Marijuana Inc.Written by Yamri Taddese Posted Date: September 5, 2016
As Canada’s federal government gets the ball rolling on legalizing marijuana for recreational use, there’s a lot of fertile ground for legal work across practice areas. On the eve of pot’s big leap into the mainstream market, lawyers tell Canadian Lawyer they’re fielding calls from clients in various sectors, all inquiring about legal ways to do work in a once underworld industry.
“It really is a new frontier,” says Debbie Weinstein of LaBarge Weinstein LLP, who acted for Tweed Marijuana Inc. during its merger with Bedrocan Cannabis Corp last year. That merger was the first one in Canada’s budding medical marijuana industry, and it solidified a sizable market share for two of the biggest players in the game. Now that legalization is coming, Weinstein expects consolidations in the cannabis industry to surge up in the years to come, offering plenty of work for corporate commercial lawyers like her.
Adam Szweras, a securities law partner at Fogler Rubinoff LLP, says Canada is on the verge of the “birthing of a new industry” teeming with opportunities for investors and legal professionals alike.
“Whether you’re making packaging for a product or [you’re] a courier company delivering boxes of products, or a trucking company, there’s going to be implications up and down the industry,” Szweras says. “You’re really creating a whole new industry. It’s all of the legal work that’s normally entailed in commercial transactions plus all the regulatory layers on that.”
A government advisory task force on legalization, chaired by former deputy prime minister Anne McLellan, is in the midst of contemplating the rules around this new industry. The feds are expected to introduce a legalization bill by 2017. Much will depend on how the regulations shake out and what type of barriers there will be for entry into the industry.
Whatever the task force and the government design, it will be unprecedented. Full, countrywide regulatory systems for recreational use of marijuana are so uncommon even Holland doesn’t have one, Szweras says. “The reality of the matter is that this will be the first legal program that any OECD country has brought in,” he says.
Many expect provinces will regulate distribution, with some room for municipal input when it comes to issues such as zoning. If lawyers’ predictions are right, the regulations will be tight, with highly restrictive guidelines on both manufacture and distribution. “It’s not like it’s a chocolate bar and you’re going to start selling it at a corner store. I personally believe that distribution will be restricted like alcohol is,” Weinstein says. “What the government wants to do is get the manufacture and distribution out of the hands of criminals. And to do that, they will restrict the manufacture and distribution.”
On the other hand, of course, the government has to ensure the restraints on distribution and access aren’t so high as to sustain the underground market. It’s a delicate balance, and much hangs on it.
What’s certain is that a highly regulated industry will mean greater need for legal services and professionals who know their way around regulations and the industry in general.
In the meantime, investors are not holding their breath until the rules are on paper — they’re already making decisions, and to do so, they’re relying on their lawyers’ best guesses on which way the regulations will turn. Cheryl Reicin, a partner at Torys LLP, advises private equity firms, venture capital funds and investment banks that fund biotechnology companies. She says that, these days, institutional investors and large banks are asking her team for insight into how things will unfold. Businesses and investors are jumping at the industry now because they feel they can’t afford to wait, Reicin says.
“It’s unknown, and this is sort of the fun in the opportunity,” she says. “It could be that once the regulations come out, some big drug companies could come and wipe out some of the smaller players.”
Eileen McMahon, a regulatory lawyer also at Torys, says the level of barriers to entry into the industry will determine which players will enter the game. High barriers, for example, will draw those who are already comfortable with thick layers of regulation, such as those in the drug industry.
“Who is currently looking at this? Everybody,” McMahon says. “You’ve got banks looking at it, you’ve got pharmacies looking at it. You’ve got possibly liquor distribution companies and tobacco companies.
Many of them are interested in how this shakes out, but, ultimately, the opportunity will turn on what the law says. So the question is where will the barrier to entry fall?”
No one can, of course, answer that question with certainty at this moment. But even with many unknowns, the lawyers Canadian Lawyer spoke to aren’t shying away from advising clients who come knocking on their doors. “Remember, we are in the business of what ifs,” Reicin says. “We come up with the metrics of potential issues, then we work with clients to decide which ones we want to address and how we address them, and they decide how much risk they’re willing to take.”
What lawyers seem to be sure about is the potential for a flurry of mergers and acquisitions. There are currently only 34 licenced producers across Canada, and 19 of them are in Ontario. For some 1,200 other applicants, the coveted permit may never come, according to Weinstein. And that, she says, is why many consolidations will happen.
Given that it’s “extremely difficult” to get licenced, Weinstein says 90 per cent of the companies on the waiting list will probably never be licenced. But those companies may have technologies or other attributes that could make them interesting acquisitions or partners, she says. In the last two years alone, Tweed has done a public offering, three public financings and two acquisitions, Weinstein adds.
