New Regulatory Authority Vets Pot Stocks

Even in the wake of warnings from the SEC regarding fraudulent marijuana stocks, investors are still seeking ways to capitalize on the “green rush.” With no regulatory body in place—the majority of cannabis stocks are traded over-the-counter and are not required to submit audited financials to the SEC—it’s not surprising the market is still attracting a number of stock fraudsters and “pump and dump” con artists.

The Association of Responsible Cannabis Public Companies, Inc., is stepping in, aiming to increase self-regulation in the industry by encouraging legitimate cannabis companies to adopt high standards of investor reporting, even though their respective OTC exchanges may not require it. Over time, the organization hopes to increase investor confidence in this sector by allowing the badge of ARCPC membership, or lack thereof, to reflect a cannabis company’s commitment to financial transparency and strong ethical and operational practices.

“We’re looking to weed out the companies with red flags. The pump and dump companies, the ones with toxic debt structures, and the ones not generating revenue from the cannabis industry,” said founder and Executive Director, Alan Hawkins, a Florida-based business attorney. He collaborated with investment and cannabis professionals to establish an organization that would encourage self-regulation and determine the criteria to evaluate companies for potential membership.

The SEC suspended trading for five publicly traded cannabis companies earlier this year, including Cannabusiness Group, GrowLife, Inc., and Advanced Cannabis Solutions, Inc., due to questions regarding the “accuracy” of public information provided by the companies. But it was too late. By the time the SEC had issued its warning, many investors’ positions had been decimated.

“The markets are moving too fast for the SEC. The ARCPC will create some oversight and set a standard that the legitimate [cannabis] companies will try to achieve,” said Morgan Paxhia, a member of the board of the ARCPC and a founding partner at Poseidon Asset Management. “For the long term of our fund, we want a better functioning public market place.”

According to Hawkins, the ARCPC will grant membership to publicly traded cannabis businesses with responsible corporate governance and transparent financial reporting. As the organization gains momentum and expands its membership, investors can look to the ARCPC as a regulatory authority to ensure the stocks they are considering have met certain criteria.

Although the ARCPC will examine applicants’ financial statements closely before granting membership, the non-profit is not looking to compete with cannabis stock analysts. “We’re not trying to pick the winners or the losers. We’re making sure that they are revenue-generating companies and they’re actually generating revenue from the cannabis industry,” said Hawkins.

The ARCPC has extended invitations to stand-out companies in the cannabis industry but is also accepting applications through its website. The organization has three members currently—the American Cannabis Company, CannLabs, and Heliospectra—and looks forward to welcoming MassRoots, an app-based social network for cannabis users, to the organization in 2015, contingent on the company’s initial public offering.

ARCPC divides its criteria for membership between the tangible and the intangible: companies must derive the majority of their revenue from the cannabis industry, be registered under the Securities Act or the Exchange Act, and have submitted at least one periodic filing to the SEC. Members also must have a demonstrated business track record, a “bona fide business purpose,” and may not engage in excessive stock market promotional activities.

“We hope to become relevant along with the natural evolution of the marijuana index,” said Hawkins. “The index is evolving in the eyes of the investor and the public and we hope to become a relevant organization for publicly traded companies.”

Emily Fata is a financial analyst, writer and consultant focused on the cannabis industry. She builds financial models and writes business plans for cannabis cultivation/manufacturing companies, dispensaries and ancillary businesses. Emily has assisted a number of companies in Colorado, Washington, Nevada and Illinois raise capital and successfully apply for state cultivation and dispensary licenses. She began her career as an analyst at a private equity firm in New York City. Emily graduated magna cum laude from New York University with a concentration in International Relations and Economics. She lives in Denver. You can follow her on Twitter @EmPatriceFata.

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