Navigating the Legal & Policy Environment for Cannabis Start Ups

Understanding the new legal and policy environment for the sale of cannabis is vital to ensuring sustainability of cannabis start ups, and the regulated cannabis market.

This article builds on my recent experience helping a client navigate the difficult terrain of branding strategy for their prospective cannabis retail store. The article is intended to introduce issues of branding, and marketing in Bill C-45 and the cannabis sales licensing process established through Alberta's Bill 26, and the Gaming and Liquor Amendment Regulations released on February 16, 2018. Other requirements of the provincial application system, such as criminal record checks, will also be introduced.

Bill C-45 (The Federal Legislation)

The passing of Bill C-45 will make cannabis legal to adults over 18 in Canada when it passes sometime this summer.

The Bill places broad restrictions on marketing of cannabis that in other sectors of the economy, including sale of alcohol, are largely overlooked and common place. Section 17(1) of the Bill prohibits the promotion of cannabis by communication “about its price, in a way that appeals to young people, by means of testimonial or endorsement, by means of depicting a person, character or animal whether real or fictional, or by presenting it in a manner that evokes positive or negative emotion about a way of life such as one that includes glamour, recreation, excitement, vitality, risk or daring.”

Similarly, cannabis retailers will not be able to offer any price promotions, games or lotteries to attract customers to their product. Section 24 prohibits providing cannabis, (or a cannabis service or accessory) for free or through a game, draw, lottery or contest, if it is provided or offered to be provided as an inducement for the purchase of cannabis or a cannabis accessory.

The same broad restrictions apply to packaging and labeling. Section 26 prohibits a person that is authorized to sell cannabis to sell it in a package or with a label that 'could be appealing to young persons'; (b) that sets out testimonial endorsement, (c) that sets out a depiction of a person, character or animal, that evokes positive or negative emotion (d) that contains false or misleading impressions (re value, quantity, composition, strength, etc.).

Bill 26 and Licensing Requirements (The Alberta Rules)

The provincial rules, regulations, and policies, specifically set out the process of licensing of sales of cannabis in the province of Alberta. As has been widely reported the province is accepting private sales of cannabis through store fronts, but will be controlling online distribution through the Alberta Gaming and Liquor Commission. Bill 26 amends the current Alberta Gaming and Liquor Act. This means that most of the rules regarding liquor licensing apply to cannabis licensing, nonetheless, there also significant additional regulations dealing with cannabis licensing. Important issues to be aware of include the criminal record check requirements, and several issues pertaining to business planning and real estate need to be organized prior to an application being submitted to the Board.

Retail Cannabis Application Process

The Application process is detailed in the Applicant Requirements Handbook and aspiring licensees would be well-advised to review the handbook in detail. Critical issues in addition to the criminal record check that aspiring applicants should be aware of include the significant application fees, architectural and zoning requirements, corporate structuring, premises requirements (ie: sale area, shipping/receiving, storage, security), and ownership/lease agreements related to the proposed commercial space (the storefront). The Application process can be broken into three elements:

1. Criminal record check,

2. Plan and business structure,

3.Ownership/lease of commercial space and development permitting.

At first glance it appears that step 1 and 2 occur simultaneously, in that eligibility for a license is determine according to the criminal record check and the business plan/organization. Once eligibility is determined the Board also requires a copy of the lease agreement or certificate of title for the commercial space and zoning approval from the municipality.

Step 1: Criminal Record Check

The Gaming and Liquor Amendment Regulations set out the test to be applied to criminal records check. This test applies broad discretion to the Board to determine eligibility. Reg. 10(2) states A person fails to pass a records check if the person at any time has been charged with or convicted of an offence (Criminal Code of CanadaControlled Drugs and Substances ActIncome Tax Act) and, “in the opinion of the board, the offence is sufficiently serious that it may detract from the integrity with which gaming activities or provincial lotteries are to be conducted or may be detrimental to the orderly or lawful conduct of activities authorized by a cannabis license.” As such, the possession of a criminal record is only one aspect of the test, the second is whether that record would “detract from the integrity” of the Board or be "detrimental" to to the lawful sale of cannabis. At first glance, this appears to be a broad test, though it may turn out to be relatively good news for those that have minor convictions related to cannabis.

