Prospective investors in companies that are seeking to get into the medical marijuana business should do their due diligence before buying into these stocks, Canadian regulators warn.
The Canadian Securities Administrators (CSA) issued an alert Monday, warning investors about the risks of investing in medical marijuana stocks. Following a similar surge of companies looking to capitalize on the loosening of laws against the growth and sale of marijuana in several U.S. states, the CSA reports that a “significant number” of companies have also announced their intention to begin growing and selling medical marijuana amid new regulations enacted by the Canadian federal government earlier this year.
“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 a company’s stock price,” the CSA says, adding that it is concerned that “investors may face financial harm by purchasing such shares at an inflated price before there is a viable business.”
The regulators note that companies cannot legally conduct a medical marijuana business without a licence from Health Canada, and that “there is likely significant time and cost required to obtain such a licence.” It also provides a link to a list of companies that have been granted a licence.
“If a company is discussing or publicizing its intention to enter the medical marijuana industry, investors should understand what resources it has committed to its plan, as well as the related risks, cost implications and time required before it can begin licenced operations,” the CSA says. “There is no assurance that a company announcing its intent to enter the medical marijuana industry will be successful in obtaining a licence, or in creating shareholder value.”