As Canada Legalizes Marijuana Next Week, Here’s What U.S. Businesses and Investors Should Know

The idea of recreational marijuana available for citizens to purchase in Canada is attracting investors to marijuana producers, retailers and in technologies that are used to grow marijuana. 

As investing in marijuana receives increasing interest, it is important to understand the provincial laws surrounding marijuana according to each province and how those regulations will affect investors, including investors in the United States. 

Barriers to entry and provincial cross comparison

As of now, recreational marijuana will become legalized across Canada next week on October 17, 2018. Although the federal government considers it legal across Canada, the provincial governments of each province will have the final say of how it is to be used and sold within their province. As a result, Americans looking to invest in this industry should carefully look at how the different provinces are approaching implementation.

Alberta has taken a more lenient approach to the privatization of marijuana sales.  The provincial government has set the legal age of consumption of marijuana to 18 years old and will allow for marijuana to be purchased at private stores and through online government sales. Individuals in Alberta will be permitted to grow their own recreational marijuana (up to four plants).

Other provinces have adopted similar sets of conditions but with minor changes. Initially, Ontario had been less lenient to the privatization of marijuana sales. Marijuana in Ontario was only to be available for purchase at government storefronts and through online government sales. This would have made Ontario a less-than-ideal market for investment in this emerging industry. Recently, Ontario’s premier approved privatized marijuana sales, making it an ideal market for investment and putting the province on a par with Alberta in terms of the implementation of the federal legislation. This has prompted private retailers like Fire & Flower to announce their intentions to operate in the Ontario market. The chart below highlights what you need to know about each province.

Alberta

Age restriction: 18 +

Distributors: Private stores and government online sales.
Personal production: Maximum of 4 plants. Landlords have agency to set restrictions.
Areas where smoking is permitted: Prohibited in cars, in areas with children present and wherever tobacco is prohibited.

British Columbia

Age restriction: 19+

Distributors: Private stores and government online sales.

Personal production: Maximum of 4 plants and not in public view.

Areas where smoking is permitted: Prohibited in cars, in areas where children are present and wherever tobacco is prohibited.

Manitoba

Age restriction: 19+
 Distributors: Private stores and online sales.
 Personal production: Not permitted.
 Areas where smoking is permitted: To be determined.

New Brunswick

Age restriction: 19+

Distributors: Government stores and online sales.

Personal production: Maximum of 4 plants and not in public view.

Areas where smoking is permitted: On private property and inside private residences.

Newfoundland and Labrador

Age restriction: 19+

Distributors: Private licensed stores and government online sales.

Personal production: To be decided.

Areas where smoking is permitted: On private property and inside private residences.

Northwest Territories

Age restriction: 19+

Distributors: Privately owned alcohol stores and government online sales.

Personal production: Maximum of 4 plants.

Areas where smoking is permitted: On private property and inside private residences, trails, highways, streets, roads and in parks if they are not used for public events.

Nova Scotia

Age restriction:  19+
Distributors: Government and online sales.
Personal production: Maximum of 4 plants.
Areas where smoking is permitted: Areas where tobacco is permitted to smoke. Landlords have agency to set restrictions.

Nunavut

Age restriction: 19+
Distributors: Online distributors are encouraged to sell in Nunavut, and private businesses are able to apply for a license to sell.
Personal production: Not permitted.
Areas where smoking is permitted: Smoking prohibited in public places apart from designated cannabis-consumption areas.

Ontario

Age restriction: 19+
Distributors: Government-operated stores and online sales.
Personal production: Maximum of 4 plants.
Areas where smoking is permitted: Private property and landlords have agency to set restriction.

Prince Edward Island

Age restriction: 19+
Distributors: Government-operated stores and online sales.
Personal production: Maximum of 4 plants only if they are not accessible to minors.
Areas where smoking is permitted: Private property with certain exceptions.

Quebec

Age restriction: 18+
Distributors: Government-operated stores and online sales.
Personal production: Not permitted.
Areas where smoking is permitted: Areas where tobacco is permitted for smoking, with exceptions to university and CEGEP campuses.

Saskatchewan

Age restriction: 19+
Distributors: Private stores and online sales.
Personal production: Maximum of 4 plants. Landlords have agency to set restrictions.
Areas where smoking is permitted: Private property.

Yukon

Age restriction: 19+
Distributors: Government stores and online sales.
Personal production: Maximum of 4 plants – not in public view.
Areas where smoking is permitted: Private property. Landlords have agency to set restrictions.

Investment, risk and the Cannabis Act

As the second country in the world, the first G7 country, and the first major economy to legalize recreational marijuana use, Canada presents an excellent investment opportunity into a burgeoning industry. 

Coca-Cola, Pepsi, Altria and other brands have expressed interest in exploring marijuana-infused products while Corona (through their parent company Constellation Inc.) has already made an investment into the marijuana industry to kickstart the process of creating a beverage with marijuana (CBD) through their partnership with Hydropothecary. When it was reported that Coca-Cola had discussions with Aurora Cannabis Inc., the stock of Coca-Cola rose slightly, while Aurora rose by 17 percent.

Regulations, derivatives and cross-border opportunities

American investors can take advantage of these investments and partnerships into cannabis. However, the current iteration of the Cannabis Act does not legalize all marijuana products. Only dried cannabis, cannabis oil, fresh cannabis, cannabis plants and cannabis plant seeds will be allowed to be sold by registered retailers. 

