Marijuana companies are misleading investors, securities regulator finds

Growing pains are showing in Canada’s fledgling marijuana industry, according to the Canadian Securities Association (CSA), whose new report looks at the reporting practices of 70 public cannabis companies and finds that investors aren’t getting enough pertinent information regarding their financials.

The long-awaited end to cannabis prohibition is finally at hand as Canadians prepare themselves for legal weed as of this Wednesday. Industry experts are predicting an initial shortage in supply, with licensed growers currently scrambling to scale up production, while on the investor side, interest in Canada’s pot companies is at its peak and continues to push valuations higher, causing many to worry about a pot bubble ready to burst.

But the new report from the CSA, an umbrella group representing provincial and territorial securities regulators, effectively claims that the industry faces more problems than unmet quotas and sky-high valuations, arguing that accounting practices in the sector need to be clearer and more transparent, particularly surrounding the prospective value of the pot plants they’re growing.

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“[International Financial Reporting Standards] require that growing cannabis plants be recorded at fair value and what our review found was that for licensed producers, their disclosure on income statements was weak around changes in fair value of those biological assets,” says John Hinze, director of corporate finance for the BC Securities Commission, in conversation with BNN Bloomberg.

“Keep in mind that accounting standards do provide choices and companies have to determine what accounting treatment is appropriate for them, and our role is to in part help to ensure that their disclosure is then sufficient,” says Hinze. “Specifically with respect to fair value changes, what we would say is a better disclosure practice would be to provide more information on the face of the income statement, for example, splitting out the components of those fair value changes, which would provide more information to investors so that they can more easily compare between cannabis issuers.”

The CSA has already had to deal with the thorny issue of Canadian pot companies that have interests in the United States, where cannabis is still a Schedule 1 narcotic at the federal level. Last year, it decided that companies should be allowed to go public as long as they clearly and fully describe both the nature of their US interests and how they plan to stay in compliance with US laws on a state-by-state basis.

Hinze says the new report found problems with a full 95 per cent of Canadian cannabis companies’ reporting yet that in no instances was there indication of deliberate attempts to mislead investors, which he says is a positive.

“It’s important for investors to have comparable financial information so that they can make informed choices,” Hinze says. “For investors who are in the cannabis industry, they should be aware that accounting policy provides for licensed producers to make choices around their accounting treatments and, of course, that could mean that their financial statements might look very different then their competitor.”

“Cannabis is a relatively young and rapidly changing industry and it’s not unusual for disclosure practice to vary more in a less mature industry like cannabis or blockchain and cryptocurrency versus more mature industries like mining or real estate,” he says.