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New producers must raise millions without a license guarantee

New producers must raise millions without a license guarantee

By Milton Wani

The barriers to entry just got higher.

Effective immediately, May 8, and without warning, Health Canada announced a major regulatory change to the application process. Anyone looking to obtain a cultivation license now has to have “a fully built site that meets all the requirements of the Cannabis Regulations at the time of their application” before even beginning the application process.

Bad news for smaller players

This major change is bad news for micro and small-scale startup producers. This sweeping change means that entrepreneurs who once could pull together $200 to $300 thousand at the start and then without having a shovel in the ground raise $2 to 4 million from investors after receiving Health Canada’s pre-approval letter, now face a larger startup cost to enter the market.

Considering there is no revenue coming in at the start, your investors and lenders will wonder how long it will take to make their money back. By changing the rules to require a full build of a site prior to getting a pre-approval letter, this regulation becomes a barrier to entry, forcing many slow-to-get-started micro-cultivators to borrow and spend more before they even apply for the license.

Health Canada’s point of view

Canada has been struggling with a supply shortage of legal cannabis since legalization. Some blame Health Canada for its slow licensing process. Of the 129 licensed facilities capable of producing up to 1,000,000 kilograms of cannabis annually, Health Canada’s February 2019 figures showed only 120,000 kilograms of dried cannabis in sales and inventory – a huge shortfall from expected.

Health Canada says the reason for this new site requirement comes from its backlog of over than 800 applications currently waiting for a license. According to Health Canada, more than 70 percent of those applications over three years old and show no evidence of building a new facility.

Health Canada said it is implementing these adjustments to “better allocate” departmental resources. “A significant amount of resources are being used to review applications from entities that are not ready to begin operations, contributing to wait times for more mature applications and an inefficient allocation of resources,” said Health Canada in its statement.

Problems in the horizons

Health Canada said that applications already in progress will go through a “high-level review.” It’s unclear what “high-level review” means right now.

It’s also unclear whether this new site requirement will affect other parts of the application. In its statement, Health Canada stated the regulatory requirements for the security clearance process would not be changed. Previously, however, applicants were required to fill out a security clearance along with the initial application.

What we do

There was no notice given ahead of Health Canada’s announcement. Preparing for changes in regulations means having the right people on your team who can adapt and pivot when needed.

Consult and Grow knows that starting a license application is expensive. Clearly, we know that real estate is a huge part of an application, whether you lease or own the facility. Security is another huge cost.

At Consult and Grow, our team understands the cannabis industry. We know where you can avoid the dangers. Our goal is to help you throughout the application process by finding the best solution for your needs. If you have any questions, feel free to contact us today.

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