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Flawed Bill C-45 Could Defeat Canadian Cannabis Legislation’s Good Intentions

by James West

New Cannabis Ventures and 420Investor CFA Alan Brockstein joins to talk about the emerging opportunities in the Cannabis space, and how investors need to watch out as the darker underbelly of capital markets are attracted to the rich valuations currently being experienced in certain issuers.

Within the text of Bill C-45 The Cannabis Act are sown the seeds for the program’s potential failure. The Liberal Government has limited time to change course and avoid both a price war and a flood of constitutional challenges.

The legislation is built on what superficially could be interpreted as contradictory targeted outcomes, and faulty assumptions.

The summary of Bill C-45’s first reading states “The objectives of the Act are to prevent young persons from accessing cannabis, to protect public health and public safety by establishing strict product safety and product quality require- ments and to deter criminal activity by imposing serious criminal penalties for those operating outside the legal framework. The Act is also intended to reduce the burden on the criminal justice system in relation to cannabis.”

That legislation alone can “prevent young persons from accessing cannabis” is a leading faulty assumption. Among the segment of society’s youth who are drawn to the hedonism and self-exploration associated with the consumption and use of drugs, marijuana is easily obtained, either from gang-associated criminal enterprise, or from non-accredited growers, who themselves can be youth. It’s a plant. Anyone can grow it.

Despite the grandiose representations from many growers that it is complex and difficult to grow, a handful of seeds thrown into any garden medium and watered will result in some measure of success. As kids, we grew a crop every summer. Usually it got swiped before we could harvest it, but occasionally, we would end up with a supply that would take us well into winter. But in this age of instant information access, even the complexities of genetics and selective hybridization are available for anybody – youth or older – to learn should they be so inclined.

The intent to “reduce the burden on the criminal justice system” can hardly be reconciled with “imposing serious criminal penalties for those operating outside the framework”.

Where the failure occurs is, if the intent is to decriminalize marijuana, you can’t constitutionally do so (arguably) by using the law to discriminate between legitimate social segments as to who is qualified and who is not. Either the plant is legal, or it is not.

Decriminalization is the only outcome that will reduce the burden and flow of marijuana-related convictions in the courts, and the contradictory language of the Bill threatens to have the opposite effect. Especially since constitutional challenges are likely to proliferate on the back of such discrimination.

Marijuana has emerged into two primary legal types: medical and recreational.

The promulgators of either camp are very different while the consumers of either product are often the same.

There has also emerged two camps in terms of legal legitimacy: the ACMPR/MMPR/MMAR licensed producers and vendors by Health Canada, and the unauthorized independent growers and dispensaries, who outnumber the authorized producers tremendously, though exact figures are impossible to collate, since the uneven application  of enforcement from east to west across the country means some dispensaries and operators are shut down frequently while springing up in new locations, often within hours of police actions.

Health Canada has announced a streamlining of the application process for ACMPR applicants in an effort to issue as many licenses as possible in time for the July 1st, 2018 hard commitment the Liberals have set for themselves as the date upon which recreational marijuana will become legal.

At the same time, we are seeing an explosion in dispensaries, both in Toronto, where they are most often raided and closed by police, and in Vancouver, where the police are more or less indifferent to who is selling marijuana, as long as it is not in proximity to youth.

The corporatized marijuana ACMPR licensees are promoting the idea that there will be a tremendous shortage of “legal” marijuana by that date. But among current recreational users, who have been recreationally consuming for decades in many cases, there has never really been a shortage of marijuana, and the “legal” distinction is not recognized.

And this is the key to the Bill’s imminent failure in its current form.

Remember that much of the impetus for the “decriminalization” of marijuana stems (or stemmed) from the fact that young people were being incarcerated for marijuana-related crimes, and the courts were thus overburdened.

Now the dialogue has changed, and there is a distinction between “legal” marijuana and “illegal” marijuana. “Decriminalization” has become “legalization”, but only for those with the financial resources and organizational talent (and lack of a criminal record) to qualify.

The language is there in the Bill’s first paragraph: to deter criminal activity by imposing serious criminal penalties for those operating outside the legal framework.

By distinguishing between legal and illegal marijuana, and by reserving the right to prosecute those who fall outside of the legal framework, the government is, in fact, recriminalizing marijuana.

This will have the effect, as it already has, of polarizing the marijuana user community into criminals and non-criminals. Since younger people are typically less able to qualify for ACMPR recognition due to regulatory hoops and costs, they are more likely to persist in sourcing and consumption from illegal sources, many of whom will have roots in the organized crime scene. Also, the rebellious nature essential to many young people preclude their ideological alignment with the Bill’s act, almost guaranteeing a continuation of the burden on courts and law enforcement from marijuana-related prosecution.

