Going to pot: Building a business in legal marijuana

  • February 01, 2015
  • Doug Beazley

Once there was a federal government with a drug problem. Publicly, it was fighting a war on drugs. Privately, it knew it was losing both the war and the argument.

A government commission recommended that the drug be decriminalized for recreational use. And tobacco companies — anxious to co-opt what they saw as a threat to their core market — began exploring the idea of getting into legal weed.

“The only real threat to our business is that society will find other means of satisfying those needs,” read one confidential memo from an unnamed tobacco industry executive.

The government in question was Richard Nixon’s administration; he ignored the 1972 presidential commission’s recommendation and opted to keep marijuana illegal. But the parallels between where the American drug conversation was 43 years ago and where Canada’s is right now are striking.

In the U.S. in the 1970s, many people believed legalization was just around the corner and that Big Tobacco would be in the best position to exploit a recreational trade. In Canada, thanks to the Harper government’s decision to overhaul the medical marijuana system last year — shifting it away from allowing patients to grow their own to granting production licences to large, secure growers — the bones of a commercial recreational industry might already be in place.

And that worries Eugene Oscapella, an Ottawa lawyer and a founding member of the Canadian Foundation for Drug Policy. He supports legalizing and regulating marijuana as the best option to reduce the harms associated with the black market, but he fears that by refusing to at least contemplate the ground rules for a recreational market now, Ottawa could end up letting the private sector shape the trade.

“Right now the product is in the hands of a stupid, violent, greedy black market that’s causing a lot of death and damage,” he says. “But as soon as you get large commercial entities involved in any commodity, governments find themselves under heavy pressure to increase the availability of the product. And that’s what we risk seeing happen with cannabis.”

Where Oscapella sees threat, others see opportunity. Many medical marijuana startups making stock offerings for venture capital last year saw their share values explode — driven by a combination of calculation and gambler’s instinct. Medical marijuana is expected to become a multi-billion dollar industry. Many observers attribute the frenetic activity on the medical marijuana market in part to speculation — investors betting medical producers would be in a position to dominate a future recreational market, or would be ripe targets for takeovers by tobacco firms.

“Could these businesses form the base of an adult-use market? Possibly,” says Michael Lickver, an associate at Bennett Jones in Toronto. He and Hugo Alves, a partner at the firm, have been building up what they believe is the first “holistic” legal service specializing in medical marijuana startups.

“It would make sense. They’d be the incumbents. They’d be the ones with the state-of-the-art, secure facilities.”

Alves and Lickver see themselves on the ground floor of a wholly new field in legal services. Because the industry is both very young and politically contentious, says Alves, it pays to specialize.

“I’d compare it to start-ups in renewable energy except for the fact that marijuana is much, much more politically sensitive,” Alves says. “This is, and it’s going to be, a highly regulated field and a lot of people getting into it don’t really know what they’re getting into. As the government learns more about how the market is actually working, the regulations will be fine-tuned. So it’s very difficult for an applicant to navigate alone.”

The service that Alves and Lickver offer extends from the licence application to political intelligence — the firm has a public affairs section in Ottawa staffed by former high-level bureaucrats who can advise clients about the political context of marijuana law.

“One thing the federal government is very worried about, for example, is the diversion of product into the black market,” says Alves. “They want a closed loop from producer to consumer — no leakage. If you understand that, you’ll do a better job of making sure the application works. The last thing any government wants is an embarrassment.

“Our approach is to view the patient and the producer as a hub, with a lot of spokes radiating out. For instance, if a client is looking for seed-to-sale software, we can point them in the direction of a product which actually works in the Canadian regulatory context.”

The problem with marijuana as a commercial product is that it’s quite cheap to grow; the high street price of marijuana reflects its illegality, not its production cost. Back in 2002, Marc Emery — the self-styled “Prince of Pot” — voiced the ambition to become the “Martha Stewart” of a recreational-use marijuana marketplace, specializing in ancillary merchandise.

Oscapella says he dreads the growth of a recreational-use market dominated by corporations using their vast resources to lobby Ottawa to keep the laws on use, production and advertising as loose as possible. Cannabis-laced food products, prime-time advertising — it’s all coming, he says, unless the federal government takes steps to shape the industry now.

“It’s just the nature of capitalism,” he says. “Once this becomes a large-scale commercial concern, the businesses involved will do what they can to build the market and push into new areas. If they can teach your grandmother to take dope for her arthritis, they’ll do it.

“The government has been stumbling around blind on this one. Their pattern so far has been reactive — reacting to the courts, to how the product is being used. It’s no easy thing to allow private sector entities to control the supply without letting them control the agenda.”

Alves and Lickver, meanwhile, say they don’t see corporations capturing the agenda in a recreational-use market. While they foresee a recreational market allowing in smaller players with lower security requirements — “artisanal” growers, in a sense — they believe the basic framework of the medical use market will keep things from getting out of hand in Canada.

“Any adult-use marketplace is going to be based also on a framework of controlled access and production,” says Alves. “You’re going to have possession limits, you’re going to have age of use limits. It would be something like the way alcohol is regulated.

“In other words, it’s not going to be a free-for-all.”

Doug Beazley is a journalist based in Ottawa.