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article imageCanadian Regulators — Pot firms failing on investor disclosures

By Karen Graham     Oct 10, 2018 in Business
Cannabis industry companies have several "deficiencies" in their disclosures to investors, including insufficient information in their financial statements, Canadian securities regulators say.
The Canadian Securities Administrators reviewed the disclosures of 70 public companies in the marijuana industry and found licensed producers often did not provide enough information for an investor to understand their performances, reports Canadian Underwriter.
The Canadian Securities Administrators (CSA), an umbrella organization of Canada's provincial and territorial securities regulators, found that 100 percent of 21 licensed cannabis producers — among a group of 70 industry operators reviewed - “needed to improve their fair value and fair value related disclosures.”
“Licensed cannabis producers often did not provide sufficient information in their financial statements and management’s discussion and analysis (MD&A) for an investor to understand their financial performance,” the Canadian Securities Administrators said in a report issued Wednesday.
Toronto Stock Exchange is operated byThe TMX Group.
Toronto Stock Exchange is operated byThe TMX Group.
TMX Group
“Some of the disclosure concerns that we identified were industry-wide, with most or all (licensed producers) having the same or similar issues.” This is particularly concerning because 74 percent of the 23 industry players have cannabis-related activities in the U.S., yet didn't provide sufficient disclosure of the risks inherent in a conflict between federal and state laws over the treatment of cannabis.
The CSA set out specific guidance for marijuana producers in Canada in February this year — simply because in the U.S. some states are permitting the sale and use of cannabis, even though its cultivation, distribution and possession are illegal under U.S. federal law.
In the February notice, the CSA said marijuana industry companies with U.S. operations would be allowed to list on Canadian exchanges if they made proper disclosures about certain risks given the drug's murky legal status south of the border.
Traders are seen working on the floor of the New York Stock Exchange (NYSE)
Traders are seen working on the floor of the New York Stock Exchange (NYSE)
Spencer Platt, Getty/AFP/File
After this review by the CSA, four companies had to re-file their management’s discussion and analysis (MD&A) documents “to correct more pervasive deficiencies,” the regulators said.
“In the event that U.S. federal law against marijuana is enforced, there could be material consequences for any issuer with U.S. marijuana-related activities, including prosecution and asset seizure,” the CSA warned in February.
The legal framework is increasingly permissive
Canada is an interesting country in that the provinces and territories have laws and regulations that seem to supersede federal laws. This is evident in the accounting practice that governs disclosures in the pot industry. A company is supposed to place a value on pot plants before they are harvested.
CSA found that 71 percent of licensed producers did not disclose the fair value amounts for cannabis plants separately — instead, the adjustments were often embedded in the cost of goods sold. Producers were also not disclosing how they calculated the fair value of their plants, also known as biological assets, the CSA said.
Green rush to the Great White North: U.S. cannabusinesses are listing on the Canadian Securities Exc...
Green rush to the Great White North: U.S. cannabusinesses are listing on the Canadian Securities Exchange for fast funding and growth opportunity.
Andy Burgess / Flickr (CC BY 2.0)
The system, as it is now, is confusing to investors because the method of accounting differs among pot producers and what is required in the different provinces and territories.
"The cannabis industry has benefited from increasingly permissive legal frameworks and has grown significantly as an emerging public market sector," the CSA said in the notice published Wednesday, reports the Cape Breton Post.
"Growing cannabis plants may progress through various stages prior to harvest, requiring management to make judgments at each financial reporting date," the CSA said. "Investors should be able to understand these judgments."
Mark Rosen, a co-founder of independent research firm and forensic accounting firm Accountability Research Corp, who has voiced his concerns about industry accounting practices in the past, said: "This should help to improve comparability across companies, which helps for investing and valuation purposes."
The trimmings and buds of marijuana plants are seen during a harvest at Alternative Solutions
The trimmings and buds of marijuana plants are seen during a harvest at Alternative Solutions
Brendan Smialowski, AFP
U.S. and Canadian laws on disclosures by companies
Disclosure is the act of releasing all relevant information on a company that may influence an investment decision. To be listed on major U.S. stock exchanges, companies must follow all the Securities and Exchange Commission's disclosure requirements and regulations. To make investing as fair as possible for everyone, companies must disclose both good and bad information.
The 10 provinces and three territories in Canada are responsible for securities regulations. Securities regulators from each province and territory have teamed up to form the Canadian Securities Administrators, or CSA for short. The CSA is primarily responsible for developing a harmonized approach to securities regulation across the country.
More about securities regulators, Canada, marijuana firms, disclosure statements, fair value