The More Things Change the More They Stay the Same:
Navigating the Slightly Legal Cannabis Industry
A little more than a year ago, the Government of Canada announced the legalization of cannabis, and Canadians (understandably) believed cannabis was now legal across the country.
Yet, that’s not really true.
The truth is, some cannabis is legal in Canada under specific circumstances, but most remains completely illegal. This might come as a shock, considering all the fanfare around the supposed legalization of the controversial plant.
If you’re looking to capitalize on the growing market and get involved in a cannabis business as an operator, investor, or supplier you need to be aware of the delicate legal line you’re walking.
This article isn’t meant to cover every challenge you may face, but it will give you a head start. There are immense regulatory pressures that are squeezing cannabis businesses and preventing potential entrepreneurs from being able to make money from one of the most profitable plants in the history of the world. And, I’m going to do it without resorting to tired pot puns; I swear that if you read anything by a lawyer about cannabis you would think our license depends on saying something is “up in smoke”.
This aims to be a helpful, candid article for you— somebody interested in the legal cannabis industry, particularly on the Sunshine Coast—that can help set you up for success.
Duffel Bags of Cash
First, a quick anecdote from a former mentor of mine:
He once told me a story of flying to Powell River via helicopter to address a labour relations issue at their mill. He was still a very junior lawyer and this was all quite thrilling. As they passed over Sechelt the pilot started taking the helicopter up at a steep incline. Why was this pilot changing course so dramatically? At that time in the 1990s, if you were a helicopter flying over the forests northwest of Sechelt, the entrepreneurs living there assumed you were the cops and they had a habit of taking shots at the aircraft from their concealed positions.
There is a massive cannabis industry on the Sunshine Coast and has been for decades.
Unfortunately, the Coast’s cannabis growers did not come out of the woods with duffel bags of cash on October 17, 2018 (“legalization day”), looking to become licensed. Most experts believe it’s because regulations make it incredibly difficult to do business without a careful plan.
If You’re Not Licensed, You’re Illegal
Broadly speaking, there are six types of legal cannabis businesses:
- Cultivation – growing cannabis flower
- Processing – creating products from cannabis flower
- Sale for medical purposes – providing patients with cannabis flower and products
- Sale for non-medical purposes – retail sales of cannabis flower and products
- Industrial hemp – growth, processing or sale of low-THC cannabis products or flower (0.3% or less)
- Ancillary services – conducting research on cannabis, doing testing, and creating other products that supplement the legal cannabis market and don’t involve the growth, processing or sale of cannabis flower and products but do involve the possession of any amount of flower or product
If you have a license to do one of these six things, congratulations—you are in the legal cannabis industry and get to experience all of the fun and excitement that entails!
If you do not have a license to do one of these six things and are doing them anyway, congratulations— you are an illegal drug trafficker under the Controlled Drugs and Substances Act and get to experience all of the fun and excitement that entails!
The industry differentiates parts of the illegal market by referring to the “black” market as the fringe elements of the industry involved in organized crime, and the “grey” market as legacy growers with small operations, retailers that developed under the old medical marijuana regime, or people who would comply with the law if they believed they could. But both are against the law.
Building Your Speculative Weed Fortress
Becoming licensed is not for the faint of heart. Retail sales are licensed by the provinces; in British Columbia, this includes a review by local governments, such as the District of Sechelt, Town of Gibsons, or Sunshine Coast Regional District. Everything else is regulated by the federal government.
For federally licensed businesses, you will need to provide notice to local authorities, provide lists of key personnel who will undergo security clearances, site surveys, physical security requirements (more on that below), reports on how good production practices and record keeping requirements will be met, and reports on key investors (including people who may exercise indirect control).
Here is a sample list of the feds’ security requirements. It includes access controls, logs of everyone going in and out of the building, detailed destruction and handling of cannabis waste, video monitoring, vaults, and a myriad of testing and reporting requirements.
Does it sound like you need to build Fort Knox? Not quite. But it is closer to that than a standard liquor store or winery. If you’re building a micro-site (which, depending on the license type, involves a maximum of 200 sq m of growing space or 600 kg of dried flower per year), then the specific requirements can be somewhat easier to fulfill, but the breadth of requirements are the same as a standard license. In almost all cases, visual evidence that demonstrates all these systems are finished and functioning are necessary before you can get the license. This means you need to have a fully built-out facility before you apply for a licence that you may or may not get.
