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Uncertainty Lingers After Ontario’s Cannabis Store Lottery

byMichael WarfordFebruary 27, 20195 minutes

Canada’s largest province—and still the only one to lack a single brick-and-mortar cannabis store four months after legalization—recently took an important, if unusual, step. In January, the Alcohol and Gaming Commission of Ontario (AGCO), which is the retail cannabis regulator in the province, announced the winners of a lottery. This lottery determined who’d receive the right to apply for the first 25 cannabis retail licences in Ontario.

A Bit of Background About the Cannabis Lottery

The cannabis lottery is just the latest development in the ongoing saga of Ontario’s often strange and haphazard journey towards opening cannabis retail stores. The previous Liberal government had planned on an entirely government-run retail operation, similar to the Liquor Control Board of Ontario (LCBO) stores that sell alcohol in the province.

However, in June of last year, elections put the Progressive Conservative (PC) party in power. And it promptly threw out the government-run plan and announced that only private businesses would be able to apply for retail licences to sell marijuana.

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Originally, the PC government promised that there would be no cap on the number of cannabis retail licences that would be available. Indeed, the government predicted that Ontario could support about 1,000 cannabis retail stores. This led many businesses to invest in staff, real estate and legal help as they prepared to become among the first marijuana stores in Ontario.

But in December, the government abruptly changed course and announced that only 25 cannabis retail applications would be released at first, and those were to be decided via a lottery to be held in January. The government blamed cannabis supply shortages—which fall under federal jurisdiction—for the change.

No Familiar Faces Among the Marijuana Licence Lottery Winners

Now that the lottery is over, we know the names of the winners. The vast majority—about two thirds—are individuals, while the rest are small businesses or corporations with little to no retail experience.

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Yet, despite this lack of experience, the winners are expected to act quickly to get their shops up and running. Within five days of the results being announced, the winners had to submit a $6,000 nonrefundable fee and a $50,000 letter of credit.

They also must open their first store by April 1 or face a $12,500 fine. If they don’t open by April 15, they face another $12,500 fine. And if they miss the April 30 deadline, there’s another fine of $25,000.

Experts predict many of the winners won’t be able to meet these deadlines. Indeed, so far only eight businesses have actually submitted their retail store applications, which are mandated before opening a physical store.

RELATED: STRICT RULES PASSED FOR ONTARIO’S CANNABIS STORES

Big Marijuana Companies Race to Partner With Winners

Not surprisingly, given that the majority of winners are sole proprietors with no retail experience, many have entered into commercial agreements with large cannabis companies in order to open their stores by the April 1 deadline. While details of these agreements have largely been kept private, some marijuana companies are reportedly offering millions to individual lottery winners in exchange for access to the Ontario market.

Ironically, while the Ontario government had hoped the random nature of the lottery system would allow small businesses to get a foothold in the industry, these commercial agreements mean that large companies will have a backdoor into the province’s legal marijuana market.

However, one issue that could complicate these partnerships is AGCO’s rule against winners entering into revenue-sharing agreements with outside entities and giving over control of their stores to them. While we currently don’t know how aggressively the ACGO will enforce this rule, the agency has already disqualified one cannabis store licence winner for violating a rule that prohibits winners from “changing their applicant type, ownership and/or corporate structure in such a way that would result in a change of control.”

Small Cannabis Businesses Are Frustrated by Changing Rules

The lottery system means that the province granted these first 25 licence application spots completely based on luck, rather than experience. Existing small businesses—like marijuana paraphernalia shops—already have years of experience in the cannabis industry, and many were hoping to move into selling legal cannabis itself. Some shops were preparing to apply for a retail licence when the Ontario government announced it would only hand out 25 spots by a lottery system.

RELATED: ONTARIO COMMUNITIES OPT IN OR OUT OF CANNABIS STORES

Indeed, numerous small business owners across Ontario had already leased retail space and hired staff, often spending thousands of dollars each month to do so. These owners also often paid for lawyers to ensure their applications fully complied with the AGCO’s strict rules.

Unlike large cannabis companies, small business owners don’t have the deep pockets to partner with the lottery winners. So, they’re now faced with a difficult choice: cut their losses or hope the government will open up the licence application process.

Ontario’s government has sent mixed messages on when they would start accepting additional licensing bids. While the AGCO said it could happen in March, the provincial government has insisted nothing would change until after the federal government addresses its cannabis supply issues.

In other words, with the first Ontario store opening in about a month, there are still plenty of question marks hanging over the future of the province’s cannabis retail industry.

Photo credit: Yarygin/Shutterstock.com

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