Things to Consider When Investing in Marijuana

October 17th, 2018 marked the beginning of the legalization and regulation of recreational marijuana (cannabis) in Canada.

Anyone who is considering investing in marijuana companies – either producers or those providing ancillary products or services – should conduct their own research to understand the risks associated with investing in a potentially volatile marketplace. This post discusses some of the risk associated with investing in marijuana and the questions you should be asking yourself before investing.

Why invest – generally?

Individuals and companies invest with the overall expectation of generating a return. With any investment, a proportion of risk is attached. There is nothing inherently wrong with taking on risk when investing, but it is good practice to research, compare, and analyze potential investments before you invest.

Why invest in marijuana companies?

Though it has been highly publicized in recent months, the legal marijuana industry makes up a considerably smaller part of the current Canadian economy. All factors point to the cannabis industry growing at a fast pace, but you need to ask yourself whether you hold the same belief (based on your research) of the growth prospects. You shouldn’t compare one industry to another for potential growth (e.g. marijuana vs. alcohol or tobacco). Each industry is unique and the companies operating in these sectors have different legal frameworks, opportunities, and business resources. Approaching any investment decision from an informed basis, as opposed to a fear of missing out, is always best.

Specific considerations before investing in marijuana companies

The marijuana industry in Canada is relatively nascent and rapidly evolving. Some considerations before investing in this industry include:

  • The rapidly growing and evolving market make it potentially vulnerable to larger fluctuations in both share price and company valuation.
  • Given the focus and attention on the industry, many companies have recently entered the space and may not have the experience, knowledge or capital to become successful. For instance, many entrants appeared to have migrated from other industries such as mining or technology.
  • In the U.S., there is currently a conflict between state and federal law related to marijuana that may adversely affect Canadian marijuana businesses and investors dealing with the U.S.  Certain U.S. states permit its use and sale, while marijuana-related practices or activities, including the cultivation, possession, or distribution of marijuana, remains illegal under U.S. federal law.
  • According to a recent review by the Canadian Securities Administrators (CSA), the quality of disclosure in this industry needs to be enhanced.

Conclusions

Investing in the marijuana sector appears attractive to many retail investors – so a friend or colleague may encourage you to invest. The best way to approach this or any investment is to discuss your goals and strategy with your registered investment advisor and determine whether the investment aligns with them.

Reference the Resources and Informed Investing pages on the InvestRight page where you will find a variety of investor tools as well as some further question to consider when developing your financial goals.

Report a Concern

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.

InvestRight.org is the British Columbia Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.

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IFRS Part 2: Changes in Financial Statement Terminology

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