Is It Time to Legalize Pot? (And if So, How Do We Do It Right?)

National magazine will host a debate on the first question at the Mid-Winter meeting of CBA Council in February. A panel of experts will outline the pros and cons to set the stage for a lively discussion about an issue that is far more complex than it seems. Is criminalizing marijuana only serving to clog the court system? What about the health risks of “normalizing” marijuana use? And would legalization really push the drug trade to the fringes by handing regulation of sales, quality and advertising to the government?

But beyond these core questions – and aside from the fact that Canadian public opinion is shifting in favour of legalization at an astonishing pace – there is another facet to the debate that tends to get lost in the noise: The challenge of setting up an entire regulatory framework for a brand new industry.

That task will merit proper consideration as the debate over legalizing the recreational use of marijuana progresses in the months and years ahead, as it surely will.

Case in point: Since 2001, when Canada first started regulating the medicinal use of pot, patients have been allowed to grow their own plants. But last year Ottawa introduced a new regime of federally licensed commercial producers, which no longer permits homegrown medical pot. The new regulatory framework is currently being challenged in court by patients, and for the time being there’s a temporary injunction in place extending the old system until the legal dispute is resolved. The Health Minister is also being challenged over a decision not to grant a licence to at least one company.

But regardless of how these cases are decided, it is clear that an emerging legal cannabis industry is already gearing up for what is expected to grow into a multi-billion dollar market, attracting investment from all quarters. Over at The Globe and Mail, Grant Robertson has done some great investigative reporting on the entrepreneurial rush to profit from legal weed:

With the lure of big profits hanging over these licence applications, Health Canada introduced a two-stage approval process. First, candidates had to design a secure operation, which would be subject to federal approval. Then they had to build that operation, risking the capital up front, without knowing if a licence would be granted.

Even with those unusual hurdles, the response was overwhelming. Health Canada, originally concerned that not enough companies would seek a licence, received more than 1,000 applications between last fall and this summer. At one point, 25 were coming in every week.

Applicants knew what a licence was – a permit to make money. “There’s no denying, there is tremendous wealth that is going to be created from this,” Mr. Arseneault said, comparing the situation to alcohol in the U.S. “You can go back to Prohibition – it’s the same concept. There is a race mentality.”

Andrea Hill, a securities lawyer at Toronto-based Wildeboer Dellelce, says the licences are like winning lottery tickets. “When these [companies] go public, they’ve consistently been going public at market capitalizations of $70-million plus.”

In a separate article, Robertson raises further doubts over the federal government’s handling of licensing medical pot growers:

When Health Canada set out to design a market – under orders from the Supreme Court – that would allow medical marijuana to be prescribed to patients who need it, the impact on the capital markets was not on its mind, according to thousands of pages of federal documents detailing the process, which were reviewed by The Globe and Mail.

But in forming this lucrative new industry, Ottawa has unwittingly left the door open for stock promoters to spin tales of vast opportunity, and enrich themselves on the backs of unsuspecting investors. And Ottawa appears to have no answer for how to stop it.

A Globe and Mail investigation has found that while Health Canada performs background checks on those who want to operate medical marijuana companies, the department has not looked into how these same companies conduct themselves in the capital markets, or what they are telling investors.

It is also worth noting, as Jared Lindzon has in a recent article published in The Guardian, Canadian lawyers are keeping a close eye on developments in Canada’s emerging pot industry. Here he is reporting on two lawyers from Bennett Jones, Hugo Alves and Michael Lickver:

While the outcome [of litigation] is yet to be determined, it could provide big new opportunities for lawyers like Lickver and Alves, who are in the process of establishing themselves as experts of marijuana law in Canada.

“It’s not often that you get to put together a legal service business focused on an industry that’s brand new,” said Alves, sitting in a boardroom 32 storeys above Toronto’s financial district. “We think it’s a good opportunity to create a business within our firm, we think it’s a good business, and it’s exciting to be part of an industry when it’s at its nascent stage.”

Alves and Lickver explain that the switch from homegrown to quality-controlled industrial production has opened a door into the once self-contained ecosystem, allowing the firm to enter the newly budding industry from the ground floor.

“We want to be the go-to lawyers in the industry,” said Alves. “We’re making sure that our networks and our connections expand to all verticals and various channel partners across the whole value chain so that we can be connectors as opposed to just dispensers of legal advice, and create a brand that has value.”

Also interesting are Robertson’s comments about major tobacco companies getting ready to jump into the market (presumably through acquisitions) if and when recreational pot becomes legal. Talk about rising from the ashes.

Typically, discussions surrounding the legalization of marijuana get reduced to easy slogans: incarceration versus legalization; harm-reduction versus prevention; organized crime versus bounteous tax revenue. Unquestionably, these are important issues to debate. But there are also cautionary lessons to draw from Canada’s experience in switching to a new medical pot regime, as well as those of the states of Colorado and Washington, which both legalized recreational marijuana in 2012.

The list is long: Is Health Canada equipped to handle a flood of applications for licenses to sell? Can we be sure it will coordinate with other agencies in ensuring that capital market rules are respected? How should we craft competition rules that govern the industry? What about trade? What about the emergence of a pot tourism industry?

Tax revenue may not be as high as expected, at least not at first. But then who makes the call on whether taxation is designed to maximize revenue or reduce drug use? We’ll have to think about regulating edibles (for a cringe–inducing read on that issue, here’s Maureen Dowd), as packaged food and beverages could be where the real money is.

Any move by Canada to legalize the recreational use of pot is bound to run into some serious challenges. Should that discourage us from doing it anyway? No, but we should be clear about why legalization is desirable and what our objectives are in going down that road. Because weed, ultimately, is a commodity. Make it legal for general consumption and it will have an impact far beyond our criminal justice system and the health sector. It will become big business. We need to keep that in mind when deciding whether we are ready to legalize it.