Remarks to the Standing Committee on Social Policy regarding Bill 36 – The Cannabis Act

October 11th 2018

Remarks re.: Bill 36, Cannabis Act, Social Policy Committee

Introduction of BlackShire

Good afternoon, my name is Jean Lépine. I am a Managing Director and Partner at BlackShire Capital. Firstly, all of my recommendations are rooted in a commitment to the following three principles:

1) A commitment to the health and safety of consumers, while operating within the legal framework
2) Made in Ontario products and Ontario entrepreneurs
3) Strong support of innovation

Let me tell you a bit about myself before proceeding further.

I have worked in Government at both the Federal and Provincial levels and have worked in the innovative pharmaceutical, beverage alcohol, audio and electronics and children’s media industries before joining a former teammate from the University of Ottawa and entrepreneur, Kevin Reed, the founder of BlackShire Capital to explore investments in private cannabis companies around the world. I have had the good fortune to have lived and worked in Canada, the US and Europe.

BlackShire Capital is a Toronto based private equity firm. A principal investor and asset manager uniquely focused on active investments in private companies in the global cannabis space. Our team includes some of Canada’s top business leaders through an executive-in-residence program and proudly extends into Europe and the US and so far, we have raised and deployed capital in cannabis cultivation operations, beverage and consumer products’ brands and most recently, in cannabis retail operations in Ontario.

In late 2018, we will launch an Israeli Medical Research Fund, and in early 2019, a European Medical Cultivation Fund and a Retail Fund.

Of note, BlackShire is also a founding Member of Ontario’s Independent Cannabis Entrepreneurs. The coalition was formed to represent member companies concerned with the development of policies that help cannabis entrepreneurs succeed and grow in Ontario’s economy.

Thank you for having me here today.

The Legislation

The Ontario Government took the bold step to reverse the previous administration’s public delivery model for cannabis retail.

In our view, the legislative framework introduced through Bill 36 creates a strong foundation for an innovative cannabis economic sector.

Of the many private / public retail models the Government could have adopted, and speaking now as an entrepreneur, we believe the Government has proposed a path forward that creates a fair and transparent regime and one that, on the surface, is positive for cannabis entrepreneurs in Ontario.

As we all know, the regulations will truly bring this legislation to life and so, we will share our views on what Honourable Members and the Government should be mindful of as this legislative mechanism is reviewed by the Committee and ultimately the legislative assembly.

At the outset, this legislation appears to avoid some of perils that the Alberta private model created, perhaps unintentionally, whereby both municipal and provincial governments must approve each retail license application resulting in a burdensome approval process. Based on the latest information available, Alberta has approved 17 licenses and in the city of Calgary, only 2 stores will open on October 17th. As a reminder, Alberta began accepting applications in late March 2018 with the objective of having 250 store licenses approved in the first phase.

The legislation appears to set up a framework that will expedite approvals through a single agency thus giving Government a fighting chance to see stores open by April 1, 2019 and begin the process of eliminating the black market.

That said, there is another major competitive issue that is quietly boiling below the surface. It is meaningful and deserves discussion. Many retail stakeholders are aware that some of Canada’s biggest licensed cannabis producers, some who have and will present to this Committee, some now foreign owned, are stealthily working behind the scenes to ensure they have a position of power in cannabis retail in Ontario.

Public comments have been made that suggest they will attempt to control retail through whatever means they can achieve.

Conversely, when the legislation was announced, the Government’s intention was clear, each LP would be allowed one retail store at their licensed production facility. Much like brewers are allowed a store on their production site.

To manage this thorny issue, BlackShire’s recommendation is that the Committee Members recommend and that Government adopt a zero-ownership rule for licensed producers. Simply put, LPs can’t own any interest in a retail organization other than the operation of an on-site store. This is the simplest and most transparent means to ensure the original intent is preserved and an oligopoly is avoided out of the gate.

Major retail landlords have told us that they are waiting to see how the Government defines ownership and affiliates before releasing available retail sites currently tied up by large LPs.

Our Regulatory Recommendations

It is therefore necessary that the regulations that define this Bill do not create unintentional loopholes benefiting large producers in Ontario allowing them to gain a first mover advantage that will shut out small businesses from this economic opportunity.

As mentioned earlier BlackShire is a proud founding member of Ontario’s Independent Cannabis Entrepreneurs or OICE.

To use a well understood historical analogy somewhat unique to Ontario, OICE is trying to sensitize government officials to the downsides of allowing a Beer Store model to take shape unintentionally.

That retail model is well known to have allowed major brewers to own and manage retail. It wasn’t until the Government intervened and provided access to craft brewers’ products through the LCBO that an innovative craft brewing segment flourished. It is important to point out that the Beer Store is now almost entirely foreign owned.

OICE has developed a set of recommendations aimed to help build a retail model that highlights the three principles I outlined at the beginning. The first recommendation is to:

  1. 1)  Create a prescribed definition for affiliate ownership, to prevent a small number of large companies to dominate the market through affiliate companies. If the Committee and Government can’t adopt a zero- ownership rule, which is BlackShire’s recommendation.
  2. 2)  Ensure the new retail network is available for all growers’ and cannabis entrepreneurs’ products, the government should institute a cap on the total number of retail stores any one retail organization can achieve at 15% of total licenses approved (akin to Alberta). In our view, this construct will encourage innovation and “Made in Ontario” cannabis industry jobs. The third is to:
  3. 3)  Prevent proximity limits for store locations in relation to other stores. Restricting the proximity of store locations to each other will create an oligopoly, allowing large first movers (specifically grocery retailers if they are allowed to become cannabis retailers) to dominate the marketplace. The Bill already includes a public notice period to address any significant proximity issues. The fourth is to:
  4. 4)  Introduce a freer online private marketplace, including the creation of a cannabis delivery licensing class, allowing small businesses to serve remote communities, or municipalities who opt-out that will have less (or no) access to bricks and mortar stores. And the fifth is to:

5) Create an exclusionary list of ancillary products and services that cannot be sold in retail stores – rather than a permissive list of those that can (such as is the case currently for beverage alcohol) – to ensure that innovative products and services, including ones that promote health and safety, can be accessed by consumers.

A Final Thought

One final thought, and while this is not foreseen in the legislation the Committee is examining, I have written about the opportunity for a Canadian jurisdiction to put a stake in the ground and promote itself as the global centre of excellence in medical cannabis research and innovation.

The industry for cannabinoid-based drug therapies is in the early stages of growth.

Recent developments regarding cannabis legalization have directed a spotlight onto the potential health and medical applications of the plant.

Entrants to the industry come from a wide range of sectors, including those looking to bolster existing operations and those who consider cannabis a disruptor to their businesses.

If we look at cities that boast a risk-taking culture, talented, diverse, and imaginative students, a sense of community and one that gives back, access to abundant capital, collaboration with industry and government support, many leading Ontario cities come to mind.

In our view, Ontario has the ingredients needed to replicate Silicon Valley’s tech start-up success.

If, however, a Canadian jurisdiction with the right ingredients doesn’t step up and put a flag in the ground and build a strategy to attract this research community and the entrepreneurship that will come with it, we will see this unique Canadian advantage slip away and likely settle somewhere in California, Washington State, Oregon or Massachusetts where retail design enables a strong research funding base.

Do keep this in mind as you deliberate on this legislation and Ontario’s competitiveness on the world stage.

Thank you for the opportunity to share our views with the Committee and I look forward to answering your questions.