After months of uncertainty and discussions, on November 16, 2018, Ontario announced the proclamation of the Cannabis License Act, 2018 (the “Act”) and its associated regulations (the “Regulations”). The new private cannabis retail framework provides guidance on the licensing requirements and the operation of private cannabis retail stores in Ontario.
As of the date of proclamation of the Act, the Alcohol and Gaming Commission of Ontario (“AGCO”) officially became the regulator of private recreational cannabis retail in Ontario. As the regulator, the ACGO has the authority to licence, regulate and enforce the sale of recreational cannabis in private stores across the province. The focus of this post is the key Regulations of the Act regarding the licensing process as well as the restrictions on licensed cannabis producers (“LP”) and what they should review and plan for if they plan on being involved in the private cannabis retail space.
Licensing Process
In order to open a private cannabis retail store, applicants must obtain a retail operator licence (“ROL”) by meeting the eligibility criteria set out in the Act and the Regulations. Each ROL allows the applicant to operate one or more retail stores in Ontario for an initial term of 2 years with the option to renew for an additional 2-year term or 4-year term. Once a ROL is obtained, every store an applicant operates must have a separate retail store authorization (“RSA”). Although Ontario has decided not to cap the number of private retail stores in the province, under the Regulations each applicant and its affiliates will be entitled to a maximum number of 75 stores per operator. In addition, every retail store location must have at least one licensed retail manager who holds a cannabis retail manager licence.
Municipalities
Until January 22, 2019, Ontario municipalities have a one-time option to prohibit cannabis retail stores from being located in their municipality. If a municipality chooses to opt out they can opt back in any time but if they choose to opt in, they can no longer opt out.
First Nations will also have the ability under the Act to pass a Band Council resolution in respect of their reserve to either permit or prohibit the AGCO from issuing RSA’s on their reserve.
First Nations Retail Locations
Ontario’s legislation appears to take into consideration the unique legal authority and jurisdiction existing within First Nations by requiring applicants to demonstrate that cannabis retail store locations have been approved by the Council of the First Nation (i.e band).
The one-time opt-out provisions applicable to municipalities does not apply for cannabis retail locations on a reserve. First Nations councils may pass Band Council resolutions or other by-laws that will permit or prohibit RSAs at any time and therefore, applicants must complete their own due diligence to ensure that they will have commercial certainty to operate their retail locations.
To provide more commercial certainty, applicants should consider requesting that their retail locations be approved by First Nations councils for periods longer than the initial licence period (i.e. 2 years).
In accordance with Section 44 of the Act, future arrangements and agreements may be entered into by the province with the First Nation council with respect to regulation of cannabis retail stores on a reserve, the licencing or authorization of persons to operate cannabis retail stores. Again, there appears to be recognition of the unique jurisdiction on reserve lands and it is expected that different regulatory regimes will emerge over time on First Nations lands. We are already aware of some communities, such as Six Nations of the Grand River First Nation, that have a need to establish their own jurisdiction so they can benefit from revenues akin to provincial and federal governments.
Licensed Producers and definition of “Affiliate”
Pursuant to the Act and the Regulations, LP’s and their affiliates are prohibited from operating more than one cannabis retail store, and the LP’s retail store must be located at their production facility.
The definition of “affiliate” in the Regulations is much broader than the definition in the Business Corporations Act (Ontario). Pursuant to the Regulations, the definition of “affiliate” includes:
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a corporation that is affiliated with the person for the purposes of the Business Corporations Act (Ontario);
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a partner in the same partnership as the person;
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a trust in which the person has a substantial beneficial interest, whether vested or contingent, or with respect to which the person acts as a trustee;
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a member of the same joint venture, unincorporated association, unincorporated syndicate or unincorporated organization as the person;
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a person who owns at least 50 per cent of the votes for electing the directors of the corporation;
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having a fair market value, including a premium for control if applicable, of at least 50 per cent of the fair market value of all the issued and outstanding shares of the corporation.
The definition of “affiliate” in the Regulations also includes direct or indirect “control in fact” by one person, or a group of persons or entities of another person. “Control in fact” (also known as de facto control), although not defined in the Regulations, is generally known as the legal concept of actually controlling an entity or person through governance and ownership interests of another party. However, as the Regulations provide that such control does not need to be direct but can be indirect, done jointly or in concert with others, and does not need to be actually exercised there is ambiguity as to what is sufficient to result in “control in fact” under the Regulations.
The Regulations also provide that a corporation will not be eligible for an ROL if more than 9.9% of that corporation is owned or controlled, directly or indirectly, by one or more licenced producers or their affiliates.
Based on the restrictions in the Regulations mentioned above, it appears the Ontario government’s objective is to create legal separation between LPs and cannabis retail operators and to encourage small businesses to enter the cannabis retail space. While we expect the Ontario government to release additional guidance over the coming weeks regarding the ownership of retail stores by LPs, LPs in Ontario should plan to review their corporate structures and/or strategies carefully under this regime to ensure compliance if they plan to be involved in cannabis retail space in Ontario.
The AGCO will begin accepting applications for licences under this new framework on December 17, 2018 and has set a goal of having private stores licenced and open for business on April 1, 2019. Until then, recreational cannabis may only be purchased in Ontario online through the Ontario Cannabis Store.
What legal and business questions come to mind with the implementation of Ontario’s Cannabis Licencing Act, 2018 for LPs? What do you think the long-term impact of these regulations will be on cannabis retailing in Ontario?
