By Fred Dreier
Cannabis companies that trade on the public markets have had a rough go of it in recent weeks.
After a stellar first quarter in which many cannabis stocks posted sizable gains, the United States Securities and Exchange Commission suspended trading of several marijuana-related companies, including Advanced Cannabis Solutions and Growlife.
The actions sent cannabis stocks into a tailspin and damaged the already-fragile reputation of publicly traded marijuana firms, which also took a hit last August when the Financial Industry Regulatory Authority (Finra) warned investors of “potentially fraudulent” marijuana companies.
Marijuana Business Daily spoke with Christopher Taylor – chief financial officer of Advanced Cannabis Solutions – about the reasons behind the SEC’s action, what impact it had on the company and how public firms can avoid these problems in the future. (Note: The SEC allowed the firm to resume trading earlier this month but has not released details about its investigation.)
Q: What can you tell us about why the SEC halted your stock?
A: It has to do with this affiliate shareholder that [the SEC] says has sold shares illegally. It was a complete shock to us. We can’t confirm [who the affiliate shareholder is] because they are investigating. In the meantime the SEC won’t discuss it with us.
Q: How do you go about regaining investor confidence in your company?
A: We’re just moving ahead. We closed recently at just under $23, and when the stock halted it was $30, so that was pretty good. If the stock stays up, and it stays up because [investors] see us executing our business plan and filing our financial statements on time, things will work out.
There are deals we are doing, and we will continue to increase our revenue. We have investment capital available. We’re continuing as a business. People have confidence in our stock, or else we would have been completely flattened.
Q: How do you manage investor relations after something like this?
A: We’ve been very up front about it. When asked, we give out all of the information we possibly can. To be very clear, this is not the result of how we managed the company. Our business model is sound and we have a lot of investors behind us. Our shareholders seem to believe us. They’re not blaming us.
Q: Regulators are warning investors that the public cannabis sector is full of pump-and-dump scams. How do you differentiate your company from the questionable businesses in this sector?
A: For one thing we’ve stayed away from putting out speculative press releases, and instead we only put out press releases based on material events. We’re not out there on Facebook telling people to buy our stock, or talking about it on bulletin boards. We only put out releases out when it’s important.
We’ve been criticized for not putting out enough information, actually. We also don’t pay for any stock promotion. We do have an investor relations firm but all they do is disseminate our press releases through their email lists. When we first started we were approached by a lot of investment companies that want to buy your stock at a discount and then promote it and sell it to make a quick profit. We don’t do that promotional stuff. That is what Finra is looking at.
Q: You took the company public through a reverse merger. What advice do you have specific to the reverse-merger process to prevent an SEC halt from happening?
A: First of all, you need to know the old shareholders and the position they have in the shell company. Make sure you thoroughly vet everybody involved with the reverse merger who is going to own stock. I mean really get to know who you’re dealing with.
The old shareholders, often times the majority shareholders in the old company, will receive a large block of the new shares. They can very easily become affiliate shareholders who are subject to restrictions. One of the disadvantages is if the publicly traded company is deemed to be a shell company, the stock will be restricted for a year. Make sure that you understand their existing stock positions, not just what they’re getting in the new company.
Q: Could these old shareholders hurt your company’s position?
A: Yes. If any of those large shareholders have blocks of stock, then they are going to become affiliate status, where they have to have the legal requirements that go with selling them.
Q: What lessons have you learned from the ordeal?
A: Be aware that the government is not here to help us. I wouldn’t say they are the enemy but the are not our friends. Part of the problem is there is a bubble in the market right now, and they are concerned that the stock is being driven up by using less than legal means and that investors are going to get burned.
Q: Is there a broader story here?
A: If you want to slow down the market and take the bubble out of marijuana stocks, you nail a few of the big premier companies that have good reputations and are performing, and that will do it. If you go after a few sleazy smaller ones – the real pump-and-dumpers – what’s that going to do? Look, the stocks are down 30% in this sector.