007, with 5,260 total products and 619 sites approved. By the end of 2008, the product licenses issued had grown to 10,675 and site licenses to 828; by the end of 2009, HC had issued 19,096 product licenses and 969 site licenses. Growth appeared to peak in 2010, when the numbers grew to 27,914 and 1,120 licenses, respectively. “I believe that the pace of regulatory change and the evolution of NHPs provide a good analogy for the expectations we should have for the cannabis regulatory process,” Hulton says.
There’s already evidence supporting this: in the next few months, some 200 new licensees should be joining the 94 already in place. Familiarity and experience with the way HC works, then, is arguably invaluable to lawyers and firms advising cannabis stakeholders. “Experience with HC is the only way you can navigate through the gray areas that will be representative of cannabis regulation over the next few years,” Hulton says.
And it will be a maze. Not only will there be multiple types of licenses, including licenses for research, testing, import and export, cultivation, processing and retail sales, but each approval may involve requirements relating to production, security, location, personnel, transportation, storage, and reporting and compliance with a proposed Cannabis Tracking System. Making things even more complicated is the fact that licenses will be tailored to the scale and type of operation that is the subject of an application.
Further complicating the regulatory landscape is the situation in the US, where federal law prohibits the use of marijuana even in the 30 or so states that have legalized its medical use and the nine states that have allowed recreational use. The Trump Administration’s withdrawal of the Cole Memorandum, which directed federal prosecutors to concentrate only on businesses that violate state and federal law, has muddied the waters further for the business community.
According to Scot Crow in Dickinson Wright’s Columbus, Ohio office, however, operators in states that have legalized cannabis “mostly ignore” federal law. “The federal government is being caught up not just in the US movement to liberalization, but also the world movement — and there’s no going back,” he says. “Some federal agencies, like the Environmental Protection Agency and the Occupational Health and Safety Administration, are even working with cannabis businesses to ensure compliance with federal law in their areas of jurisdiction.”
Indeed, more than 4,000 publicly traded companies in North America are associated with cannabis. “If you look at the money cannabis is generating for state coffers, with some going back to the federal government, it’s going to be tough to put the toothpaste back in the tube, especially now since some of that money has been allocated for various uses,” Pakulis says. “Although there’s still a slight bit of concern about the federal position in the marketplace, legalization is not a question of ‘if’ but a question of ‘when’.”
However that may be, the issue remains a complex one, as evidenced by a recent decision from the US Court of Appeals for the Ninth Circuit in April, which ruled that the federal government can enforce federal drug laws on federal lands, even in legalized marijuana jurisdictions such as California.
To no one’s surprise, perhaps, the regulatory conundrum in the US has spilt over the border.
Most notably, the Canadian Securities Administrators (CSA) has imposed additional disclosure expectations for issuers with US-related cannabis activities, even those with “indirect involvement” and those providing goods and services to third parties involved in the US marijuana industry. The requirements emphasize the uncertainty that exists in the US and recognize that enforcement of federal laws could create material consequences for such issuers.
Meanwhile, The Toronto Stock Exchange and the TSX Venture Exchange have gone so far as to suggest that companies found to be violating US federal law could face delisting reviews. At least one company has taken the regulators’ actions to heart: in February, Leamington, Ontario-based licensed medical marijuana producer Aphria, agreed to sell part of its stake in Liberty Health Sciences Inc. as part of a strategy to reduce its US holdings.
Notwithstanding its imminent legalization, then, cannabis remains tainted — even on the medical side.
Nowhere is this more evident than in the financing field. Although medical cannabis became legal in 2001, production was limited and so was the need for financing. But things changed in 2016 as companies like Canopy and Aurora ramped up for major production. Still, the proposed legalization of recreational cannabis made the banks wary. “Canadian banks are not into it, partly because of the situation in the US and partly because the recreational cannabis legislation in Canada is new and fraught with confusion,” says Langlois’ David. “They continue to confuse the divide between medical and recreational cannabis and remain wary of reputational risk that might taint them.”
For the same reason, major pharma companies have refrained from associating their brands with cannabis products. “If you’re producing Tylenol, you don’t want to be producing cannabis,” David says. “Weed is still kind of taboo, something dark and something that people are afraid of. Everyone smokes, but nobody talks about it.”
Dhillon is of similar mind. “There’s a myth that it’s easy for a cannabis company to raise money, but that’s true only for the large players,” he says. “On the private company side, unless you have reached a fairly advanced stage in your licensing application, it’s hard to get money to build out facilities. In some cases, it’s even difficult to get bank accounts opened in the industry.”
It was only very recently that the market saw the first leap into the sector by a major Canadian bank. In January, Bank of Montreal (BMO) committed to five million shares of Canopy in a C$175 million bought deal. The move, however, didn’t seem to encourage the other big banks to take the leap, at least not imminently: following the BMO deal, most made public statements that can at best be characterized as cautious.“This industry has been built without the benefit of participation from the major banks,” says Osler’s Trachuk. “Investment bankers, particularly GMP Capital, Canaccord Genuity and Cormark Securities, own this space on the equity side.”
Although insurance companies, pharma, large tobacco companies, agra concerns and hi-tech entities are venturing into the field, equity financing remains a difficult proposition, especially for new entrants. According to a client bulletin issued by Blake, Cassels & Graydon LLP, cannabis companies have “begun to slowly pivot away from dilutive equity financing in search for debt financing to fund their growth.” Credit unions, debt funds, equipment financiers and private lenders, Blakes says, have “increasingly been looking at and lending to cannabis companies.”
