When it comes to investing in the cannabis industry, the vast majority of companies are of the over-the-counter (OTC) variety. That is, they aren’t listed on the major exchanges (NYSE, Nasdaq, NYSE MKT). This will certainly change over time, as the industry is still in its infancy. However, at this point in time, you have to look to the OTC exchanges if you’re looking for a wide selection of cannabis companies.
So what are the drawbacks of investing in OTC stocks? Here are a few of the big ones:
- In many cases, the company is not required to file any financials with the SEC
- The stocks are generally not that liquid and can be easily manipulated
- There really isn’t any reasonable analyst coverage on OTC stocks
- Investors have to be aware of phony companies or those stocks involved in pump and dump schemes
The basic premise is that without the accountability needed to list on the major exchanges, there’s quite a bit more risk with OTC companies. So why would any legit company want to list on an OTC exchange?
First off, because the listing requirements aren’t as stringent, it’s an easy way for a company to get all their ducks in a row before up-listing to a one of the major exchanges. Think of it as an early-stage listing for younger companies.
More importantly, investors in smaller companies want to have an exit strategy in case the company doesn’t perform as expected. It gives big investors a fairly easy way to sell out their stake if management isn’t doing what’s expected of them. In other words, it’s a way to keep management accountable.
That being said, there are ways to determine which OTC companies are legit – and more importantly investable. These qualities are true for any industry, but particular so for the cannabis space because it is so new and basically unproven.
First and foremost, check the company’s website. A poorly presented website is the first red flag of a fly-by-night company. If management can’t be bothered to spend a little on a decent website, then chances are the rest of the company is a mess as well. The website is the first place potential investors go to research a company. Even rookie managers should know this simple fact.
Once you’re at the website, here are few things to look for:
- Is the information current? It doesn’t have to have been updated yesterday, but within a month or so is a pretty good sign the company is still functioning as intended.
- Check the news stream. Lots of news (legitimate news, not just fluff pieces of “promises” or jumping from one idea to another) is a good sign the company cares about impressing investors and is potentially making progress towards its goals.
- Look at the management team and directors. If C-level execs have a proven track record or if they are able to attract seasoned and successful board, it lends credence to the quality of the company. Don’t be afraid to contact the company to discuss any matter. Management needs to be open and transparent.
- Look for financial filings. An OTC company doesn’t have to necessarily file something every quarter, but there should at least be some financial documents to look at. If there’s a big gap since the last financial filing has been made, that could be a cause for concern as well.
- Finally, there should be a reasonable amount of content regarding the product. You should be able to easily grasp what the product is and get a ballpark idea of where it is in the development process. If you leave a website and still don’t understand what the company does, it’s generally not a good sign.
Of course there are plenty of other factors to consider, but the short list above will give you a good head start on the due diligence process. Good OTC companies are definitely out there, you just need to do your homework. Next time, we’ll take a closer look at some of the types of OTC companies which exist in the cannabis industry.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of PotNetwork.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://potnetwork.com/legal-disclaimer/.