A net of attorneys, advisers, investors and entrepreneurs are operating round the clock to design and ease complicated deals between most of those 25 mostly unknown winners of the Ontario retail cannabis lottery and also entities which believe themselves veterans of the cannabis sector that are intent on engaging in the state’s cannabis retail platform.
But structuring these prices is proving to be more complex than first thought, given strict ownership requirements laid from the Alcohol and Gaming Commission of Ontario (AGCO) that stop lottery holders out of ceding any sort of control over the future possession of a cannabis retail shop at least before the lottery interval is finished in December 2019.
“There are lawyers that are contacting us saying they have clients looking to do a deal, and if we might know a lottery winner. And then you have lottery winners who want to sell their licence, but now realize they can’t just do that, they have to have a role in running the business,” stated Rami Chalabi, a partner at McCarthy Tétrault’s cannabis team
“So we are trying to figure out ways to help where we are onside with regulations,” Chalabi clarified.
On Jan. 12, Ontario declared the 25 champions of its own cannabis retail lottery, that had before Jan. 18 to fill out an application for a retail permit, which upon receipt could permit them to start establishing a bricks-and-mortar shop in a designated area of the state.
A huge majority of the lottery winners were sole proprietors, however the AGCO’s rule of possession effectively suggests that these folks won’t be permitted to sell their licences (once received), enter into a franchise arrangement that could see somebody else conduct the cannabis store, or enter into any sort of venture that could see them discuss or hands over control to some other thing.
“The AGCO has specified three things that I think many people were not prepared for: you cannot change the name of your business, the structure of your business and who controls your business,” clarified Brenna Boonstra, that manages the retail licensing team in Cannabis Compliance Inc., a cannabis consultancy. “If you’re a sole proprietor, no one can buy equity in your business, so you cannot take on partners.”
“The AGCO has given three things many individuals weren’t ready for: you can’t change the title of your company, the arrangement of your company and that controls your organization.” Brenna Boonstra, Cannabis Compliance consultancy.
The issue that attorneys and advisers are attempting to work out, based on Boonstra, is how can an entity who didn’t win at the lottery gain from a cannabis retail permit?
Abi Roach, the creator and proprietor of Hot Box Café at Toronto, Canada’s longest surviving cannabis couch, calls for the lottery procedure “ridiculous” since “most people who put their hat in the ring just wanted a golden ticket to get rich quick.” Roach states she and her staff at Hot Box had their floor plans, security programs and staff set up months ago in anticipation of engaging in the recreational industry. This was prior to the lottery system was declared.
“I’ve spent 20 years in this business and now I have people calling me saying do you want to buy in? They don’t understand the fact that as a sole proprietor you cannot change the structure and ownership of the company. So what can I really do at this point?” Roach stated.
Abi Roach: “Most people who put their hat in the ring just wanted a golden ticket to get rich quick.” Peter J. Thompson / National Post
An alternative for individuals like Roach, based on Boonstra, would be to strike some sort of revenue-sharing arrangement using a lottery winner, in exchange to the experience on conducting a cannabis shop.
“I’m actually seeing quite a few revenue-sharing agreements being set up, deals that are not related to ownership and equity. For example, someone who has a lease on a location suitable to open a cannabis store, could enter into a revenue-sharing arrangement with a lottery winner,” Boonstra clarified. “But again, ‘control’ is a complex legal definition so you have to make sure the deals that you make are somehow not related to ownership and equity.”
Real estate agent Daniel Sax filed a lottery application, didn’t appear victorious, but then got contacted by a range of parties working with lottery winners that had been interested in striking some sort of deal. Sax runs Sensi Properties, a property investment company which operates with licenced manufacturers to scout out buildings and places acceptable for cultivation. At one stage, Sax asserts he was near “tying up 20 properties” in expectation of Ontario’s cannabis retail market opening upward.
However, after three times of that which he predicts “complete mess and chaos” he chose to give up about building a bargain with almost any lottery winner entirely.
“This whole process has been overtaken by greed. People are asking for millions, and so to me, the deals that I see being done are not economically viable. Absolutely not a sound investment decision,” Sax said. He declined to disclose details of exactly what transpired between him and a range of lottery winners. … the bargains that I see being performed aren’t economically viable. Definitely not a sound investment decision.” Lottery applicant, property agent Daniel Sax.
Chalabi, also, confirmed he knew of bids led to lottery winners which ranged between”$5 million and $7 billion . )
“You can not market that license now, however there are those that would like to pay and that are lining up to enter a position that will permit them to become a part of the market later on,” Chalabi said.
David Phillips, the former president of the Ontario Cannabis Shop, considers the AGCO was very clear in the language they’ve used all together when it comes to the possession and management lottery winners should have over a upcoming cannabis shop.
“But it seems that there is now a lot of creative thinking going about to determine ways that novel partnerships can be entered into. My advice to lottery winners is, be extremely careful as to how your lawyers and consultants structure any deal because the AGCO will apply very rigorous scrutiny and they are well-equipped to do so,” Phillips advised the Financial Post.
Ontario’s cannabis lottery interval ends on Dec. 13, 2019 — then point, the provincial government has stated that it’d “open up” the retail permit application procedure. There are no definite rules how precisely that process will operate, but the possession guidelines spelled out by the AGCO technically just apply provided that the lottery interval is set up.
“I think the way some people are rationalizing it is that if you enter into a deal with a lottery winner right now, you can have terms that say ownership and control remain with the winner until the end of the lottery period, then we renegotiate,” stated Boonstra.
Sax, however, claims that he Can’t comprehend why somebody would invest a lot in an arrangement which may fall apart if the “government changes their mind on a whim.”
“You have to navigate a partnership with X number of parties, in a very tight frame of time, to maybe make money in the future subject to what the Ford government wants? I’m happy to sit back, have my popcorn and watch this mess unfold.”