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article image'Big Cannabis' opens a backdoor to Ontario's pot lottery winners

By Karen Graham     Feb 15, 2019 in Business
Ontario - Cannabis firms with Limited Partnership (LP) support have started setting up partnerships with winners of the Ontario retail pot lottery - creating a grey area that may be a problem for the Alcohol and Gaming Commission of Ontario (AGCO).
The AGCO has laid out strict rules that govern the cannabis retail market in Ontario that include ownership rules barring the 25 individual lottery winners from entering into any kind of revenue-sharing agreements with outside entities that would result in the winners ceding control of their cannabis stores, reports the Financial Post.
On Wednesday, three Canadian marijuana firms — Choom, and Inner Spirit Holdings in partnership with licensed producer (LP) Newstrike Brands reached agreements with lottery winners to - as they say - "aid in the establishment of a retail store in Ontario." High Tide, with two agreements from lottery winners, is also working to get into the Ontario pot market.
Chris Bogart, the president, and CEO of Choom confirmed to Cannabis Investing News that the cannabis retailer had secured a partnership with an undisclosed winner of the Ontario lottery.
“We are thrilled that the lottery winner chose Choom to help them successfully open and operate a retail cannabis store in Ontario,” Bogart said.
Newstrike and Inner Spirit said they have no financial ties with the lottery winners they have struck a deal with. Instead, they will be allowed to set up an “Up Cannabis experiential hub” in the store of the lottery winner. Inner Spirit also "indicated" it will help with the construction of the store, license its own brand and “provide expert product training.”
Brenna Boonstra, the director of quality and regulatory consulting Cannabis Compliance, told the Investing News Network (INN) that talk of these sort of partnerships and “buying into a retail lottery winner” were widely held in the lead-up to the lottery, meaning it is totally expected.
“It was no secret that deals were being tabled in the week that our retail operators had to complete their retail operator license application,” she said.
Raj Grover, president, and CEO of High Tide said in a press release announcing the first deal the undisclosed lottery winner was “looking for a strong partner.”
As for High Tide, Canadian LP Aurora Cannabis owns an investedment interest in the company. In a press release, Aurora Cannabis told its shareholders "The pace of achievements by High Tide in such a short period of time reinforces the value of our strategic investment. We're pleased with the rigor Raj and his team has shown in strategically allocating our capital to fuel their growth initiatives and we look forward to what High Tide will achieve in this important segment of the Canadian consumer cannabis market."
What the Ontario government has to say about LPs
The Ontario provincial government dictates that Canadian LPs are allowed only one retail location if the company has a facility in the province. Other than this, LPs are not permitted to participate in the full retail market.
This is where the whole situation is getting sort of sticky, and creating a grey area as far as the legality of the deals that ACRO is going to be dealing with. Boonstra seems to think that ACRO will be able to "take into account irregularities or oversee the role of LPs in these transactions." She adds, “I would think we can trust the AGCO to do their due diligence and enforce the rules. We have to."
There is another side to this issue. Eric Foster, a Partner at law firm Dentons LLP, who is currently involved in helping a number of lottery winners enter into agreements with outside entities said, “I have honestly never seen anything so silly in my entire legal career."
“I have a challenge understanding why some arrangements are acceptable to the AGCO, and why some aren’t. I know that a number of winners have received very nasty letters from the AGCO threatening to disqualify them because of the retail structures they have proposed,” Foster said.
So far, AGRO has only disqualified one lottery winner - Gary Hatt - under rule 2(b) of the lottery regulations, which states that winners are “not permitted to change their applicant type, ownership and/or corporate structure in such a way that would result in a change of control.”
More about Ontario, pot lottery, Alcohol and Gaming Commission of Ontario, cannabis companies, legal questions
 
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