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Most winners of Ontario cannabis lottery have 'no idea what they are doing'

Members of the media gather on October 16, 2018 in a Montreal cannabis store owned by the SQDC (Société québecoise du cannabis), a day before the October 17, 2018 legalisation of cannabis in Canada. (Photo by MARTIN OUELLET-DIOTTE / AFP) (Photo credit should read MARTIN OUELLET-DIOTTE/AFP/Getty Images)

Canada’s largest pot market will see no more than five physical retail stores open their doors by the provincial government-imposed deadline this spring, predicts a cannabis lawyer with clients looking to tap into the market.

The Alcohol and Gaming Commission of Ontario (AGCO) announced the winners of its lottery to apply for the first 25 licenses on Friday, starting a five-day countdown to submit a $6,000 non-refundable fee, a $50,000 letter of credit, and a Retail Operator Licence Application.

Stores that fail to sell pot on April 1 stand to lose that $50,000.

“For the most part, they are going to have to consider losing that $50,000 as part of the licensing cost,” Trina Fraser, a partner at Brazeau Seller Law, told Yahoo Finance Canada on Monday. “I’d say it’s unlikely stores will be open on April 1.”

The AGCO said 17,320 applicants participated in its lottery last week, the vast majority (66 per cent) were sole proprietorships.

Fraser expects the relatively inexpensive $75 expression of interest fee to enter the lottery lured many unprepared applicants who face slim odds of opening a store without the help of a well-capitalized partner. She is currently working with clients who lost in the lottery and wish to strike a deal with one of the winners.

Fraser describes a “flurry of negotiations” underway as the 25 winners work towards clearing their first hurdle by Friday. She is not aware of any finalized deals as of Monday morning.

“I’m hearing rumours of all sorts of crazy offers being made to lottery winners, especially in Toronto. Millions of dollars. That doesn’t make sense to me because there is nothing for these lottery winners to sell,” Fraser said. “Really what you are paying for is just the opportunity to somehow participate with them in this venture. My advice to clients is that anything you are offering them should be structured in a way to keep that proprietor involved and actively pursuing the store.”

The licenses awarded by the province are non-transferable, and the application process must be completed under the same legal name as the party identified on the application to participate in the lottery.

Fraser expects the lottery winners are under immense pressure, inundated by offers to finance debt or provide retail support, with limited time to consider what’s on the table.

“The don’t have the luxury of time,” she said. “From what I’m hearing, few or none of them will succeed on their own.”

Further delays to the roll-out of legal pot shops would intensify criticism of Ontario’s Progressive Conservative Government.

The province’s introduction of legal recreational cannabis has been hampered by hasty shifts in strategy. The previous Liberal government chose provincially-run online sales and physical retail. Premier Doug Ford opted for government-run online-only sales, and delayed the launch of private physical retail stores. Lack of supply then prompted a 25-store cap on the number of locations.

Fraser calls the April 1 deadline “unrealistic.” She said the province could have bolstered the lottery winner’s chances of success by implementing a screening process or requiring an operator license to enter.

“That would have limited the pool of lottery entrants to those who were serious operators. They didn’t. I suspect it’s because for whatever reason they are attached to this deadline of April 1 for opening stores,” Fraser said. “(Now), you have the majority of your winners having no resources and no idea what they are doing.”

The situation is further complicated by the fact that municipalities have until Jan. 22 to opt out of allowing pot stores to open, leaving some lottery winners unsure of where they can set up shop.

Last week, National Access Cannabis Corp. released figures showing its per-store revenue in other provinces is on track to exceed $2-million per year.

Given the expectation that the first wave of Ontario brick-and-mortar cannabis stores will be greeted by lines around the block when they open, Fraser expects investors will be more than willing to help lottery winners shoulder startup costs.

“It’s wild speculation on all of our parts that these are going to be profitable operations and that there is this significant benefit to being one of the first 25 stores to open,” Fraser said. “If the winners partner with the right party who has deep pockets, that $50,000 (letter of credit) is going to be a non-issue.”

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