As 2018 rolls out, what one lawyer terms “cannabis fever” continues to grip Canadian investors, with the market implications of legalizing cannabis shaping up to be one of the key legal risks facing businesses.
“One of the biggest challenges presently faced by the cannabis market is uncertainty, and uncertainty in capital markets fuels volatility,” says Andrew Powers, partner at Borden Ladner Gervais LLP.
“We’ve got a rapidly changing regulatory landscape for cannabis in Canada and it’s fueling fast growth in what is a relatively nascent market sector.”
The government of Canada — “Shooting from the hip,” Powers notes — set an initial goal of July 1 for the implementation of the Cannabis Act, and while the legislation is working its way through the process “in reality it’s going to take some time before we have a really clear picture of what the adult use recreational market in Canada is going to look like.”
BLG recently released its annual report, predicting the biggest legal issues businesses will face in 2018. The report, Top 10 Legal Risks for Business in 2018, offers Canadian businesses “deeper insight into the key trends and regulatory changes that will have legal implications in the year ahead.” The legalization of marijuana will bring changes that “will be highly disruptive, expanding the opportunities and challenges available to established businesses and new entrants.”
Powers says publicly listed licensed producers have been accessing the Canadian capital markets “at an incredible pace” since Prime Minister Justin Trudeau’s liberal government won a majority in October 2015.
“These publicly listed LPs have raised in excess of $1.8 billion of equity, which is a staggering number for a short period of time,” Powers says.
The size of the deals are also growing — he notes that in 2015, public offerings of common shares ranged from $5 million to $12 million for established LPs, which “had a hard time getting interest from the market.” But in 2017, particularly near the end of the year, “it was typical to see the same issuers raising $80 million to $100 million in one fell swoop.”
While we are watching “the birth of a market sector,” Powers says it isn’t a typical market or typical commodity. In fact, he calls it “a rather contentious and highly regulated one.” He points out that a recent Globe and Mail article said a poll revealed half of Canadians don’t agree with the legalization of an adult use recreational market in Canada. The federal government has been facing calls — from school boards and police associations, for example — to “slow down, take a closer look and more care building the infrastructure before the switch is flipped.” Trudeau seems to have heard these concerns, and has stepped back from the initial launch date.
But regardless, the Cannabis Act is only one piece that will “sit on top” of the different pieces of provincial legislation that, “as a package, will govern the market and that’s where the uncertainty is at present,” Powers says.
Take the distribution laws, which vary from province-to-province. Ontario’s model is based on the existing LCBO framework but other provinces, such as Alberta, don’t have anything similar to leverage.
“This patchwork of distribution models has been widely criticized as missing the mark on a number of fronts, most importantly creating a workable consumer-facing interface,” Powers says. “There’s an absence of clarity with regard to product diversity, product expertise, pricing models and taxation — it’s all hazy.”
Market participants and investors alike are susceptible to uncertainty, and while evaluations presume the recreational market in Canada, which is viewed as the path to profitability, is free of potholes, “in reality it is full of them and a misstep can wipe out hundreds of millions of dollars in value,” Powers adds.
The bottom line, he says, is we don’t know when we’re going to have a clear picture and investors “would be wise to be cautious” and “exercise some restraint” while the market settles into its final form.
“I’m not suggesting they sit on the sidelines, but wait and see how the adult use recreational market will look once all the pieces fall into place.”
The remaining nine legal risks for businesses listed in the report are cybersecurity and protecting data, transforming infrastructure, failure to consider aboriginal and treaty rights, tax system reforms, trade agreements and cross-border commerce, challenges relating to sexual harassment in the workplace, disruption caused by technologies, the environment and climate change and class actions.