Understandably, this makes many people wary of starting a cannabis business and makes illegal cannabis producers wary of risking their existing businesses. Good cannabis consultants can increase your chances of approval (some claim to have had zero license rejections) but fees can start as high as $50,000.
Paying People to Take Your Money
Outside of public costs, private costs are also significant, including something as simple as getting a bank account.
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act obligates banks and credit unions, life insurance companies, brokers and agents, stock brokers, money services businesses, real estate brokers, accountants, and notaries, amongst others, to report any transaction where there are reasonable grounds to suspect that it is related to the commission or attempted commission of a money laundering or terrorist financing offence. Lawyers are presently exempt from this regime but have significant reporting requirements that are mandated and audited by the Law Society of British Columbia to prevent lawyers from being drawn into money laundering while simultaneously protecting solicitor-client privilege. The Financial Transactions and Reports Analysis Centre (FINTRAC) monitors and enforces this reporting system.
Each time a bank wants to open an account for a cannabis business, they are expected to go through an extensive due diligence process that proves the business operates within the law. This includes proving operators, clients, and anyone else involved in the business are people that are considered low risk for money laundering. And there are many other factors banks have to consider..
If you think it’s a catch-22 that illegal cannabis businesses can’t get bank accounts to help make themselves legal because they’re presently operating illegally and therefore almost every transaction has a degree of money laundering—well, there’s the Canadian cannabis regime in a nutshell for you…
Banks and credit unions tend to throw their hands up and say they won’t offer these bank accounts without monthly fees of $500-$1000 plus due diligence fees to open the account that run into the thousands—if they will deal with them at all. And if you want a US dollar bank account, just forget it.
These are just examples of the costs to run a cannabis business and while they may scare you, they also bring enormous opportunity.
As noted in one article, there has been “very little crossover” between the black market and the legal market. So far, legal cannabis businesses are best at the actual business side— raising money and regulatory compliance. Illegal cannabis businesses are best at cannabis —creating quality product at prices people expect to pay.
An entrepreneur who thinks they can do both will succeed at exploiting this market gap. The key will be finding smart money that believes in the value of a successful, quality cannabis business as both a business opportunity and moral good (i.e. nobody looking to make a quick buck). As well as finding legal ways to build on the knowledge of the Sunshine Coast’s (and British Columbia-at-large) craft cannabis community, and rigorously avoiding illegality. These are not easy feats and the legal landscape in the industry is evolving day-to-day.
We are able to connect you with excellent cannabis compliance lawyers and consultants who can guide you through the licensing process. For others who do not believe they can handle the expense of complying with these requirements, there are still excellent options available to you that we are well-equipped to guide you through.
If you’re a legacy grower who may be banned from handling cannabis in a production capacity, you can still make money from the expertise you have developed over many years. Service agreements can be created to help you sell your knowledge about plants and production to licensed growers. If you have developed unique strains of cannabis, you may be able to get a patent. If you have simply developed recipes for cannabis extracts or edibles, for instance, you may be able to protect that knowledge as a trade secret that can be sold.
If you don’t have concerns about the security clearance but just lack access to money, you may also be able to enter into joint venture opportunities with licensed cultivators and processors. It is considered easier to amend an existing license than to get a new one. Licenses are site specific, so growers sometimes need to build out more capacity than they have demand for in their current products. A joint venture with a grower for cannabis-infused beverages, for example, can give you an opportunity to be involved in the market while piggy-backing on the license of another company.
You may want to provide infrastructure and services to cannabis producers or invest in their companies, in which case you will just need to be sure the producer is operating within the law.
It’s a crime to take money that you know or believe came from the commission of a crime so you need to protect yourself in your leases and contracts— even a landlord who rents commercial property to an unlicensed cannabis operation may be committing a crime, and conduct the appropriate due diligence. And, if you are an investor, you need to ensure you have the appropriate protections in your shareholders agreement to ensure your investment isn’t seized and forfeited.
While the cannabis industry is currently a difficult place to make a buck, there are creative and lucrative ways to get involved. Bridging the divide between business and craft growth will help licensed producers address the significant quality issues that are keeping a large proportion of the retail trade in the black market.
All you need to be is an imaginative entrepreneur who recognizes the scale of the challenge to overcome. And, have the right people to support you along the way.