The regulations at this time do not allow for the sale of an edible or drinkable product that contains cannabis, such that Coca-Cola or Corona may want to make. Even if the regulations did allow consumable products, currently no cannabis product can be sold that contains caffeine, nicotine, or ethyl alcohol, further restricting companies like Corona and Coca-Cola from bringing a product to market.

There have been indications of legalizing edible products in 2019 or 2020, but until the regulations change, only the five types of cannabis products are legally allowed to be sold in Canada. Investments into these business partnerships and mixed products may turn out to be lucrative, but the major risk that must be noted by investors is that the regulations do not allow for the sale of these types of products.

Other risks of investing in the Canadian marijuana industry are created by the U.S. federal government. Many states have legalized marijuana in some form or another; however, the U.S. federal government remains opposed. There have been indications and declarations that Canadian citizens would face a ban from entering the U.S. if they are found to be working or investing in the Canadian marijuana industry.

As of this last week prior to legalization, the U.S. Customs and Border Protection Agency has retracted this previous announcement clarifying that as long as Canadians are not entering the U.S. with the intention to conduct marijuana-related business, they shouldn’t face any issues at the border.

U.S. citizens who have invested or are employed in this industry are likely not expected to face a ban from re-entering their own nation, but other penalties could be levied against them. U.S. border police have no direct means of accessing one’s employment history or investment portfolio, but they can become suspicious and administer a punishment if answers to questions like “What do you do for a living?” or “What was your purpose in going to your destination?” yield answers that relate to the cannabis industry.

Other agencies of the federal government, specifically the Drug Enforcement Agency (DEA) might be more accepting of legitimate marijuana companies, as they have recently granted Tilray permission to import cannabis into the U.S. for medical research. When investing in the marijuana industry, American investors must note and be aware that their activities may be punished by the U.S. federal government before investing in this industry.  

The point of sale is another problematic area that investors must be aware of before committing their capital. The regulations place possession limits on how much cannabis a person can carry with them in a public area at any one time. A public area includes a motor vehicle located in a public space, so driving from the retailer to home is in a public area. These possession limits place a cap on how much a customer can purchase at any one time. 

Ontario, the largest population and biggest market in Canada, recently announced new developments regarding retail stores for cannabis sales. Private businesses will be able to obtain a license and sell cannabis to the public, but these stores will only start opening in April 2019. Retailers will be purchasing their product supply from the Government of Ontario who will be acting as the wholesaler. Retailers will not be able to set the sale price of their product since that will also be decided by the Government of Ontario. Finally, municipalities in the province of Ontario can opt out of allowing retail stores from opening in their region. They have until January 22, 2018, to make that decision, and municipalities that opt out can choose to opt in at a later point in time. Once a municipality has opted in, they are no longer able to prevent a cannabis retailer from opening its doors and conducting business. This opt-out clause creates uncertainty as businesses and investors do not know which markets will be available and which will not.

Ontario confirming that private businesses will handle the retail operations for cannabis sales is excellent news for investors. There are many opportunities that investors can take advantage of and there will be no arbitrary limit on the number of retail stores that will be present throughout the province. However, investors must account for the risks of a government wholesaler and one who sets the retail price for the product. If a grower is not able to secure a contract with the government, their product becomes infinitely harder to sell to the public.

A retail sales price set by the government is another hurdle that retailers will need to overcome. Retailers are more adept at determining what the price the product should sell at, as they are more aware of the market demands while also ensuring sustainability of their store. The government could set the price too high where customers will not purchase the product, or the price too low, limiting retailers’ ability to remain profitable. 

Uncertainty but opportunity with craft growers

Investments into smaller scale marijuana growing operations, otherwise known as microgrowers or craft growers, also carries risks any investor must be aware of. There are the normal concerns of success, growth, and sustainability that investors have in any industry about smaller and less-established companies. In the cannabis industry, there is a general fear that these craft growers will not have the shelf space to be able to sell their product. While Canada’s cannabis regulations allow for craft growers to exist, the sale of their product is where the hurdles are created.

Current regulations do not indicate any reserved space for craft growers. Retail space, which the government controls, could all be directed toward larger growers, pushing out and preventing any craft growers from having their product reach the consumer. Many of the larger growers have deals in place with provincial governments to supply their cannabis. Since many provincial governments will be acting as wholesalers, smaller growers may not be able to compete with the offers and contract prices the larger growers can present to the government. There is a genuine fear that these larger organizations will flood the market with their product, preventing micro growers from being able to sell their goods. The regulations allow for microgrowers to exist and creates an investment opportunity, but the regulations do not protect them when bringing their product to the market, making them vulnerable to being muscled out  

Craft growers are further disadvantaged by the inability to advertise their product and differentiate themselves from their competitors. It will be much more difficult to establish a brand, which is critical to competing and taking part in the market away from the larger, more established companies. Marijuana products must be sold in plain packaging, similar to that of nicotine cigarettes. There are strict regulations for logos and colors used. Marijuana packages must also be labeled with health risks, the cannabis symbol and information about the product. With such strict marketing and promotional regulations in place, craft growers will have a hard time differentiating themselves. Even the larger growers will be disadvantaged, as they will not be able to market as effectively.

Canada legalizing recreational marijuana use and the new regulations that will surround this industry have opened several investment opportunities in entering this new industry. There are many avenues an investor can explore, but the new regulations create risks that an American investor must keep in mind before investing.

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