As if competing alongside capital-rich mega corporations was not challenging enough, Health Canada added another hurdle for craft growers looking to break into Canada’s legalizing cannabis industry.
The federal department announced yesterday (May 8), effective immediately, all hopeful cannabis cultivators and distributers must have a fully built and compliant site before submitting a licence application.
For those current awaiting a status update on standing applications, a site evidence package—videos and photographs verifying a facility—must be submitted to proceed. Unprocessed or semi-processed applications will also be subject to a new “high-level review”.
On a public call yesterday, Todd Cain, Health Canada’s director general for licensing and medical access, explained the new review process as something between a preliminary screening and in-depth evaluation. The review will delve into details like site readiness, proximity to other businesses, personnel security clearances, and the business’ standing with its respective local government.
These new conditions apply to anyone hoping to legally produce and sell cannabis in Canada and industry insiders say this likely won’t create any issue for well-funded corporations planning million-square-foot grow facilities.
“The problem is that it [the site requirement] disproportionately affects small business people that aren't well-capitalized,” says Travis Lane, a longtime cultivator and director of the B.C. Independent Cannabis Association, to the Georgia Straight. “That’s the major downside with this build first, licence later approach.”
Expect more delays
While large publicly traded companies and mega-corps have been allowed to apply for a federal stamp of approval—with 129 newly licensed sites making it through the process since 2017—small-scale growers (also referred to as micro cultivators) were told to wait their turn. And they did.
Only recently has the application portal opened to producers wanting to cultivate in 200 square metres (around 2152 square feet) or less of total canopy space. And there are currently no micros with product in the legal market. For those in the back, that’s: none, zero, zilch.
Many worry the regulator’s new expectation of hopeful licensees will result an even longer wait time for Canadians hoping to see craft product on legal dispensary shelves.
“It delays the time in which we will see micro start to flood into the market,” says Lane. For one, the process to obtain mandatory staff security clearances now can't start until after the facility is built.
“Even if someone owns a piece of land, and has a sound business plan, they need to clear the lot and build the building before they can even apply for security clearance.”
Lane estimates only 25 percent of micros have fully equipped sites at the time of application and fears this new requirement will be enough to push them out of contention all together.
“It's already been an incredibly difficult process for small scale cultivators to get in the space,” says Lane.
“I think it'll end up with a certain number of applications dying on the desk.”
A risky financial gamble
The main concern is the impact the new site requirements may have on applicants who don't have ready access to investment capital and financial resources.
“No longer can you get partway through the regulatory process, and then spend your money,” says Lane. “This new requirement means you have to spend your money right at outset.”
Despite the immense economic growth in the cannabis sector, obtaining enough capital to build an entire facility is a difficult ask considering few banks will dole out loans to the volatile and still highly stigmatized industry—even for the big guys.
“If it was any other industry, this would probably be a relatively welcome announcement because you could get bank funding, borrow money, there'd be investment funds out there that are ready to go for small businesses. You have advocacy groups that actually represent a large number of small businesses that will be able to make their voice heard,” says Lane. “As it stands right now…there's no real voice speaking for the micro licences.”
Turning to private investors isn’t any easier. Cannabis lawyer, advocate, and consultant Kirk Tousaw says the new regulations makes pumping money into a legal cannabis business that much more of a gamble for financial backers.
“The primary cost of getting this type of business off the ground for small entrepreneurs is now going to be in the build-out cost,” says Tousaw on the phone. “Now you've got essentially sink all your capital into your build, and you have no idea of Health Canada is even going approve it.”
Essentially, purchasing a site, clearing the lot, and pouring hundreds-of-thousands of dollars into erecting a fully compliant grow-op only secures applicants a spot in the line—a queue evidently so long Health Canada has had to created the aformentioned new checkpoint to shorten and slow.
The black market takes home another win
So, if this means that craft cannabis won’t be in the market for a while, where will Canadians be able to find small-batch cannabis?
Well, of course, the illicit market is already entirely made up of these grassroots growers and with little motivation to transition it will remain that way for some time.
“The ripple effect of this runs completely contrary to the whole point of legalizing cannabis in the first place,” says Tousaw, pointing out Prime Minister Justin Trudeau’s initial goal in ending prohibition was to transition away from a black market, towards a legally regulated industry.
“This doesn't do that because there's no real incentive for people to take that risk of transitioning. And when you’ve already got sort of a nice little gray market business going, why roll the dice?”
Cannabis lawyer Trina Fraser stated early on—back when the Cannabis Act was making its way through parliament—she believes the easiest way to displace the illicit market is by turning the individuals feeding it into legal producers.
“That is what the micro categories were intended to do. That's what they were designed for,” she tells the Straight. “But there were already so many concerns that the barriers to entry for those micros were too high. This just makes the mountain higher."
Another means to an end
It is clear federal officials are being crushed underneath a growing pile of applications and don’t have the manpower to plug through all of them. Health Canada even admits as much.
In a conference call yesterday, Joanne Garrah, Health Canada’s director of licensing and security for the Cannabis Legalization and Regulation Branch (CLRB), attributes the decision to mandate ready-built facilities was a result of the amount of time and resources required to complete the application process.
She says 70 percent of successful applicants over the past three years have yet to submit an evidence package demonstrating proof of a built facility.
Effectively, the regulator is looking for ways to better spend time and resources than reviewing the paperwork submitted by applicants with no real dog in the game.
Tousaw says there are better ways of accomplishing this objective, many of which wouldn’t so harshly impact small businesses.
“There are other ways to achieve the goal of cutting out frivolous applications or applications that don't proceed than just making this kind of dramatic change,” he says.
“A lot of the big downsides of this could be ameliorated if it exempted the micro categories, if it was applicable to standard processing, standard cultivation, but not the micro categories. It would be a lot more justifiable in my book.”
Lane echoes a similar sentiment, suggesting instead the department run security clearances, site builds, and other mandatory steps parallel to the application process.
“If they would allow applicants to file for security clearance at the same time as they are building the facility, or if they could do a financial check or an attestment, instead of making them wait until the site is fully built and ready, then that would probably present a solution that didn't cause the extra delay,” he says.
He says he sees no issue with the department prioritizing applicants with prepared sites, rather he would like to see micros exempt from a process that excludes them entirely for not having a facility at the time of application.
At least there are helpful guides
There was one positive to yesterday’s announcement, adds Fraser.
She says the cannabis industry has been begging for interpretive guides to simplify the complex and highly detail set of regulations and procedures—going back to the Marihuana for Medical Purposes Regulations (MMPR) and Access to Cannabis for Medical Purposes Regulations (ACMPR) licensing days.
Health Canada finally delivered. Alongside the application addendum, the department published a set of manuals outlining good production practices, physical security measures, and the general licensing procedure.
“The Cannabis Act and the regulations are very dense, very cumbersome, and hard to read for most people. These guides take all that information and synthesize it and presented in a way that's digestible for people,” says Fraser.
“It's a great kind of tool for people who don't want to read 350 pages of regulation and try and sort them out.”
Last month, Health Canada also published a guide outlining the official procedure for product recalls.
But for anyone who’s already read the regulations, she adds, there is not much the guides can add to the knowledge base.
Short term pain, long term gain
Lane says he doesn’t want to be "too negative" about the new application requirement, as it is likely to achieve this goal—just not at the outset.
“There's a potential for a net positive here,” he says. “If they can clear out all of the incomplete and never-to-be-finished applications, maybe the queue gets shorter and all of a sudden licence times turn around faster. And I think that'll be the case two years from now.”