“For lawyers like myself, this new industry presents a very, very good opportunity if you’re representing the bigger companies because what will happen is they’ll consolidate. They will continue to acquire businesses,” she says. “So, for a lawyer, there’s partnership agreements, there’s commercial agreements, there’s public fundraising and mergers and acquisitions.”
There are also ample opportunities to advise ancillary businesses. In fact, that’s where many predict a huge chunk of the work will be for lawyers. There will be builders, agro producers, technology providers and others that will become involved in the industry and require legal advice of their own.
“When I look at the clients that I have, they’re spending millions and millions of dollars on infrastructure to build up this industry,” Weinsten says. “And this is just step one; this is really at its infancy. This industry is really just beginning and will only take hold within the next one to two years, after the federal government comes out with legislation to legalize the selling of cannabis not just for medical purposes but [also] for occasional and recreational use.”
Barbara Miller, a partner at Fasken Martineau DuMoulin LLP, says her firm is advising a client on the delivery side of the business. Currently, licenced producers ship their products to customers via courier services such as Canada Post and Purolator. “But other delivery services are entering the market,” she says, and they have to follow rules around storage, delivery and insurance.
Some questions have also come from unexpected places, Miller says. Her firm, for example, has received an inquiry from an insurance company about the risks of insuring the cannabis market, asking what happens in case of mould, theft or fire. “There are several insurance companies now entering this space,” Miller says, and the number is only going to grow with legalization of recreational use.
Lawyers working within the Food and Drug Act also stand to gain from pot’s big leap into the mainstream market. McMahon says lawyers will be advising on packaging details for edible products such as chocolate and sodas that contain cannabis. “There will be very strict guidelines, I think in time, about the quantity and quality of products; what’s in there so that there is uniform product packaging,” she adds.
Investor interest in the cannabis industry is a cross-border matter. As pot inches toward legality in Canada, American investors are watching with anticipative interest, says Robert McVay, lawyer at Seattle-based law firm Harris Moure LLP. The states of California and New York, two of the biggest investment sources in the U.S., have not offered investors opportunities to throw their money into the cannabis business. Even in Washington State, which has decriminalized recreational marijuana, out-of-state investors face various limitations, McVay says.
“They [investors] have wanted exposure to the market, but it’s actually been hard for them to find places to put their capital,” McVay adds. “So, [in] Canada, it’s still to be seen what type of limitations there will be on out-of-country investment into the Canadian market; but assuming it’s a relatively open market, I think you have money out there that’s eager to be thrown into this.”
The first movers from the U.S. are those who want to tap into the edible products segment of the business, according to McVay. They’ll come bearing their unique packaging, design and technology, he says, and they’re looking to partner with local growers and producers. American rapper Snoop Dogg is among the first to wade into the Canadian pot market. In February, Snoop announced he had entered into a partnership with Tweed that will allow the Canadian producer exclusive rights to use content and brands from his company, LBC Holdings.
There’s already a connection between Canadian and U.S. companies in this business. Some Canadian companies that haven’t succeeded in becoming licenced producers here have sent their cash down south. They’re investing in extraction technologies and in real estate in the American cannabis industry, according to McVay.
“As the Canadian market on the medical side was kind of starting and stopping, there were a number of Canadian public companies that were raising a bunch of money but weren’t able to really spend it in Canada on the marijuana side,” McVay says. “So there’s actually been a lot of Canadian investment into the U.S. industry, especially here in the West Coast.”
In other cases, Canadian companies were doing well enough in the Canadian medical cannabis business that they sought to expand into the U.S., McVay also says. American interest in the Canadian market is, however, tempered by the fact that, under U.S. federal law, marijuana is an illegal controlled substance. Investors are nervous about putting their money into a cannabis business elsewhere even if they can’t figure out which laws they’re afraid of violating, McVay adds.
“It just feels like an extra step,” McVay continues. “So I think businesses are really interested, but I also think they’re going to be a little bit hesitant before they jump in and start dumping money and technology [into Canada].”
To Szweras, that barrier is an opportunity for plenty of “fascinating” cross-border work. “There are things you can do to get ready and I’ve been working with companies that are looking for partners in this sector. You have a flurry of activity — Americans coming here and Canadians trying to break into the American market,” he says. “There’s a slew of cross-border issues that makes this much more fascinating.”
One of those issues will be anti-money laundering, Szweras says. Even companies that are legally involved in the cannabis industry in the U.S. are violating federal law, he says. U.S. banks are allowed to take cannabis companies as clients if they’re in certain states where recreational use is legal, but banks have to file reports for those clients, Szweras says.
“So the question is, when you have a cross-border movement of money or even a cross-state movement of money, what does that mean? It’s one thing for a Canadian to invest in a marijuana business in the U.S., [but] the question is is it legal to get any money back?” he continues. “There are legal ways of approaching this, but it’s something that’s complex and has to be done very carefully. I think the anti-money-laundering issues are going to keep people busy.”
