Marijuana Stocks Pose Investor Risk, Watchdogs

Canada’s securities watchdogs are warning investors to be wary of publicly traded companies with ambitions to grow and sell medical marijuana after a rush of at least 13 firms into the industry.

Investors may be at risk if they buy into small or previously inactive stocks seeking to enter the business after Canada moved to commercial production of the drug on April 1, Canadian Securities Administrators said today in a statement. The change was designed to replace home-grown medical marijuana.

"In many of these cases, just the announcement of intent to develop a medical marijuana business has resulted in an immediate rise in a company’s stock price," said the CSA, an umbrella group for the country’s provincial and territorial securities regulators. The Montreal-based agency didn’t identify any companies by name.

Investor interest in marijuana stocks has soared as regulatory changes in Canada and parts of the U.S. have opened the door to legal business opportunities. There about 13 marijuana-related companies on the junior Canadian Securities Exchange, according to James Black, a Vancouver-based vice president of listing development for the exchange. The TSX Venture Exchange lists one stock.

‘Dot-com Era’

"Investors should be aware that companies cannot legally conduct a medical marijuana business without a license from Health Canada, and that there is likely significant time and cost required to obtain such a license," the CSA said in the statement.

Health Canada, a federal department, has so far licensed 20 companies to cultivate marijuana and had 858 applications for licenses as of May 20, Sara Lauer, a department spokeswoman, said in an e-mail response to questions. Of those, 370 were returned because they were incomplete, 149 were refused and 30 withdrawn.

"It’s kind of like the dot-com era," Bruce Linton, chairman of Ottawa-based Tweed Marijuana Inc., said today by telephone. "There are going to be those who talk about doing and those that are doing."

Tweed, which is among companies that have been granted a license by Health Canada, has more than tripled to C$2.88 ($2.65) on the TSX Venture Exchange from its private placement price of 89 cents on March 7.

‘Get Educated’

"I just urge people to be very cautious," Nick Brusatore, chairman of Affinor Growers Inc., said in a telephone interview. Buyers of marijuana-related stocks should be asking themselves "is there a real tangible business opportunity with a proper, qualified team of people ready to execute it?"

Montreal-based Affinor, which has risen 2,780 percent this year on the Canadian Securities Exchange, is seeking regulatory approval to grow marijuana in Canada, said Brusatore. The Affinor chairman said he’s been in agriculture for 15 years.

Next Gen Metals Inc., a Vancouver-based venture capital provider with plans to fund investments in medical pot, industrial hemp and alternative medicines, is organizing the GreenRush medical marijuana investment conference in Toronto on June 26.

"It doesn’t matter which new industry comes along," Harry Barr, chief executive officer of Nex Gen, which also trades on the CSE, said by telephone. "When you’re looking at a start-up company in a start-up industry, you gotta get educated."

Canada’s warning follows investor alerts about marijuana-related stocks from the U.S. Securities and Exchange Commission and the U.S. Financial Industry Regulatory Authority.

Legal Marijuana

"With medical marijuana legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention -- including the attention of scammers," FINRA said on its website.

Investors should be wary of "pump-and-dump" ploys in which investors are lured by aggressive and potentially false statements designed to create unwarranted demand for small companies, FINRA said.

The SEC said in a May 16 statement it temporarily suspended trading in five marijuana-related stocks in the U.S.