Since the federal government’s Cannabis Act was passed into law in October, which legalized the recreational use of cannabis, the gold rush of activity in the sector has only intensified.
Since the federal government’s Cannabis Act was passed into law in October, which legalized the recreational use of cannabis, the gold rush of activity in the sector has only intensified. With that, of course, has come a greater call on the services of the bar, with an “unprecedented” number of legal areas engaged by the change in cannabis law in Canada.
“Just like any other sectors, we realized there are real estate, tax components, IP, licensing, branding components, all these areas of law that we traditionally service, now servicing one more sector: cannabis,” says Morris Szwimer, who has a commercial law practice with Spiegel Sohmer Inc. in Montreal. This led firms to “concentrate our efforts on this new area. If you look around, law firms big or small, everyone has their toe in the water in some respect.”
As for activity, “It’s basically a gold rush,” says Trevor McCann, an insurance and professional liability partner in Clyde & Co. in Montreal. “You’ve got huge market demand and shortfalls. There are new, lucrative opportunities. You have largely capitalized companies and small players interested in getting in on the action, hoping to be bought up.”
Cannabis companies on Canadian stock exchanges reportedly raised $1.4 billion in equity in the first quarter of 2018 alone. Szwimer agrees that the growth is unprecedented.
“When you look at the business, it’s . . . like any other, but this is the first time we’ve seen an area of law to come out of nowhere. It took law firms by surprise.”
What industry and law firms are grappling with for the first time, too, is that “we’ve never brought a product out of the Controlled Substances Act and made it completely available,” says David Wood, co-chairman of the Borden Ladner Gervais Cannabis Industry Focus Group, based in Calgary. “It’s unprecedented.”
Kirk Tousaw, of Tousaw Law Corporation in Vancouver and Victoria, B.C., has made a career advocating on behalf of medical cannabis patients and providers. As a crusading lawyer in the fight for cannabis use, he says he never thought he’d see big firms with cannabis practices. Yet, today in the sector, “you’ve got everything from standard breach of contracts to civil litigation, raising money and IPOs.” When he organized a conference on cannabis in B.C. three years ago, it was for an afternoon, he says. The most recent one lasted two days.
“It’s touching so many areas now, and it’s integrated as any other industry would be.”
For Wendy Hulton, a partner in product regulation at Dickinson Wright in Toronto, the ramp-up in activity started more than two years ago. She was practising when the Industrial Hemp Regulations came into effect in 1998, and she brought the first cosmetic hemp product to market, which, she says, remains the most successful one of its kind on the market today.
In the past two years, in anticipation of the legalization of marijuana for recreational use, activity has “ramped up exponentially, and continues to grow daily,” she says.
M&A, intellectual property, immigration, finance, regulatory, marketing and advertising are all practice areas engaged by cannabis, she says. Her fellow partner Tim McCulloch, a commercial litigator who is Dickinson Wright’s Cannabis Practice Group chairman, based in Phoenix, also names food safety and employment law. Securities law is also engaged.
As cannabis suppliers “are moving into the mainstream, a lot of these entities are moving into the public securities sphere,” says McCulloch. “I think it will continue to burgeon and grow; the markets are now moving from being very underground.”
In the United States, he adds, “We’re still where Canadian companies once were.” Cannabis is legal for sale in some states but not federally. “But as these industries mature, they’re running into the same situations that industries have in dealing with maturation. It’s an added twist of being in the cannabis space.”
And the industry is set to grow even more when the proposed regulations for cannabis topicals, extracts and edible products that were released on Dec. 22, 2018 come into effect in October. This opens the door to companies in the food processing and beverage industry to move into the cannabis space.
Schedule 4 of the Cannabis Act will be amended to include topicals, extracts and edibles, says Szwimer. “You’ll get traditional food and pharmaceutical companies in those sectors looking to develop products that you’re able to put onto the market.” Although the Cannabis Act says these items can be available within a year of passing the legislation (on Oct. 17, 2018), “businesses may be able to bring them to market earlier than that.” In topicals, businesses are already busy developing lotions and cremes that contain the cannabinoids delta-9-tetrahydrocannabinol — THC — and cannabidiol — CBD — in varying levels.
Market capitalization is big, and “we’re only going to see it get bigger,” says Szwimer. His firm has received inquiries from clients in the cannabis sector who hope to grow and become licensed producers, while others want to invest and become stakeholders. At that time, banks were not involved in the cannabis sector.
“This year, we’ll see a shift and another level of lawyers in banks, which will be funding these operations,” he says. Now, private equity firms and other institutional investors are involved. “BMO has been very active. You’re seeing guys from TD, Royal Bank, interested in getting involved.”
In the United States, Dickinson Wright’s McCulloch says he sees Canadian investment coming into the cannabis space in Arizona, where he’s based, and to Florida (where there is a restricted medical cannabis regime) in particular. This has caused an escalation in prices, he says.
“We see a lot of capital looking for investment in the industry [and] I’ve seen some escalation in that since October. There have been investors in these states since prior to October, over the past couple of years. But after legalization in Canada, it’s reached another level.”
