"People are asking for millions of dollars": the crazy, legally-charged battle to win Ontario lottery winners

A network of lawyers, consultants, investors and entrepreneurs work tirelessly to design and facilitate complex transactions between many of the 25 largely unknown winners of the Ontario and Ontario retail cannabis lottery. entities that consider themselves veterans of the cannabis industry wishing to participate. in the province's cannabis retail system.

However, the structuring of these agreements is more complicated than previously thought, given the stringent ownership requirements set out by the Alcohol and Gaming Commission of Ontario (AGCO) that prevent lottery holders to give up any control over the future property of a cannabis retail store at least until the end of the lottery period, in December 2019.

"There are lawyers who contact us saying that they had clients who were trying to reach an agreement, and if we knew maybe a lottery winner. And then you have lottery winners who want to sell their license, but realize now that they can not do it, they have to play a role in running the business, "said Rami Chalabi, a cannabis group partner from McCarthy Tétrault.

"So we are trying to find ways to help where we are with the regulations," said Chalabi.

On January 12, Ontario announced the 25 winners of its cannabis lottery, which had until January 18 to apply for a retailer's license, which would allow them to start opening a physical store in a store . designated area of ​​the province.

The vast majority of winners in the lottery were sole proprietors, but the AGCO ownership rule actually means that these people will not be allowed to sell their licenses (once received), nor to enter into a franchise agreement providing that someone else will run the cannabis store. or enter into any type of partnership that would see them share or transfer control to another entity.

"The AGCO has identified three things that many people were not prepared for, in my opinion: you can not change the name of your company, its structure and the control of it," said Brenna Boonstra, who oversees the Cannabis retail licensing group. Compliance Inc., a cannabis consulting company. "If you are a sole proprietor, no one can buy equity in your business, so you can not hire partners."

The AGCO has identified three things that many people are unprepared for: you can not change the name of your company, the structure of your business, and the control of your business.

Brenna Boonstra, cannabis compliance consultancy

According to Boonstra, lawyers and consultants are trying to understand how an entity that did not win the lottery can benefit from a cannabis retail license?

Abi Roach, founder and owner of Hot Box Café in Toronto, the oldest cannabis show in Canada, describes the lottery process as "ridiculous" because "most people who put their hats in the ring just want a golden ticket to get rich quickly. " Roach says she and her Hot Box team had their floor plans, their security plans and their staff in place several months ago in anticipation of their participation in the legal leisure market. This was before the announcement of the lottery system.

"I spent 20 years in this area and now I have people calling me to tell me that you want to buy. They do not understand the fact that as a sole proprietor, you can not change the structure and ownership of the corporation. So what can I really do at this point? Roach said.

According to Boonstra, a person like Roach would have the opportunity to enter into a revenue sharing agreement with a lottery winner in exchange for the expertise needed to run a cannabis store.

"In fact, I see a lot of revenue-sharing agreements in the making, agreements that are not related to ownership and equity. For example, a person who has a lease on a suitable location to open a cannabis store may enter into a revenue sharing agreement with a lottery winner, "said Boonstra. "But again," control "is a complex legal definition, so you need to make sure that the transactions you are making are not in any way related to ownership and equity."

Real estate investor Daniel Sax submitted a lottery application, unsuccessfully, but was subsequently contacted by a number of parties working with lottery winners interested in entering into an agreement. Sax heads Sensi Properties, a real estate investment firm that works with licensed producers to identify culturally appropriate buildings and places. At one point, Sax said he was about to "sell 20 properties" in anticipation of the opening of the Ontario cannabis retail market.

But after three days of what he calls "complete chaos and chaos," he decided to forgo entering into an agreement with a lottery winner.

"This whole process has been overtaken by greed. People are asking for millions of dollars, and for me the agreements I see being in place are not economically viable. Absolutely not a good investment decision, "said Sax. He refused to divulge details of exactly what was going on between him and a number of winners in the lottery.

… The contracts I see going on are not economically viable. Absolutely not a good investment decision

Lottery candidate, real estate investor Daniel Sax

Mr. Chalabi also confirmed that he was aware of proposals to lottery winners ranging from "$ 5 to $ 7 million".

"You can not sell this license now, but some people are willing to pay and are preparing for a job that will allow them to be part of this market in the future," Chalabi said.

David Phillips, Past President of the Ontario Cannabis Store, believes the AGCO has been very clear in the language it has always used regarding the ownership and control that lottery winners must have over a future Cannabis shop.

"But there seems to be a lot of creative thinking going on right now as to how to build new partnerships. My advice to the winners of the lottery is to pay close attention to how your lawyers and consultants structure any transaction, as the AGCO will apply very stringent controls and they are well equipped to do so, "Phillips told the Financial Post.

The cannabis lottery period in Ontario ends on December 13, 2019. After that date, the provincial government stated that it would "open" the retail license application process. There are no clear rules as to the exact operation of this process, but the AGCO's ownership guidelines are technically applicable only to the extent that the lottery period is in place.

"I think some people think that if you make a deal with a lottery winner right now, you can have conditions that say that ownership and control remain with the winner until the end of the lottery period, then we renegotiated, "said Boonstra.

Sax, however, says that he does not understand why anyone would invest so much in an agreement that could collapse if the "government changes its mind on a whim".

"You have to manage a partnership with X number of parties, in a very tight deadline, to possibly earn money in the future, subject to what the Ford government wants? I am happy to be able to sit, watch my popcorn and watch this mess unfold. "