Thus, the bill’s principle objectives are defeated in the Bill’s own language, before it even sees the light of day.

Part of the impetus behind Canadians’ support for the legalization of marijuana was the “social harm” reduction potential.

Countless young Canadians have had their future prospects forever blighted because of convictions for marijuana-related offences. This new legislation, in its current form, doesn’t do much to lessen that potentiality.

The only really viable solution is to broadly and unconditionally decriminalize marijuana, reduce the burden of access and qualification for individuals interested in growing and selling marijuana products, and focus on protecting the public from pesticide-laden product, almost all of which has been found to be derived from corporatized ACMPR sources anyway.

The Potential Supply Glut

The problem with a broad-based decriminalization is that it means the emergence of vast supply into what would become more of an open market. Especially with the corporate growers racing to build million-square-foot-plus facilities that could add hundreds of thousands of kilograms to the supply equation, though most of those will not be up and running by July 1st, 2018.

Most recreational users of marijuana will not be fazed by the sudden legalization of their chosen recreational substance. Most have been sourcing marijuana from individuals with whom they have long standing relationships.

The corporate side’s representation that there is going to be this sudden wave of consumers from the recreational market is perhaps a little bit misleading, if not downright wrong.

In documentation created by Arcview Research, a U.S.-based cannabis investment group, it is indicated that prior to legalization in Colorado, 100 percent of recreational users’ marijuana was supplied from illegal sources. Hard to argue with that logic.

But the same report also suggests that only 28% of recreational marijuana was sourced from illegal suppliers in 2016. I don’t understand how one could ever know for sure about that, since the illegal growers are likely not reliably reporting sales figures.

So even after being legal for three years in Colorado, almost a third of consumers are still accessing their supply from illegal sources.

If it takes three years to get the recreational consumer in Canada into the official system, it is unlikely that any serious shortage of “legal” marijuana will materialize. Especially in the face of overburdened courts likely unwillingness to try and prosecute somebody for supplying “illegal” marijuana.

Already, 40 percent of those charged with marijuana offences in Toronto are seeing their charges quietly dropped before even their first appearance. One must wonder what that ratio will drop to when we have “legal” marijuana. I can’t wait to hear what kind of rhetorical gymnastics government lawyers are going to come up with to try and draw that distinction credibly.

Corporate Cannabis Risk

So lets assume, for the sake of argument, that regardless of what Bill C-45 ultimately looks like when passed into law, that the unauthorized growers and vendors of cannabis across Canada are sufficiently incrementally emboldened to start vending their products in the open as is they were legitimate and legal.

Wait a sec…they’re already doing that.

Online especially, we can source marijuana-by-mail from at least 85 different businesses all promising to deliver weed and associated products almost instantly across Canada. Just for that quantity to be in existence, we know that there must be customers keeping them alive. According to Weedmaps, the most recognized online resource for finding weed and products to by illegally, these 85 mail-order services are complemented by no less than one 63 storefront dispensaries.

Weedmaps shows 85 delivery services and over 60 dispensaries operating in Toronto, none of which are legal.

So how much business will the corporate ACMPR licensees take from this vast dark market supply?

It is actually the corporate growers who have greatest existential risk, in my opinion. If the corporate universe can’t advertise, and are encumbered by the twin burdens of compliance with both Health Canada and (in many cases) securities regulators, they will never be able to compete in a price war environment.

While it is a common refrain to hear corporate growers proclaim an all in cash cost per gram (now or in the future) well below a dollar a gram, that might not be sufficiently appealing to rec users of long standing with preferred suppliers of equal duration. It definitely won’t be enough to sustain profitability and growth for corporates if they can’t somehow crowbar off a significant portion of the underground rec users to their cause.

One thing that regulators seem to overlook is that the recreational segment of the marijuana using population are already predisposed against anything to do with corporations and government, who (let’s not forget) were the cause of all of the marijuana persecution of the last 50 years. There are many grudges out there whose expression will come in the form of support for the “craft” grower, as I recently heard non-legal cannabis growers in Canada refer to themselves.

In many respects, Bill C-45 is damned if it does or doesn’t, approach the legalization of cannabis for recreational use as a broad amnesty and general decriminalization. But one thing is sure: the goodwill accrued by the Liberal party in its openness to legalizing marijuana will likely evaporate if the result is, in fact, selective legalization. It will be interesting to see what path the government eventually takes.

 

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