It seems that everywhere you turn the news is covering recent changes to legislation regarding the use of marijuana. In some U.S. jurisdictions, these changes involve either allowing for the medical or recreational use of marijuana, or the decriminalizing of possession in small amounts. As a result, many companies have stated their intentions to become suppliers of marijuana, with some retail investors looking to “get in on the ground floor.”
On Friday, April 4, 2014 the first marijuana producer began trading on the TSX Venture. There are also a number of these companies trading on different Over-the-Counter (OTC) markets in the United States (including the OTC Bulletin Board and the OTC Markets Group’s OTCQB and OTC Pinks) purporting to becoming major players in this new sector.
Less than a week after that April 4 trading start, an SEC crackdown caused some of the most popular stocks in the sector to crash.
So what do you need to know?
- Similar to the dot-com boom back in the late 1990s and early part of the last decade, there is a great deal of hype about the cannabis sector; share prices will tend to fluctuate based on speculation rather than on real market value.
- The ASC does not recognize any OTC markets as exchanges. Stock exchanges such as the Toronto Stock Exchange, Nasdaq and the New York Stock Exchange have specific quantitative and qualitative listing and maintenance standards that are monitored and enforced. OTC markets are simply stock quotation services – there are no defined standards for companies quoted on these markets. This increases your risk of potentially losing your money.
- OTC companies with a connection to Alberta may be required to file with the ASC and other Canadian regulators either audited or unaudited financial reports depending on their OTC tier; failure to comply will result in a company being cease traded, leaving investors unable to sell their shares.
How can you help protect your money and avoid being scammed?
- Exercise extreme caution when considering an investment in any highly speculative market like marijuana stocks, as the potential for misrepresentation is at an elevated level. Relying solely upon information found on message boards, in stock promotion newsletters or provided by the company can result in significant losses.
- If, after thorough research, you still want to invest in this high-risk sector, familiarize yourself with the regulations, licensing bodies, etc. that govern the growing, processing and distribution of marijuana either for medical or recreational use where it is allowed.
- As with any financial transaction, be well informed so you can decipher whether the information you’re being given is true, and don’t take significant risks with money that you cannot afford to lose.
The bottom line is that it’s your money, but you’ve worked hard for it. Take steps to think critically about the risks you are taking when investing.
The Canadian Securities Administrators issued an alert on June 16 about investing in marijuana stocks. For more information, check out an investor alert issued by the Financial Industry Regulatory Authority in the United States (FINRA), as well as an investor alert on marijuana-related investments by the U.S. Securities and Exchange Commission.
Next week we’ll return to our regularly scheduled blog series “Summer Celebrations” with a post on advice for new grads.