Ontario pot rules restrict retail ownership of licensed producers

TORONTO — An Ontario cannabis retail licence will not be issued to a corporation if more than 9.9 per cent of it is owned or controlled by one or more licensed marijuana producers or their affiliates, the province said Thursday, dealing a blow to pot growers who have stakes in retail.

The province's new pot retail regulations also stipulate that this restriction applies whether the marijuana producer's ownership of the corporation is direct or indirect.

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The Cannabis Council of Canada welcomes the additional clarity but is "disappointed" as the regulations may have some "unintended consequences," said its executive director Allan Rewak.

"So many licensed producers have invested, in a passive way, in a lot of retail chains... And unfortunately this could and likely will prevent those players from engaging in this marketplace."

The detailed rules released Thursday shed more light on the province's private cannabis retail framework, after Canada legalized pot for recreational use on Oct. 17. Applications for licenses will begin on Dec. 17 and retail stores are expected to open in April, with a market concentration of 75 stores per operator.

Until then, the only legal way to purchase adult-use cannabis in the country's most populous province is online at the Ontario Cannabis Store.

In a bill introduced in September, the Progressive Conservative government said licensed growers and their "affiliates" may not hold more than one retail location between them, located at a production facility.

On Wednesday, the province said stand-alone stores can be open any day between 9 a.m. and 11 p.m., but they must be at least 150 metres away from schools and bar entry to anyone under 19 years old.

Licences won't be issued to any person or organization who has an association with organized crime, and applicants must demonstrate their tax compliance status to show they are in good standing with the government.

The pot industry had been waiting for clarity on the degree of involvement licensed producers can have in front-line sales. The regulations released Thursday offered more detail on this aspect of the province's framework, including its definition of "affiliates."

This definition is key for those who have recently made investments in retail chains. For example, Aurora Cannabis owns a 25 per cent stake in Alcanna Inc., which has five private retail pot stores in Alberta. As well, Canopy Growth recently acquired Hiku Brands Inc., which has several coffee shops in Toronto under the Tokyo Smoke banner.

Under Ontario's Cannabis License Act, "affiliates" are defined, among other things, as "a corporation of which the person beneficially owns or controls, directly or indirectly, shares or securities currently convertible into shares carrying more than 9.9 per cent of the voting rights."

This is restrictive for cannabis producers, but it remains unclear whether this leaves some wiggle room for some retail ownership models such as franchises, which do not involve voting shares.

"It appears as though the government is trying very hard to limit LPs to just one retail outlet at point of production," said Omar Khan, vice president at Hill and Knowlton Strategies who advises cannabis clients on public policy and public relations. "Yet the regulations seem unclear on whether or not LP’s will be able to franchise out retail operations."

Also notable for would-be cannabis retailers in Ontario is the regulations do not specify a minimum distance between stores, said Trina Fraser, an Ottawa-based lawyer who advises the cannabis industry.

Would-be applicants were rushing to get their applications in first before someone else stakes their claim on a nearby location, and potentially freeze them out, she said.

"That was creating a lot of angst... That fear is now gone," Fraser said.

The regulations also state that cannabis retail stores must be standalone stores, and "enclosed by walls" to qualify for a licence. That means the store-within-a-store model used for wine and beer in some retail shops won't be extended to pot, she added.

"It's certainly interesting that for maybe for some larger retail that were interested in creating segregated spaces within their stores to be a cannabis store, that certainly isn't going to be permitted," said Fraser.

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