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Cannabis Lottery System Fails Investors: Ontario 2019

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Many prospective cannabis business owners were disappointed by the Alcohol and Gaming Commission’s (AGCO) lottery that took place on January 11, 2019.  The lottery’s 25 winners across Ontario are now in a position to apply for a cannabis retail license. Of these, five were allotted to Toronto.

So what’s the problem? The winners of the lottery were not based on merit. Instead of opening the lottery to those who had already made a significant investment, signaling their serious intent and business chops, they threw the lottery open wide to everyone and anyone. Many who entered the lottery were so unprepared, they failed to qualify to proceed to the next phase of the lottery.

17,000 Expressions of Interest In Ontario

In Ontario alone, there were 17,000 Expressions of Interest in the lottery. Over 64% of these did not even take the time to incorporate themselves, including all of the five winners from the GTA. In comparison, many serious contenders, including my clients, spent tens of thousands of dollars on business plans, security plans, site plans, architects, legal fees, and lease deposits. Yet, despite their readiness,  they had very little chance of winning among a pool cast so wide and indiscriminately.

Those who won the AGCO lottery must proceed to the next step: apply and be vetted by the AGCO for a license. Many will not pass the difficult vetting process, especially with having to check all the boxes before the looming deadline of January 25, 2019.

Lottery Winners Must Satisfy Stringent Requirements

To proceed to the next phase, lottery winners must be able to pay a $10,000 application fee and undergo a criminal, employment and financial 10-year background check. The government has also asked that applicants submit a $50,000 standby letter of credit. If the applicant fails any of these requirements by January 26th, the AGCO will select another applicant off the waitlist, and the 2-week process will repeat itself.

A Better Approach to Vetting Applicants

What would have been the smarter approach? The Ontario government should only have allowed lottery applications to be submitted by those who qualified through a merit-based system. This might include demonstrating preparedness to pass the financial, criminal, and employment vetting process, in addition to other indicators, such as having secured a retail location.

Had the government selected only from prepared applicants, I believe that approximately 1000 Expressions of Interest would have been submitted, instead of the 17,000 that inundated the government. The AGCO could have further vetted the applicants by asking for a $10,000 application fee in the first phase. Instead, the government asked the lottery winners to submit a $10,000 application fee; however, many of them are unable to meet this financial hurdle. If the lottery winners were drawn only from those demonstrating preparedness, financial and otherwise,  all those selected would have been in a position to proceed.

This process has not only been hurtful to legitimate investors, I don’t believe the government will achieve its objective of having 25 pot stores open by April 1, 2019. What a shame that the government that is “open to business” has missed the mark in helping thousands of business owners open theirs.

Cannabis Lottery Ontario

-Shira Kalfa, BA, JD, Partner and Founder

© Kalfa Law 2018

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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