Canada: Ontario Releases Much-Anticipated Cannabis Retail Regulations

Introduction

On November 15, 2018, nearly one month after adult-use cannabis became legal in Canada, Ontario released the regulations under the Cannabis Licence Act, 2018 (Act) regarding cannabis retail in the province (Regulations), and announced that the Alcohol and Gaming Commission of Ontario (AGCO) will begin accepting retail store applications on December 17, 2018.

The Regulations cover a number of areas, including enumerating additional criteria that would make a person ineligible for a retail operator licence or retail store authorization, the permitted proximity of cannabis retail stores to schools, hours of operation for cannabis retail stores, what retail stores can sell and what kind of training certain persons must complete. In addition, and perhaps the most anticipated topic the Regulations cover, is the definition of "affiliate".

The definition of "affiliate"

As discussed in our last article, Ontario's new cannabis retail regime, the Regulations prohibit federal licensed producers, together with their "affiliates", from holding more than one retail store authorization. As many expected, the Regulations have defined the term "affiliate" very broadly. Under the Act and the Regulations, an "affiliate" includes:

• Two corporations in which one is the subsidiary of the other, where both are subsidiaries of the same parent or where both are controlled by the same person (the term "person" encompasses both individuals and corporations);
• A corporation in which a licensed producer owns or controls, directly or indirectly, securities or convertible securities carrying more than 9.9 percent of the voting rights of such corporation;
• Partners in a partnership;
• Persons with substantial interests in trusts or persons who act as trustees of such trusts;
• Members of the same joint venture;
• A person (or group of persons) who own(s) at least 50 percent of the votes to elect the directors of a corporation;
• A person who owns shares of a corporation that have a fair market value of at least 50 percent of the market capitalization of the corporation; and
• A person or group of persons who have any direct or indirect interest that, if exercised, would result in "control in fact" of another person.

In addition, much of the above criteria will apply to persons or groups of persons who are determined to be acting "jointly or in concert," whether they are acting pursuant to an agreement or arrangement or not.

The broad definition of "affiliate" has important implications for licenced producers, because licensed producers, "together with their affiliates," may only hold one retail store authorization under the Act.

However, the Regulations also create material implications with respect to retail operator licences held by licensed producers. For instance, section 7 of the Regulations provides as follows:

Compliance with this restriction may prove a challenge for public companies, which may not be aware of, and cannot control, the purchase of their shares by licensed producers or their affiliates.

The Regulations also impose a limit of 75 retail store authorizations for any single applicant, together with such applicant's affiliates. The Government of Ontario has stated that this number has been set to prevent an inappropriate degree of market consolidation, to promote not only opportunities for small businesses, but also investment in the cannabis retail sector.

Operation and location of cannabis retail stores

While the Regulations permit cannabis retail stores to be open seven days a week, such stores may only be open to the public between the hours of 9:00 a.m. and 11:00 p.m. In addition, no one under the age of 19 will be allowed to enter the store.

The Regulations require that cannabis retail stores be stand-alone stores only. Cannabis retail stores may not be located within another commercial establishment, and such stores must have physical walls separating them from any other commercial establishment or outdoor area. In addition, the areas where cannabis is stored or received by cannabis retail stores may not be shared or accessible to any other commercial establishment or the public.

While the Act only authorizes cannabis retail stores to sell cannabis that was purchased from the Ontario Cannabis Retail Corporation, the Regulations add cannabis accessories and shopping bags to the list of items that cannabis retail stores are authorized to sell. It is important to note that these restrictions on what cannabis retail stores can sell, in addition to the mandated separation of such retail stores from other commercial establishments, create a regime in which cannabis café-type establishments cannot easily exist.

Proximity to schools

The Regulations prohibit any retail stores from being located less than 150 metres from schools, including private schools and federally-funded First Nation schools off-reserve. This setback came as a surprise to many, as the Government of Ontario had previously been critical of the former government's plan for the setback to be 450 metres from schools, citing concerns that a 450-metre setback was too close. Nevertheless, Ontario believes the Regulations will address the risk of youth exposure to the cannabis market.

Additional prohibition on who may be approved for a cannabis sales licence

The Regulations enumerate specific instances in which applicants will be denied a licence, including those previously convicted of cannabis-related offences. Of note, cannabis retailers that have been operating illegally after October 17, 2018 will not be eligible for cannabis sales licences in Ontario.

In addition, the Regulations prohibit the issuance of licenses to individuals or organizations who have been involved or associated with organized crime, or who are not in good standing with the tax authorities.

No cannabis distribution services agreements

The Regulations provide that it is a condition of a retail store authorization that the holder not enter into contracts or agreements with any person or entity for the provision of cannabis distribution services, except for agreements with the Ontario Cannabis Retail Corporation. The Regulations do not provide a definition of "cannabis distribution services," so it is unclear, at this time, what kinds of commercial activities between licensed producers and Ontario cannabis retailers are prohibited.

What is "the public interest"?

Under the Act, the AGCO may take the public interest into consideration when determining whether to grant a retail operator licence, a retail manager licence or a retail store authorization. According to the Regulations, the only matters that may be considered "matters of public interest" are: (i) public health and safety; (ii) protecting youth and restricting their access to cannabis; and (iii) preventing illicit activities in relation to cannabis. These categories, while few in number, clearly permit broad interpretation and may leave applicants on unpredictable ground pending further guidance from the AGCO or the courts.

Training requirements

Anyone who holds a retail store authorization, a cannabis retail manager license, and anyone who is an employee at a cannabis retail store, is required to complete approved training courses or programs regarding the responsible sale of cannabis, record-keeping and reducing the risk of cannabis being diverted to an illicit market.

Cannabis retail seal

All cannabis retail stores will be required to prominently display the newly-released cannabis retail store seal in a conspicuous place that is visible from the exterior of the store. Failure to displace the seal will result in revoking the retail store authorization for that store.

Dentons' analysis

The release of the Regulations has created a maelstrom of controversy and excitement. As many expected, the definition of "affiliate" was drafted broadly and places clear limitations on the ability of licensed cannabis producers to have an active role in the Ontario retail regime. We note that there are still certain ambiguities within this definition, and we expect the Ontario government will release additional guidance over the coming weeks regarding the ability of licensed producers to maintain an interest in retail participants, including by way of a franchise or management services model. 

The restrictions on retail stores being located within a commercial establishment, and selling anything other than cannabis and cannabis accessories, will also preclude established retail outlets from implementing recreational cannabis sales into their current operations. We expect this was met with disappointment by several established retail outlets that were looking to integrate cannabis sales into existing models.

Additionally, with less than a month until initial applications may be submitted, many historical and new market participants will be looking to move very quickly to ensure a "first mover advantage" by getting their applications in the queue on the first day. However, much is still unknown regarding the actual application process, and the government has indicated it will be publishing a Cannabis Retail Regulation Guide, which will have comprehensive information regarding the application process. At this point, those who intend to enter the Ontario retail sector need to ensure they have a sufficient level of preparedness such that they can move quickly once the final details are released. 

Dentons' leading Cannabis group will continue to work closely with existing and new industry stakeholders who intend to participate in the Ontario cannabis retail regime, and provide frequent insights on these important developments.

About Dentons

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