Illegal Dispensaries a Vexing Question as Canada Explores Recreational Marijuana

By Omar Sacirbey

The six-week-old government of Canadian Prime Minister Justin Trudeau is considering what type of regulatory system to establish for recreational marijuana, which the country’s new leader promised to legalize.

But entrepreneurs operating illegal dispensaries may have already created a de facto system that the government will find neither easy nor in its interest to undo.

“The system is already being built,” said Paul Pedersen, a managing partner specializing in cannabis with Greywood Partners, a consulting and brokerage firm with offices in Vancouver and Toronto. “This is a case of entrepreneurs moving faster than the government.”

 And a handful of observers believe medical marijuana dispensaries might be able to successfully transition into the recreational market in some fashion.

“The dispensaries are a black market or at best a grey market phenomenon,” said Paul Rosen, CEO of PharmaCan Capital, a financing company in Toronto that funds medical marijuana cultivators. “ The longer the government requires to craft an alternative white market program the more likely that the dispensaries will become entrenched within communities and within the general body politic across Canada.”

Under Canada’s current laws, the only legal way to purchase marijuana is online or over the phone through one of the country’s roughly 20 approved growers, who then mail the product to the patient. About 31,000 Canadians are registered in the program.

By comparison, Pedersen said, between 200,000 and 300,000 cannabis users in Vancouver alone get their cannabis from dispensaries that are illegal under federal law, but have been allowed to exist by local authorities.

“The fact that so many people opt to get their cannabis from the dispensaries says the by-mail system is broken,” Pedersen said. “Cannabis users don’t want to order over the Internet and get their product through the mail. They want to walk into an establishment and see and smell what they’re buying.”

There are now about 140 dispensaries in Canada, Pedersen estimated, but in the wake of the Trudeau election, new storefronts are opening every week.

Vancouver is home to about 120 of those dispensaries, which for years have been able to operate without worrying about police interference because Canada’s federal law enforcement, the Royal Canadian Mounted Police (RCMP), doesn’t have jurisdiction there and some other big cities, while local police made a policy decision not to go after dispensaries.

In August, the Vancouver City Council adopted dispensary regulations, including a requirement that they get licensed.

There are more than 160 applicants, Pedersen said, both from existing dispensary owners and entrepreneurs who want to open new dispensaries. The council now has a short list of about 40 applicants, while Pedersen expects about 30 dispensaries to win licenses. Winners will also have to pay $30,000 license fees.

Dispensaries that didn’t get approved have received or will receive notifications telling them they need to shut down in six months. There were also some dispensaries that didn’t apply and will likely operate until authorities decide to close them.

“There are always people who are not going to follow the rules. There’s been a little bit of push-back from the cannabis community, who looked at it as cash-grab,” Pedersen said.

In the last several months dispensaries have sprung up in at least a few other major Canadian cities, including Victoria, Port Alberni, Nanaimo, all of whose local authorities are considering setting-up Vancouver-like regulations. At least a few dispensaries have opened in Toronto, where federal police don’t have jurisdiction and local authorities haven’t intervened.

“People know that legalization is going to happen, and they think it’s going to happen like this,” said Russ Orsborn of Orsborn Cannabis Consulting in British Columbia. “Being a first mover is very important.”

While the previous conservative government threatened federal police intervention and encouraged local police to enforce federal law, the new government may be more hands-off.

“Now that we have a Liberal government, it’s possible that the RCMP won’t have the pressure to crack down on dispensaries,” Pedersen said.

On Tuesday, however, Canada’s federal police made good on an earlier threat to raid marijuana dispensaries in Nanaimo, on Vancouver Island. and executed search warrants against three of the operations. So it’s unclear how this will play out.

The new government will strongly consider dispensaries in any regulatory discussions, and there’s a chance that they might somehow be able to transition – or be folded – into a recreational program.

“The question of distribution is going to be central to the success of the regulated market,” said Rosen of PharmaCan Capital. “Several groups would like to participate in the distribution of cannabis products across Canada, and can credibly argue that they have the best platform in which to safely and reliably deliver quality assured products to Canadians. These include pharmacies, government owned alcohol stores, convenience stores which currently sell tobacco products subject to regulation and of course aspirant dispensary owners.”

Last month, some Ontario officials said cannabis should be sold through state controlled liquor stores. If a provincial government decided to sell cannabis through liquor stores or another option, the dispensaries would likely have to close.

However, Pedersen believes that many dispensaries would try and stay open because customers would prefer them over liquor stores or other options.

Pedersen believes that the Trudeau government will let provinces decide how to regulate cannabis within their borders, and that it’s plausible than some may decide to sell cannabis through liquor stories, but unlikely.

“I don’t think cannabis consumers will accept that model. And they’ll determine what the system looks like,” Pedersen said. “Cannabis consumers want to buy at a store that exclusively deals with cannabis and cannabis-related products. It’s hard to go against what the consumer’s want.”

Omar Sacirbey can be reached at [email protected]

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