Speaker's Corner: Canada’s medical marijuana industry offers a range of business opportunities

Public opinion in North America related to the consumption of marijuana for both medicinal and recreational use has evolved greatly in the past few years. In the United States, recreational marijuana is now legally available in Colorado and Washington. Voters in Alaska and Oregon voted on the same issue last week. The New York Times recently called for ending the federal ban on marijuana. Medicinal marijuana is now available in 23 American states and in 2014 is an industry estimated at $2.6 billion.
North of the border, possession of marijuana is still a summary offence, but the government has approved it for medicinal use since 2001. About 40,000 Canadians are registered users of medical marijuana. Health Canada expects this number to increase tenfold within the decade. Canada’s medicinal marijuana market is worth approximately $120 million and is expected to rise to $1.3 billion by 2024. The industry is already attracting investors from Canada and abroad.
The government repealed Canada’s marihuana medical access regulations, which had governed access to medicinal marijuana since 2001, on March 31, 2014, amid concerns about security and quality control measures, the availability of marijuana to patients, and the illegal marijuana industry. The marihuana for medical purposes regulations, which came into effect on June 7, 2013, now govern the control, production, distribution, and possession of medicinal marijuana in Canada.

The new regulations brought changes with respect to how Canadians access medicinal marijuana. Existing authorizations to possess, designated-person production licences, and personal-use production licences expired on March 31. As a result, individuals must now dispose of marijuana obtained under the marihuana medical access regulations, cease marijuana production, and notify Health Canada that they have taken these actions.

Under the new regulations, users must obtain a prescription from an authorized health professional and purchase the product from licensed producers. In response to an application challenging the requirement to obtain marijuana from a licensed producer and a subsequent Federal Court injunction, Health Canada is treating certain existing licences as extending beyond March 31.

More recently, Health Canada proposed additional amendments to the new regulations. It will create a prescription-monitoring program to monitor the use and prescription patterns of doctors and other health-care professionals who prescribe marijuana for medical purposes. The rationale of the amendments is to collect information that will improve the ability of licensing bodies to monitor the professional practices of their members with respect to the use of marijuana.
The new regulations did not adopt a dispensary model and has limited the methods of distribution for medicinal marijuana. Under the new framework, the only way to obtain medicinal marijuana is through licensed producers authorized by Health Canada. These licensed producers must ship marijuana directly to clients or their health-care practitioner. Licensed producers are not able to operate storefronts or provide medicinal marijuana to dispensaries or compassion clubs for distribution. Instead, producers will distribute all dried marijuana under the new regulatory framework via secured shipping methods.

Dispensaries have historically operated as an act of civil disobedience and remain officially illegal under the new regulations. As of 2013, there were approximately 50 dispensaries operating in Canada serving approximately 30,000 patients. Dispensaries provide individuals with community-based support, knowledge about uses of medicinal marijuana, and alternative access to various strains and routes of administration. Although not incorporated into the legal framework, police have generally tolerated well-established dispensaries governed by best practices. However, it remains unclear how police will respond to these dispensaries under the new regulatory regime.

The new regime leaves open opportunities for dispensaries to convert to educational resource centres that no longer dispense marijuana but may continue providing information, education, and referrals. Alternatively, dispensaries may begin transitioning to the new framework by becoming licensed producers themselves. As a licensed producer, they could legally continue producing and distributing medicinal marijuana. However, even as a licensed producer, dispensaries would still not be able to dispense marijuana on-site, again limiting their ability to provide a community-based model of care for patients.
Concerns remain from the compassionate community on the lack of patient care, community support, and education that is available under the new regime as it does not recognize dispensaries or allow for marijuana derivatives to be provided to patients. In 2011, the Canadian Association of Medical Cannabis Dispensaries was created to represent dispensaries nationwide. It actively participated in Health Canada’s stakeholder consultation process on the new regulations but was ultimately unsuccessful in getting dispensaries recognized as legal providers of medicinal marijuana. The association continues to support the existence of dispensaries and has put in place a certification process with the hope that uniform best practices and self-regulation will be a positive step towards the future integration of dispensaries into the current legal framework.

Despite the Federal Court injunction, registered users will soon likely need to purchase medicinal marijuana from licensed producers. That is certain to generate significant activity in Canada’s medicinal marijuana market as issuers seek licences and begin operating. There are several steps to obtaining a licence.

