The legalization of marijuana in Canada which took place less than five years ago has presented a number of challenges that continue to inhibit the ability of shareholders to make informed decisions. A surge of marijuana producers on the stock market sparked the interest of many investors, giving rise to a thriving bull market. However, many shareholders are beginning to express concerns surrounding the transparency of cannabis firms.
In order to maintain a steady increase of the cannabis sector on the stock exchange, it is imperative to develop a working relationship between Canadian firms and their investors, empowering shareholders to assess this new industry and its potential going forward.
As a trusted corporate governance advisory firm, our experienced analysts at Kingsdale Advisors have identified a few key reasons why marijuana firms must redirect their focus towards investor transparancy. Continue reading to learn how the implementation of better financial reporting practices will strengthen the market.
As a brand new sector, investors do not know how to approach marijuana firms, or gauge their sustainability as a sound long-term investment option. Growers thus far have failed to provide a working business model that positions the cannabis industry as a lucrative entity. Due to the highly competitive nature of the emerging sector, many firms directed their resources towards advertising on social media, and gaining the interest of potential shareholders. While this short-term strategy proved to be highly effective, investors are left with little information about the continued profitability of these firms, or their potential for growth. By providing a more transparent financial picture, marijuana firms will benefit from the sustained loyalty of educated investors.
Marijuana firms can be found across two different platforms including major stock exchanges, and “over-the-counter,” also known as “pink sheets.” Concern arises with companies that have chosen the route of trading on the pink sheets, as this leaves far more room for marijuana firms to omit important financial information without violating any laws. The standards for major stock exchanges differ in the sense that participating companies are required to file with the Securities and Exchange Commission. This regulatory body assures investors as it requires firms to provide detailed records of third-party transactions, and corporate governance. Investors are therefore able to gather information and form their opinions regarding the trajectory of the company. Pink sheet trading has therefore rapidly decreased in desirability, indicating a demand for a higher level of transparency.
For prospective shareholders who are unfamiliar with the marijuana sector, it is difficult to envision a clear path for these firms based on numerous false evaluations of profitability. As a supplier of cannabis, it is impossible to know exactly how much profit a single plant will turn over, due to the recent formation of the sector on the whole. All marijuana firms on the stock exchange are required to provide specific figures to support accounting requirements. However, these firms are granted the right to release highly ambiguous financial projections based on the little knowledge we have about the market and potential for recreational and pharmaceutical demand going forward. Investors are beginning to catch on to this flaw in the system, and are realizing they are unable to gauge the security of their investments in this sector. The best way to establish an accurate financial history that attracts new shareholders is by communicating with investors and creating a dialogue that helps inspire confidence in the longevity of the industry.
For expert corporate governance advisory services, our team at Kingsdale Advisory has the tools you need. Contact us to learn more about our range of offerings.