As McMillan’s Munro sees it, however, the large banks will eventually come onside. “Cannabis isn’t just a garage industry anymore,” he says. “We’re talking about sophisticated issuers with sophisticated products who will increasingly attract major players.”
At the other end of the capital markets spectrum, M&A in the cannabis industry has already impacted Canadian jurisprudence. Aurora’s hostile bid to take over CanniMed Therapeutics Inc. marked the first time securities regulators have considered the use of a shareholder rights plan to impose restrictions on a hostile bidder in the context of new take-over bid rules adopted in 2016. In December 2017, the Financial and Consumer Affairs Authority of Saskatchewan and the Ontario Securities Commission cease traded CanniMed’s defensive rights plan and, in reasons released in March, provided important guidance on the application of the new rules. “There’s something poetic in the fact that a brand new industry represented the first test of brand new bid rules,” says Osler’s Watts.
Barely one month after the regulators’ ruling, the parties struck a $C1.1 billion deal for Aurora to buy CanniMed in the largest M&A transaction to occur in the industry to date. It superseded by far the previous leader, Canopy’s friendly $430 million purchase of Mettrum Health Corp. in 2016, and followed by mere weeks Aphria’s $230 million acquisition of BC-based Broken Coast Cannabis Inc.
On the listing and financing front, independent underwriters, many of them well versed in the junior resource industries, underwrote WeedInc.’s $34.5 million offering earlier this year and Delta 9 Cannabis $23 million financing. Equity deals totaled over $700 million in the cannabis sector in January alone.
Many lawyers also believe a wave of consolidation that will fuel the M&A is inevitable. “On the positive side, there are going to be people joining forces for synergistic reasons,” Dhillon says. “And on the negative side, there will be companies picked up cheap because they haven’t executed well.”
From an operational perspective, the legalization of marijuana could have a profound impact on the Canadian workplace. “The legalization of marijuana will create a societal shift in perspective that will destigmatize its use and make things very interesting,” says say Loretta Bouwmeester, who practises labour and employment law in Mathews Dinsdale & Clark LLP’s Calgary office.
Interesting, indeed. The 2017 Canadian Cannabis Survey, conducted by DriverCheck, an Ontario-based provider of workplace medical testing and assessment, showed that 23 per cent of workers use cannabis, 39 per cent have driven under the drug’s influence, an equal number have been passengers in cars with drivers under the influence, 21.4 per cent used cannabis to get high before or at work, and 7.7 per cent did that weekly or daily.
Otherwise, DriverCheck statistics show that 10.2 per cent of roadside alcohol and drug tests conducted in 2014 in Ontario were positive for drug use — and 70 per cent of the time the drug was cannabis. As well, 36 per cent of licensed commercial drivers involved in fatal accidents tested positive for drugs, with cannabis again the culprit 70 per cent of the time. “The Colorado experience suggests that we can expect a significant increase in overall use following legalization,” Bouwmeester says.
Just how endemic the workplace problem is already appears from media reports in January 2018 that two Toronto police officers were suspended after getting so high that they began hallucinating during a raid on a weed dispensary. They did call for backup, but one of them experienced pot paranoia when more officers arrived, and immediately ran off.
Although there’s no doubt that cannabis can be an impairing agent, by causing euphoria, relaxation, time distortion, difficulty with divided attention, and impacting cognition and memory, accepted thresholds for measuring impairment are sadly lacking. “Legalization is arriving without proper tools to address the safety implications,” Bouwmeester says.
Despite the fact that there are no tests of impairment, but only of recent use and likely impairment, employers will have to develop clear policies regarding their expectations for the duty of fitness. Additionally, the extent of employers’ duty to accommodate employers has yet to be delineated in the context of medical marijuana users. Overall, the rules for the workplace environment remain hazy; as long as they do, workplace law practitioners are likely to be in considerable demand.
Meanwhile, lawyers advising the industry and its advertisers and marketers will have to find ways to cope with strict advertising, branding and packaging rules that render creativity a serious challenge. With more than 2,000 trademark applications and registrations covering “cannabis” or “marijuana” in the Canadian Trademarks Database, a comprehensive brand protection strategy seems likely to be a condition of success in the industry. But that strategy is subject to various statutory limitations, including requirements to display graphic health warnings, adherence to standardized lettering, restrictions on the use of colour and “brand elements”, and prohibition of celebrity endorsement and consumer testimonials.
Given these limitations, it’s likely that IP lawyers will be busy protecting their cannabis clients with the tools that are at their disposal. These include enforcement of plant breeders’ rights, trade secret protections, and patents for inventions related to cannabis (although the plants themselves are not patentable in Canada). Otherwise, while the Tobacco Act contains many similar prohibitions on promotion, lawyers will undoubtedly seek to test the applicability of existing jurisprudence to the new legislation by way of endeavouring to give their clients the greatest latitude possible.
What is certain is that lawyers of all ilks who are involved in the cannabis industry, will notice that the environment has changed noticeably. “For the last few years, the business community has viewed cannabis as an industry seated at the kids’ bench,” Dhillon says. “But now it’s sitting right at the head of the big boys’ table.”