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What is the cannabis industry?

As Canada and jurisdictions in the U.S.A. have reviewed and updated laws related to the use and sale of cannabis, the emerging market has gained momentum and built excitement amongst investors hoping to cash in on “the next big thing.” However, as with all evolving business models and legislation, there are many potential risks you should be cautious of.

Considerations before investing in cannabis

As with any emerging market accompanied by significant speculation and excitement, there are a number of risks that should be carefully considered before investing. The following are especially true for the growing cannabis industry.

  • No guarantee of success: Despite the rapidly growing number of companies in the sector, there remains no guarantee that their businesses are profitable or will be in the future. Many cannabis companies are speculating about their success on future distribution and companies’ forecasts of success may only be hopeful speculation.
  • Government and legal considerations: Even with the legal regulations now complete, there may still be changes to the laws regarding where cannabis can be sold and if it can be advertised – any future changes may ultimately decrease the value of an investment.
  • Pricing and taxation: Government-mandated pricing and taxation on cannabis products may also pose a risk to the success of the legal cannabis industry. Cannabis products, especially those intended for recreational use, are generally priced above the black market. In this fast-evolving situation, it’s unclear that legitimate companies growing and selling the products will be able to sell enough product to make a profit.
  • Investing in American companies: While the sale and distribution of cannabis is legal in some states, it is still illegal under federal law. Should the American federal authorities choose to enforce the law, it could put the money of investors at risk.
  • Inflated share prices: The cannabis industry has generated a great deal of interest among investors with the expectation of quick growth. However, it’s important to remember that these investments can be highly speculative and based upon expectations of future success, rather than current performance. You ultimately risk paying an inflated price for an investment that may not increase in value.

Researching cannabis investment opportunities

With a highly speculative market like cannabis, the potential for misrepresentation is at an elevated level. One big concern is the level of transparency and disclosure of this emerging industry. In October 2018, the Canadian Securities Administrators published a review of 70 reporting cannabis issuers’ continuous disclosure, and highlighted common deficiencies. The review showed that quality of cannabis companies’ disclosure needed to be improved, and a review of best practices.

If you are considering investing in a cannabis company it is a good idea to research the investment opportunity, determine that it is legitimate, evaluate the risks and consider how the investment will meet your financial goals before you get swept up in the excitement and ‘high’ of the industry.

  • Review disclosure documents and materials. Companies offering individuals the opportunity to invest are required to provide specific disclosure documents that contain information about the business, its management, comments on how the company has performed, industry trends or events that may have affected the company’s performance, operations and business risks, including the nature of its operations in specific countries and states, as well as how it complies with laws in each jurisdiction in which it conducts business. 
  • Speak with a financial adviser. Advisers can answer questions about particular investment products and assist you with selecting investments that can help you achieve your financial goals.
  • Learn more. Explore more articles, tools and resources on checkfirst.ca to learn more about investing, including investing basics, investing dos and don’ts,and the red flags of investment fraud.
  • Contact the Alberta Securities Commission. If you have further questions or concerns about investing in the cannabis industry.