CALGARY—In the final years of cannabis prohibition, Earth Dragon Organics owner Tessa Serra and her five staff members made CBD-infused bath bombs from a small kitchen facility on Salt Spring Island.

Over a hundred dispensaries across Canada stocked Earth Dragon’s line of creams, lotions and other cannabis topicals. No longer. Their bath bombs ended up in police evidence lockers more than once, but Earth Dragon didn’t withdraw from the illegal market because of a raid. Instead, Serra sold Earth Dragon to Pasha Brands, a Vancouver-based company cultivating formerly illegal companies for the regulated market. After the sale went through, Earth Dragon stopped producing and selling — for now.

Once Canada’s next phase of cannabis regulations take effect in October, Earth Dragon’s goods will hit the shelves again at licensed cannabis stores. Serra said she’s frustrated by some of the changes required — instead of their old decorated compostable paper boxes, for example, their products will be wrapped in regulation packaging emblazoned with Health Canada warning labels.

“As far as my recipes and ingredients — they can all stay the same,” said Serra, who will also continue to oversee Earth Dragon on Pasha’s payroll as their product manager.

“I didn’t just sell it and say goodbye to it.”

One of Prime Minister Justin Trudeau’s justifications for legalizing recreational cannabis was choking out the black market. Regulated alternatives to black-market weed would, in theory, draw customers away from the criminal organizations selling it: similar ideas ended alcohol prohibition in North America. Trudeau’s government has also been publicly adamant about shutting the door firmly in the faces of illicit operators looking to gain a foothold in the regulated market.

Canada’s biggest licensed producers such as Aurora and Canopy grow cannabis at unprecedented scales in facilities more akin to laboratories than grow-ops. Patrick Brauckmann, executive chairman of Pasha Brands, wasn’t impressed. He said the new regulated industry didn’t have any connection with the West Coast’s long-standing illicit market and highly experienced growers who were left out of Canada’s legalization regime entirely.

“The government obviously knew that prohibition wasn’t working, and it was bad for people, so they came up with legalization,” Brauckmann said. “But legalization excluded all of the original industry founders because it didn’t allow them a connection with a regulated industry — because they had previously been involved in an illegal activity.”

Certain key personnel at a cannabis company are required to get a Health Canada security clearance, in part, to ensure legal weed isn’t diverted to the illegal market. This includes not only a criminal record check, but also an examination of intelligence files gathered by law enforcement. Past associations with organized crime are considered, but Health Canada’s website said those charged with simple cannabis possession or small-scale growing “may be able to participate in the legal industry, depending on the circumstances.”

Legalization hasn’t deterred Canada’s illicit growers. Brauckmann said around 20,000 small-scale cannabis farmers — usually tending plots of several thousand square feet at most — are still active in British Columbia alone. He expected Canada’s illegal market will remain uninterrupted for several years in spite of legalization. However, Brauckmann said these small-scale growers recognize there’s going to be more money growing premium craft weed in the legal market.

“People are willing to spend hundreds of dollars for a bottle of wine — and the same will also exist for cannabis,” he said.

That’s why transitioning these illicit growers to the legal market is part of Brauckmann’s mission. Through B.C. Craft Supply Co., a co-op of sorts between small-scale cannabis growers who’ve received a micro-cultivation licence and meet Health Canada’s standards, Pasha will have a ready supply of high-quality craft weed. Brauckmann couldn’t talk specifics when interviewed by Star Calgary, but said several dozen growers had already signed on.

“Instead of us growing in a big facility like (Aurora) Sky, up in Edmonton, I can get the same production (as a) facility like that by working with 100 micro cultivators,” Brauckmann explained. “But I don’t have to worry about a crop failure because if one guy has a problem, I’ve got 99 more that are still in production.”

Meanwhile, Pasha Brands has raised more than $25 million to date and will keep raising capital. They’ve got a 10,000 square foot processing facility under construction on Vancouver Island and dozens of employees. Earth Dragon is among their portfolio of West Coast companies, as well as Grizzlers, sellers of pre-roll joints, Baked Edibles and medicinal cannabis provider Beard Brothers. All have put their activities on hold in preparation for their legal market unveiling.

Trina Fraser, a partner at Brazeau Seller Law who specializes in the cannabis industry, said there is a degree of uncertainty when staff apply for Health Canada security clearances, but it isn’t impossible.

“There’s no prohibition on legacy market participants from participating in the legal market per se,” she said.

For mainstream cannabis companies looking to capitalize on the name recognition of well-known illicit brands, Pasha’s strategy of snapping up brands such as Earth Dragon can even pay off. Brazeau said these deals can range from outright asset purchases to acquiring intellectual property, such as customer lists.

“These brands do have value to legal cannabis companies that could maybe offer legitimacy and credibility to these new companies who might be struggling in that respect,” she said.

Sometimes, Brazeau said, these deals include the talent of an illicit company — the master grower, edibles baker, or topicals producer. Their connections can be very valuable to licence holders, she said, even if only as a consultant to the legal company. In such a role, they wouldn’t be required to pass the intense background checks Health Canada requires.

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These haven’t been an issue for Pasha. Brauckmann said staffers holding positions requiring security checks are coming out of the legal industry. Much of the change required for outfits like Earth Dragon will be in their production methods and regulatory requirements.

Serra said Pasha is covering the cost of Earth Dragon’s transition to the legal market, including an upgrade to hydraulic presses capable of producing roughly 450 bath bombs an hour, far more than Earth Dragon’s staff could ever make by hand.

Pasha Brands wasn’t the first licensed producer to approach Earth Dragon, but Serra said their concept of buying other prohibition-era companies was a very different offer. And as successful as her company was on the black market, police crackdowns added to a sense of instability.

“People always bought our products and our website did really great,” Serra said. “There’s always work, but there’s always a bit of uncertainty: Is everything going to get shut down?”

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