Prospective applicants must address five key areas in their applications:
•    Site: Purchase and lease of a suitable location, obtaining relevant licences and sourcing security equipment, location, and other information.
•    Records: Standard forms, preservation of records and method, privacy concerns, recall procedures.
•    Product: Cost considerations, production quantity and capacity, microbiological standards, labelling and packing requirements pursuant to food and drug regulations, activities involved.
•    Personnel: Security checks and clearances, biometric scanning, supervision, and authorized individuals.
•    Notification: To local government, police, and fire authorities of proposed activities.

Producers must also designate qualified quality assurance people responsible for the quality control of the marijuana and submit a report on their qualifications and the regulatory compliance of the buildings and equipment they will be using.

Under the new regulations, the minister must issue a licence after examining an application as long as there are no grounds for refusal. Grounds for refusal include general technical ineligibility, falsified documents, inadequate security measures, previous nefarious conduct with respect to controlled substances, and failure to produce security clearances.

Before the minister will issue licences, Health Canada verifies compliance with the new regulations’ security requirements and its directive on physical security requirements for controlled substances through a pre-licence site inspection. It also verifies the quality assurance report at this inspection. The licence is renewable annually and allows for the production of marijuana and the operation of the business.

Health Canada’s healthy environments and consumer safety branch’s office of controlled substances monitors compliance and enforcement. Licensees must maintain adherence to the new regulations and are subject to a matrix of municipal, provincial, and federal laws. They include provisions under the Food and Drugs Act (for advertising, labelling, manufacturing, and inspection), the Controlled Drugs and Substances Act (for inspections) and the narcotic control
regulations (for advertising).

As the commercial marijuana industry grows, it is raising capital in ways similar to other innovative industries, including clean technology and renewable energy. Interest appears to be strong with about 900 companies having submitted applications to Health Canada for licences under the new regulations as of June 2014 and approximately 25 new applications coming in weekly. Issuers looking to enter the market can raise funds in the following ways:

1.    Prospectus: Issuers can raise capital by issuing a prospectus containing a detailed disclosure of the business and the securities they are offering. Unlike issuers in the natural resources industry, prospective issuers have no specific disclosure obligations and there are no requirements regarding specific technical reports stamped by a qualified person. The drawbacks are that issuing a prospectus can be an expensive and time-consuming process that might be impracticable for smaller issuers and entrepreneurs.

2.    Private investment: Ontario issuers under the Ontario Securities Act’s accredited investor exemption can raise funds from high-income individuals or those with substantial assets. This exemption allows high-income individuals or certain related parties to the company to invest directly in a private company while bypassing the prospectus requirement. Similarly, private companies can also raise funds through the minimum $150,000 investment exemption available to investors.

    The Ontario Securities Commission has recently proposed four new exemptions to raising capital generally that would be available to businesses in this industry should they get approval. They include an offering memorandum exemption through which issuers would be able to raise capital after providing comprehensive disclosure to investors; a family, friends, and business associates exemption that would enable startup issuers to raise capital within the personal networks of their principals; an existing security holder exemption through which issuers listed on the Toronto Stock Exchange and its venture exchange as well as the Canadian Securites Exchange could raise capital from existing security holders; and a crowdfunding exemption whereby issuers could raise capital from investors through an online platform registered with securities regulators.

3.    Stock exchange listing: There are currently 31 medical marijuana companies listed on Canadian exchanges. Issuers can seek a listing on an exchange with the most accessible options being the Canadian Securities Exchange or the TSX venture exchange as a Tier 2 industrial, technology or life sciences business. The Canadian Securities Exchange, which currently lists 13 marijuana companies, is the most flexible board for small issuers at an early development stage. While both exchanges have minimal business qualifications or restrictions relative to the main TSX board, the cost of an initial public offering or a listing can eat into the funds companies raise.

The commercial medicinal marijuana industry in Canada is in its infancy and is offering an early advantage for those willing to take the risk whether by raising capital privately or going public. As the traditional pharmaceutical market faces patent expirations and decreasing research and development budgets, one avenue for an exit is selling to pharmaceutical companies as they increasingly focus on acquiring specialty biotechnology businesses to spur growth in new markets. Potential risks include the difficulty of predicting demand and competition until licensed commercial producers commence operations under the new regulations. Producers should also consider protecting their patents and trademarks, plant breeder rights, trade secrets, and production and operational techniques.

Nadim Wakeam is chairman of the mining group at Blaney McMurtry LLP with a focus on corporate and securities law. Patrick Gervais focuses on a range of commercial matters at Blaneys. The authors would like to thank Zachary Garcia and Jessica Weik, both students at Blaneys, for their assistance with research for this article.

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