Securities regulators require full, true and plain disclosure of material facts by public companies, and there have been several instances in recent months where regulators have looked at specific industries.
A case in point is a Canadian Securities Administrators release on Feb. 23, 2015. It notes that staff of the British Columbia, Alberta, Ontario and Quebec securities commissions reviewed the disclosure of some 62 companies -- the majority of which were previously junior mining companies -- that intend to get involved in the medical marijuana industry.
In reviewing these would-be medical marijuana moguls the regulators found that 25 of them "raised serious investor protection concerns relating to balanced disclosure." As to the remaining 37 companies, they generally requested that the exchanges where their shares were listed halt trading pending the release of "more detailed and comprehensive information" about their intention to get into the medical marijuana business.
I suggest that anyone planning to invest in this area recognize the speculative risks and be prepared to see their investment go up in smoke. Only a handful of companies are Health Canada licensed producers under the Marihuana (sic) for Medical Purposes Regulations, far below the number of public companies planning to enter the medical marijuana business.
Dealers -- in securities as opposed to pot -- are required to know their product before making a recommendation to clients, and the CSA's release would be pertinent to dealers, their sales people, investors, as well issuers who are required to provide "sufficient and balanced disclosure related to their change in business to the medical marijuana field." The regulators are concerned that the companies benefited from "an immediate increase in their share price" when they announced their intention even though they omitted "important information such as the stage of their plans and any risks and uncertainties related to those plans." I'm generally suspicious when shares of speculative issues jump on limited disclosure and wonder who are the sellers.
The same concerns would generally apply to any public company intending to change its field of business. Too bad the CSA didn't release the names of any of the companies because their success or failure in their previous businesses might be an indication of how investors would fare in their intended new ventures.
Even when companies generally provide adequate disclosure, it is important that the people selling their stocks understand the products. Along these lines, the Financial Services Commission of Ontario and the Mutual Fund Dealers Association announced in January that mutual fund dealers who have salespeople also licensed as mortgage agents and brokers must also be licensed as mortgage brokers by FSCO if they want to sell syndicated mortgages. These can be complicated products, and since a mutual fund dealer is responsible for the actions of its salespeople it makes sense for the dealer to be a mortgage broker too. The salespeople would be required to take specialized courses to get licensed.
The FSCO and MFDA announcement follows a FSCO Public Alert last year regarding unlicensed syndicated mortgages. It received complaints about non-licensed businesses offering mortgage investments though websites and using terms like "guaranteed high rates of return" or "secured by real estate" or "RRSP and LIRA eligible."
In late 2013 the OSC announced that two individuals were charged with one count of trading without registration and one count of trading in securities when they were prohibited from trading. The charges stemmed from sales of syndicated mortgages.
They pleaded guilty to one count of breaching an Ontario Securities Commission (OSC) cease trade order and last month Bernardo Giangrosso was sentenced to 90 days in jail and two years' probation while his partner Naida Allarde Giangrosso was fined $5,000 and sentenced to two years' probation.
Also in January the Ontario Securities Commission issued a report on its staff's review of real estate investment trust distributions disclosure.
REITs own income-producing real estate assets. They tend to appeal to investors who look for predictable cash flow. The OSC looked at 30 REITs that had their head offices in Ontario specifically to assess the "quality and sufficiency" of disclosure regarding the sustainability of their distributions.
Key concerns pertained to distributions paid to investors by some REITs which exceeded the cash flows from these REITs' real estate properties. The yields might seem impressive to the unsophisticated investor but part of the money paid out might be financed by debt. The more a REIT borrows the more interest it has to pay and the less cash flow will be available to distribute to investors. The OSC found that 33% of REITs paid distributions that exceeded cash flow and that none of these provided "expected disclosures" about their excess distribution.
Furthermore it found that the amounts that were distributed by 70% of those REITs exceeded 10% of annualized cash flows. A dealer recommending a REIT to a client of course would have the expertise to understand financial statements and explain the risks to clients, including the potential impact of excess distributions. But people making their own decisions with little experience in complicated debt investments might need more extensive disclosure from the issuers. The OSC sets out several examples of improvement. It also requires REITs to comment on the sustainability of excess distributions and to provide immediate disclosure when a company makes a decision to cut distributions, "even before a company's directors approve it if the company thinks it is probable they will do so."
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