Hulton also notes that investment in the sector is becoming more sophisticated, with more due diligence being done.
On the insurance side, Clyde & Co.’s McCann says clients are potentially affected by the new regime in a number of ways. Some clients are looking to insure cannabis companies, while other insurance clients are looking to manage existing risk.
“Insurance is facilitation of capitalism and its tentacles, including insurance transactions, so something that’s a social or business model change inevitably has impacts on the insurance industry,” says McCann, who also teaches insurance law at McGill University.
Clients can also benefit from a lawyer’s training in life sciences, and BLG’s Wood, who has a Ph.D. in biochemistry with a formal education in plant metabolism, says his background has “been tremendously helpful working with clients in this area,” particularly in patent law. “When I’m talking to people about what they’re doing in their downstream products [such as cannabis oil and topicals], there’s inevitably a lot of chemistry involved” owing to the many chemicals in the cannabis plant and the different types of cannabis flowers.
Regulation and product liability
As cannabis edibles, extracts and topicals become regulated in October, more of lawyers’ work is coming from helping federally licensed entities or applicants in the cannabis sector in transactions involving securities or supply arrangements with food and beverage companies.
“Now that we’re getting into edible cannabis products, the hard part is making food properly,” says Wood, which includes preparing an extract to be infused. Regulations don’t allow for cannabis products and regular food products to coexist in the same building, he explains, in large part to protect children from accidental cannabis consumption. For example, if infused cookies and non-infused cookies were made in the same factory, mistakes or even sabotage could occur.
“A lot of our food companies export food; you don’t want to accidentally export cannabis in food.”
In regulation, McCann believes a strong link can be made between cannabis products and para-pharmaceutical products such as protein supplements, food powders and Gingko supplements — more so than with alcohol or tobacco products.
Cannabis is “an area where a producer or anyone dealing with the product has pretty strict [Health Canada] regulations they need to comply with [and] there are issues surrounding non-conformity of the products themselves.” For cannabis, the THC levels in a product might make it subject to product recalls, for example, or there could be problems with labelling, product contamination and consumer class actions.
“Insurers may assist them in those situations,” McCann says. “My proposition to an insurance client would be, if you’re looking at writing a policy to protect supply-chain cannabis companies, look at them as you would a para-pharmaceutical company. How would you assess those risks and manage them when they manifest?”
Restrictions in the cannabis sector include common ownership of federally licenced producers and retailers, says Wood. Each province has its own rules, and “people are trying to make past deals fit when maybe they don’t. . . .
“When you’re in a regulatory environment that has a ton of pressure to expand, there’s also regulations that have subjective standards that we’ve never seen enforced,” Wood says. “This comes out mostly in the promotion” of cannabis, of which advertising is a subset. The prohibitions are based on those of tobacco advertising, though the consequences of breaches are less severe, he says.
Tousaw believes the current restrictions placed on advertising cannabis products “infantilize the consumer and treat cannabis as a substance that is significantly dangerous when it isn’t. . . . Our [cannabis product] labels are as sterile as they can get, with big stop signs on them; this is ridiculous stuff that cannot last,” he says, adding that he sees a Charter challenge as “winnable.”
Risks and rewards
It’s a market with many players, both large and small, and high investor interest. Yet scrutiny comes with that, and smaller companies may not be used to that or to the requirements that come with going public, says McCann. So, they may issue press releases that put them offside securities regulations. He cites the case of one company, an integrated cannabis group, that issued a press release on a deal that had been made with a medical marijuana company that attracted a lot of interest. Not all of it was positive, with detractors saying the nature of the company was not really changing much. “Then, the stock crashes, and it leads to securities class actions.
“How do claims play out in a gold rush scenario?” McCann asks. “If you’re an insurer, you need to understand and characterize it. How do I understand how they’re operating, and what parallels can I draw to other situations I’ve seen before?”
Lawyers working in the sector also warn about the types of clients a lawyer or firm takes on.
“B.C. has had a culture of deciding not to enforce, resulting in a bunch of people running illegal businesses,” says Wood. “Now, a lot of them are trying to transition to the regulated market. . . . In a situation like that, read your code of ethics and make sure you’re not taking proceeds of crime” from companies that may still be operating illegally. “That’s the biggest one specific to the industry.”
McCulloch and Hulton concur. “We think the industry is a positive one and that the past prohibition was foolish,” says McCulloch. “But as in any industry that’s in a changing legal landscape, there are certain individuals involved then, and still involved, who are perhaps not folks who would listen to lawyers like us, because they haven’t utilized our services.”
The risks in working in the cannabis sector are far outweighed by the rewards, though.
“It’s the gift that’s just going to keep on giving,” Hulton quips. “I want to send a fruit basket to Health Canada! It will continue to benefit our bottom line,” she adds, noting her firm’s “bench strength in being cross-border. Because [Dickinson Wright is] so well known in the U.S., we have a really steady influx of work, and we’re hiring more associates to handle this.”
Cannabis is “a viable business that will make money for everybody,” Spiegel Sohmer’s Szwimer agrees. “It’s like a cash cow at the end of the day, for everybody.”