Recently, the Cannabis Act was granted Royal Assent, resulting in the official passing of the legislation for legalizing cannabis in Canada. The Act is expected to be in force as of October 17, 2018.

The Canadian government’s recent decision to legalize recreational marijuana may significantly impact capital markets and M&A deals. The decision to legalize recreational marijuana at the federal level is unique to Canada, compared to other jurisdictions like the U.S. where it remains illegal federally and is currently regulated by states (such as Colorado, California and Washington).

While the state model in the U.S. has experienced some early success, the prohibition at the federal level makes operational realities (e.g., banking, transportation) more difficult. Canada’s legal framework may therefore open the doors to greater foreign investment, particularly for those seeking to gain a foothold in the sector without having to operate in an ambiguous legal and regulatory environment such as the U.S.

Notwithstanding the opportunities presented by the passing of the Act, the influx of new companies into the cannabis space may present some significant challenges to immediate success.

Careful consideration must be paid by investors to factors such as:

  1. the increase of competition changing the current market dynamics;
  2. price uncertainty, including forecasting the illegal market’s dominance and potential tax on products;
  3. changing and evolving regulations;
  4. consumer behaviour; and
  5. start-up risks associated with a new and growing industry.

Some industry experts have expressed concern over the increase of competition, citing the rarity of a new industry emerging overnight. That said, others have suggested that the barriers to entry, such as stringent regulatory requirements, may be enough to deter immediate competition in the sector.

While we cannot be sure of the exact outcome on capital markets and the M&A space, it is reasonable to suggest that Canada may soon experience a boom of activity in the cannabis sector.

The author would like to thank Nazish Mirza, summer student, for her assistance in preparing this legal update.

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