Regulators Urge MMJ Investors to be Cautious

Since the federal government began issuing licenses to companies this spring, Health Canada has been flooded with requests for permits. There are only 13 companies that are licensed to grow medical cannabis right now. According to the federal government an average of 25 new applications to grow medicinal marijuana are submitted each week. Health Canada predicts that the number of patients seeking cannabis as a medical treatment will climb to 400,000 in a decade.

Medicinal marijuana is a $100 million-a-year industry in Canada. Legalizing marijuana for recreational use will make it as accessible and profitable as alcohol is today, raising its potential to billions each year. The medical industry is a business opportunity that’s also fraught with risk. The rewards could be high, but investors aren’t getting all of the information they need to make informed decisions, in some cases.

The old system, which Ottawa called the Medical Marihuana Access Regulations (MMAR), was rife with corruption. Some operations were small growers under the old system who were looking to get licensed in the new regime. A few of them seemed to be growing quite a lot of product for just a few patients. One grower was growing about 700 marijuana plants for just four patients – which would make selling all of the product impossible in a legal manor.

Speculation within the industry has it that the government has a finite number of medicinal marijuana growers in mind. This would make existing license holders the owners of a lucrative permit. Health Canada says it has no number in mind. Rather, they say that they’ll let the industry decide according to supply and demand.

Regulators have expressed concern about wild predictions made by companies rushing into the market in an attempt to lure investors before the boom cools off.

“The CSA is urging investors to be cautious when considering investing in medical marijuana stocks. While some have touted medical marijuana as a significant new sector for investment, the CSA has observed a number of small or inactive reporting issuers announcing medical marijuana business plans. In many of these cases, just the announcement of intent to develop a medical marijuana business has resulted in an immediate rise in the company’s stock price,” a federal regulator said.

Like the dot com business frenzy of the past, the medical marijuana industry is experiencing a boom. There’s millions – some would say billions – to make and people are scrambling to get on the train while it’s still a hot topic.

A sector review by Canadian regulators found that 72 percent of companies that announced plans to get into the medical marijuana business were previously companies that had nothing at all to do with medicinal marijuana, such as mining, technology and agriculture companies.

The report said that regulators saw that many companies saw a jump in their share price on announcing plans to enter the medical marijuana business, “even in cases where little, or any, substantive information was provided to the public about their prospective plans.”

Bill Rice, chair of the Alberta Securities Commission, said the bulk of the disclosures were unacceptable.

“The level of deficiency in issuers’ disclosure is unacceptable as investors need comprehensive, balanced information to understand the business changes being proposed by these issuers,” Mr. Rice said in a statement.

The report also said regulators required that 92 percent of the companies it reviewed were to issue new statements to investors to clarify their earlier press releases. Companies were asked to provide a clear discussion of their stage of entry into the field. This includes what work still needs to be done before a revenue-generating licensed business could begin operation, including whether a license application had been submitted and its current status.

In the future Health Canada and the Canadian Securities Administrators will have some hard decisions to make. With ever-evolving regulations and the weight of public opinion leaning toward universal acceptance of medical marijuana, someone will have to fill the void that exists between growers and patients. These commercial medical cannabis producers, eventually, will fill this void and ensure ill citizens get the medical treatment they need to increase their quality of life.

What are some risks associated with investing in cannabis stocks? Would you invest anyway? Share your thoughts in the comments below.