The opportunities in legal pot may be lush, but not every law firm is rushing to promote its work in the area. John Fowler is president of Supreme Pharmaceuticals Inc., a licenced medical marijuana producer. A lawyer himself, he says when his company was first looking for help from external law firms, many of them told him they weren’t interested. Some firms are worried about offending other clients by facilitating a line of business that many still associate with criminals. Others don’t want to be seen to be promoting the use of cannabis from a moral standpoint. Fowler says things are slowly changing, but some lawyers are still unwilling to show off their work in this industry.
“I’m sure there’s lots of lawyers doing the work, but they keep it private and that’s very telling to me,” Fowler says. “I know a few lawyers who have done reasonably sizable transactions that you’d think would be on their short web site bio but it’s not.”
Hugo Alves, a corporate and commercial partner at Bennett Jones LLP, represents several participants in the industry, including Supreme Pharmaceuticals. His firm decided to pursue this practice area three years ago, he says. “Every firm has a culture; every firm has an outlook. Our firm is hugely entrepreneurial. That’s sort of engrained in our culture,” he says.
When Bennett Jones decided to pursue medical marijuana-related work, Alves says the firm was willing to say, “Look, we trust your judgment to not go and put the firm’s reputation or other clients in a difficult position.”
The stigma around doing work related to cannabis extends across industries. Traditional banks, for example, don’t typically lend to marijuana companies. “Right now, apart from a few small credit facilities provided by Farm Credit Canada and maybe some of the smaller credit unions, there’s really no business of secured lending, traditional services for the cannabis industry,” Alves says.
“As cannabis use becomes integrated from a social perspective, the same way alcohol is not really stigmatized if it’s used responsibly, you’ll see kind of a broader acceptance of cannabis use among some key industry stakeholders, like insurance providers and banks,” Alves adds.
Szweras says the banks are aware of the opportunity the cannabis industry presents, but they want to weigh the risks before getting involved. “They look at it and say, ‘If we piss off one client and we lose one big client as a result of this, is it worth it?’” he says.
As the regulations here in Canada and in the U.S. begin to evolve over time, lawyers say some of the traditional credit providers will enter the industry more readily. The harbingers of change are already here with both banks and insurance companies making serious inquiries about the industry. Weinstein says that, perhaps two or three years ago, “it was almost embarrassing” to be involved in the cannabis business. “Today, there’s very little of that. It’s seen as a cutting-edge, new industry that’s growing and people are very eager about it. I think those who are still looking at it as a taboo are going to miss out,” she says.
Once recreational use becomes federally legal, the reality is that it’s not going anywhere, Fowler says.
“Entrepreneurial firms recognize the opportunity and get into the space now and some of the more conservative firms may miss a good opportunity to grow a business that really isn’t any different from any other federally regulated employer,” he says.
As some law firms watch skeptically from the sidelines, others are restricting their work to advising ancillary businesses wishing to work alongside licenced producers. The bottom line is, Szweras says, “It’s an opportunity for lawyers across all sectors. Anyone who is really serious about this industry should be involved now.”
Building the practice
At Bennett Jones, building the practice took entrepreneurial skills but also the willingness to go the extra mile, Alves says. “I don’t know any entrepreneur that’s built a business that when you talk to [him or her] says, ‘It was pretty easy; every second I was working I got paid for,’” Alves says. “It takes a lot of elbow grease to build a business and that’s also a part of the entrepreneurial makeup.”
If lawyers decide to pursue this area, it will take willingness to invest time into the firm outside of their regular responsibilities, says Alves. “It’s not as if we got into cannabis and abandoned our other practice areas and I came to work every day, tried to build a business and went home. I worked eight or 10 hours doing my law firm work for my other clients and every waking moment that we had outside our responsibilities to the firm was dedicated to trying to build a business in this industry.”
Whether serving the growing cannabis market will be best done in boutique law firms or handled by big law is up for debate. Szweras says all law firms will chase the work, but “I think niche, boutique, entrepreneurial practices will be able to service those clients because they’re going to be able to speak their language and solve problems in a matter that’s practical.” That’s because most participants in the industry will be entrepreneurs and small- and mid-size businesses, he says.
Fowler is less convinced this is a job for boutiques. In the U.S., marijuana-related firms tend to be full-service boutique firms because of the stigma of cannabis use being federally illegal, he says. But “the Canadian boutique model is more geared toward services than industry,” Fowler continues. “So I think I’d like to see more big firms involved in this space.”
Alves expects both small and large players will eventually be part of the business. Just like there’s room for craft beer in the alcohol industry, there will be a part of the market that will gravitate towards small, artisanal producers, he says. “I think there’s room for everyone.”
As a lawyer, Szweras says, it’s an exciting time to be working in this industry. “How often is it that we get to be involved in the birthing of a new industry? That’s the thing I find most amazing.”
Published in Canadian Lawyer Cover Story