The 3 Biggest Challenges Facing Canada’s Licensed Cannabis Producers

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Today marks the beginning of a brand new economic landscape for Canada’s cannabis producers. While formerly only the medical market was legal, the legalization of recreational cannabis will equate to big business for the Licensed Cannabis Producers (LPs) who are prepared to grow and sell their crops in this yet uncharted territory. But while the government has increased its leniency on cannabis consumers, LPs continue to face stringent regulations when it comes to how they lead and operate their businesses.

Given our position as global thought leaders in the cannabis business space, we have shared a number of content pieces in recent months pertaining to the unique needs of Canadian cannabis companies. Today, we will take a look at the Top 3 Challenges that LPs will need to overcome within Canada’s new, expanded market.

1) Choosing a corporate structure
In Canada, companies that hold an Access to Cannabis for Medical Purposes Regulations (ACMPR) license face heightened restrictions on who can be an officer or director of the company. Further, each and every officer and director must have received security clearance based on these restrictions, and the reasons for being denied run the gamut.

For example, currently, LPs cannot appoint a non-resident of Canada as a director or officer. In the case of a company attempting to take their sales global, this could be particularly problematic. Naturally, if your company is expanding into, say, the South American market, you would want to have South American expert to be on your board of directors, for regional purposes. In situations like this, it’s easy to see how LPs could be forced to choose the “right candidate to pass security clearance” rather than simply choosing “the right candidate”.

In order to get around this, it is best practice for all LPs, in particular LPs planning to eventually go public on a Canadian exchange, is to set up a holding company above the LP company. This is recommended because holding companies face no such restrictions, allowing the shareholders of the entity to select directors, based strictly on their ability to best perform in their role. Additionally, a holding company structure facilitates share transactions, which would require regulatory approval if the company operates strictly as a LP. It is important to note, the LP subsidiary must still comply with corporate regulations for their directors and officers –rules and regulations vary from province to province.

 2) Gaining the right leadership and guidance
As in any nascent industry, several of Canada’s biggest cannabis players began as small operations started by passionate entrepreneurs. And while these entrepreneurs are or may be experts at growing and cultivating high quality cannabis, they often require assistance in growing their skill set as experts in business operations, finance, management and governance.

The cannabis industry will continue to face increased scrutiny, changing regulations, and legal precedents. It’s for this reason that it is absolutely crucial that Canadian cannabis companies seek guidance from experienced business and finance experts.

As we discussed in our prior two-part series, Top 10 reasons why Cannabis companies need accounting leadership, activities like creating an investor deck, establishing a corporate structure, and going public require an abundance of knowledge and real-world experience. The best leaders know to “hire their weaknesses”. Cannabis companies should seek assistance from outside experts to ensure success and sustainability over time.

3) Managing supply and demand
While financial findings have shown that the Top 10 largest cannabis producers in Canada will be able to produce 1.8 million kg per year by 2020, the Parliamentary Budget Office predicts that by 2021, demand will only reach 734,000 kg[1].

For smaller producers with tighter margins (like the craft producers we mentioned in, 5 big ways M&A activity will impact the Canadian cannabis market, this overproduction could be devastating. Meanwhile, larger companies that have the operations to turn that overproduction into oils and edibles, or ship it overseas to existing collaborations could stand to benefit.

The only certainty here is uncertainty: In an unprecedented market, it’s difficult to predict who will want what, and for how much.

Zeifmans: Your trusted business advisor
As a cannabis LP in Canada, it pays to have a trusted advisor on your side, prepared to add value at every step of your business life cycle. From the very first stages of a start-up venture, to an IPO and beyond, the team at Zeifmans has the subject matter expertise necessary to support Cannabis companies on their path to exponential growth.

To learn more about our Cannabis Team, reach out to members, Larry Zeifman, Robert Grunwald and Jennifer Chasson.

[1] Ottawa Citizen, “Smoked Out: How Canada’s Pot Producers Could Overshoot Demand”, https://www.newcannabisventures.com/why-canadian-cannabis-producers-publicly-list-through-holding-companies/