Speaking at a major cannabis conference in Toronto last month gave me a window into the current Canada-California cannabis connection that will likely prove useful in representing clients from both locations in the months ahead. The bottom line is, at the moment, the Canada and California cannabis industries can help each other in more ways than one.
Most know that in 2018 Canada became just the second nation to legalize commercial cannabis (Uruguay was the first). And, much has been written about Canadian investment funds seeking cannabis opportunities around the world, and especially in California, which is expected to be North America’s largest cannabis market by far.
Given this context, my colleague Karen Balderama and I traveled to Toronto to speak at the O’Cannabiz conference specifically to explain the due diligence steps that Canadian investors should undertake before deciding to put their money into a California cannabis company. We have represented both Canadian and U.S. companies on both sides of financing and M&A transactions. As a result, we have a good sense of the upsides and pitfalls.
We know that California companies need capital and that Canadians have it and are looking for deals. What we didn’t fully appreciate was the great extent to which Canada can use help from California (and other states and countries) to make their industry flourish. That’s mostly because product supply and advertising is so extraordinarily limited in Canada.
The restrictions are central to the origins of Canadian legalization, which Prime Minister Justin Trudeau promoted as a way to keep marijuana away from underage users and curb cannabis-related crime. Those goals were key to getting both houses of Parliament to approve legalization and have directly informed the national approach.
In years to come, Canada may loosen its tight regulations and the U.S. likely will modify or end the federal cannabis prohibition. That might decrease the need for cross-border collaboration. But for now, the Canadian and California cannabis industries can help each other out in big ways.
In light of that background, here are our top three takeaways about the current Canada-California cannabis connection.
1) Canadian cannabis operators (as opposed to investors) who want to expand need open markets like California because Canada’s industry is so constrained. An example from Toronto makes this point. At 2.9 million, Toronto’s population is the largest in Canada. So far, Toronto has allowed five cannabis dispensaries. Oakland, California’s population is 425,000. Oakland has eight operating dispensaries and nine that are conditionally approved, according to the City’s website. While visiting Toronto, I observed lines at cannabis dispensaries measuring full city blocks. Toronto is not unique. Cannabis retail is constrained nationwide.
2) Canadians are scouring the world (not just California) for opportunities. One conference session I attended was entitled Cannabis Deploys Stage 3: Global strategy in an Accelerating Market. Speakers at the session emphasized that in the near future cannabis companies will emerge that have an international reach, including in Europe, Central America and Asia. The recent news about the Canada pot giant Canopy Growth agreeing to purchase U.S.-based Acreage Holdings, fed into this narrative. “All of the large Canadian companies will have a presence in the U.S.,” said Hamish Sutherland, the President of White Sheep Corp., which focuses on international cannabinoid production. “It’s not a matter of ‘if,’ it’s ‘when.’” Speakers agreed that global cannabis companies would have a significant presence in California.
3) California provides an opportunity for Canadian operators to create brand identities not available at home. Canada’s restrictive marketing rules mean that their cannabis packaging looks like the U.S. generic food labels from the 1980s. The labels are mostly black or white, except for a red stop sign sticker that includes a marijuana leaf and the letters “THC” and a bright yellow label warning that cannabis can be addictive. The limited branding is a manifestation of the original mission of limiting underage use, but it makes it very hard for entrepreneurs to differentiate their products from others.
In other words, effective product branding is not currently possible in Canada. In contrast, California’s history of a longstanding semi-legal cannabis industry has built-in cultural cache that is perpetuated by innovators creating some of the most clever and creative cannabis marketing in the world, which is generally allowed under state regulations (other than obvious attempts to attract children).