Pot firms have ‘deficiencies’ in disclosures, regulators say

Dozens of public companies reviewed by CSA fell short on requirements

ARMINA LIGAYA 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.

The umbrella organization of the country’s provincial securities regulators noted that 100 per cent of the licensed cannabis producers reviewed needed to improve disclosures regarding the fair value of their marijuana plants.

The accounting practice, in which a value is put on pot plants before they are harvested, has been criticized because it is confusing for investors and approaches differ among companies.

“The cannabis industry has benefited from increasingly permissive legal frameworks and has grown significantly as an emerging public market sector,” the CSA said in notice published Wednesday.

“Our review identified industry specific disclosure deficiencies, which are notable given the recent rapid growth of this industry.”

The CSA also noted that 74 per cent of

publicly listed cannabis companies with operations in the U.S. — where marijuana is legal in some states but illegal at the federal level — did not provide sufficient disclosure about the related risks, as previously requested by the umbrella organization.

In a previous 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.

The notice seeking improvement in disclosures from cannabis companies comes one week before recreational marijuana is legalized across Canada on Oct. 17.

In the lead up to legalization, investor interest in the volatile sector has soared. Valuations of some cannabis companies now rival those of firms in more established industries. For example, shares of Nanaimo, B.C.-based licensed producer Tilray Inc. rose as high as $300 (U.S.) last month on the Nasdaq market — up from $17 per share during its initial public offering in July.

The requirements outlined by the CSA will do much to improve investor understanding, said Mark Rosen, 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

“This should help to improve comparability across companies, which helps for investing and valuation purposes,” he said.

“Within the next year, the quality of the financial reporting of the LPs will become very relevant once the euphoria in the sector wears off, growth slows, and reality sets in.”