Step 2: the Checklist (business planning)

Step 2 or the planning step (which occurs simultaneously with step 1) requires the deposit of $3000, payment of an application fee of $400 and license fee of $700. It is unclear whether the license fee and deposit will be refundable. Other requirements include submission of a floor plan of the proposed premises, site plan, and offer to lease from a prospective landlord, as well as corporate particulars and documentation related to acquisition of cannabis products.

Step 3: Ownership and municipal Approval

Step 3 occurs once the Applicant has been deemed eligible by the Board by passing the criminal record check and planning requirements. At this stage the proposed premises must be secured to meet the requirements of the regulations including those pertaining to point of sale area, shipping/receiving, storage, and security. The prospective licensee must have an executed lease agreement of the acceptable commercial space, or certificate of title, and must have the proper municipal development permit.

It is worth noting that that neither the City of Edmonton nor the City of Calgary have passed bylaws related to cannabis zoning or development permit requirements.

Separate Space Requirements

According to Policies 3.1.1 to 3.1.4 a retail cannabis store must be separate from any other business. There is a list of factors to assist the Board in determining the relationship between two entities but basically a retail cannabis store cannot be part of another store which precludes a current cannabis accessory store or liquor store from having a cannabis section.

Premises Requirements

Policies 3.2.1 to 3.2.10 require a cannabis retail space to be located more than 100 meters from a provincial healthcare facility or school, or parcel of land designated for school use. (Note: this requirement may be varied according to municipal zoning bylaws not yet in place). A retail store must also included designated spaces for sales, separate entrance/exit, receiving, and storage.

Physical Security Requirements

Policies 3.3.3 to 3.3.11 deal with security of the premises, and require, among other things, that a retail store contain a professionally installed and monitored security system for the premises that included detectors for tampering or entry points, motion detectors, panic/robbery button. The policy also requires that a digital camera system be installed that operate 24 hours and include coverage of point of sale, receiving, customer areas, and storage rooms.

Store Names and Signs Requirements

Policies 3.4.1 to 3.4.8 require that the business name to be prominently displayed at all public access points. Signage must be in ‘good taste’ and not depict a lifestyle, endorsement, person, character or animal. Signage may not promote intoxication. Terms such as, but not limited to “chronic”, “stoned” or “high” are not permitted. Graphics may not appeal to minors, show the use of cannabis, display intoxication, display a cannabis product or accessory, display a price or price advantage, or display a cultural or sporting event.

Conclusion

The proposed federal and provincial regulatory environment for the sale of cannabis is rapidly coming into view. Aspiring Cannabis businesses will be able to begin submitting licensing application as early as March 6, 2018. This is a heady time, and the rush is on, but Applicants should be planning their trademarking, branding, and marketing strategies well in advance of submitting an application to ensure all aspects of their business will be in compliance once they set up shop in what is sure to be a fiercely competitive market.

The most significant limitation on the branding/marketing plan of aspiring licensees is that they must ensure their business and brand identifiers are in compliance with section 17 of the Federal legislation and provincial regulations and policies as detailed above.

In terms of the licensing process, the AGLC Board has broad discretion to determine eligibility, which at present, may be the biggest source of uncertainty for Applicants that have had run-ins with the Canadian legal system. It may be possible to deduce that possession charges will get the pass while trafficking convictions will not, but beyond that there is a vast spectrum of individual circumstances that might be weighed in assessing whether an Applicant's eligibility would detract from the integrity of the Board or be detrimental to the lawful sale of cannabis in this province.

The other steps of the application process are matters of business planning, and commercial leasing or real estate negotiation. A strong marketing strategy, and business plan (and adequate financing) provide would-be applicants the tools to meet the, not insignificant, costs of setting up, and operating, a retail cannabis store. In short, a business plan and marketing strategy should be a high priority for aspiring licensees.

In sum, the regulatory environment that is rapidly creeping up around retail cannabis can impede even the strongest entrepreneurial spirit. This legal environment is a significant obstacle to aspiring licensees, and is likely designed as such. Nonetheless, every cannabis business person from Bay Street-backed chains to ‘craft’ retailers are at at the same starting line. Understanding and anticipating the rules of the game will be invaluable to success in the new regulated cannabis market. For those that can commit the resources and secure the acumen to organize a strong legal and business strategy, this promises to be an exciting and potentially lucrative moment in the history of cannabis in Canada and Alberta.

 

-Elliot H. Bridgewater

Elliot Bridgewater