Canada, which has long been known for its financial dependability and the presence of secure banks, has now become a location for marijuana growers and bitcoin miners to set up base.
The easy listing rules on Canadian junior exchanges have made it easy and strategic for some such companies to consider opening up in the Canadian Wild West.
There are examples around. Vancouver-based Cryptocurrency Miner HIVE Blockchain Technologies, which is backed by Canadian businessman and mining financier Frank Giustra, saw its value triple on the very first day of trading. It went on to become the largest blockchain-related company anywhere.
However, blockchain technology comes with many complexities attached as do Lithium stocks. Recently, Vancouver-based Liberty One Lithium Corp rose around 250 per cent after paid promotions. Paid Stock promotions that are done to increase the market value of a company became part of the new round of business. However, Liberty One’s value dropped by almost two thirds after rules tightened following such action.
Using online promotional tactics and such strategic moves to make a business seem more exciting and ‘investable’ can backfire, experts said. Those that used paid promotions or short term news to help the stock’s surge can then end up losing a lot of shareholder value.
West High Yield Resources Ltd, a small magnesium explorer in Calgary, saw a 1000 per cent surge after an asset it owned sold for 46 times the value of the company. While this initially appeared positive, later the financing on the deal fell through leading the stocks to plunge drastically.
Investing in the Toronto Venture Exchange is not like investing in the New York Stock Exchange, according to experts.
The Rule of thumb is, the bar lowers with each hop from the New York Stock Exchange to the Nasdaq to the Toronto Stock Exchange. “And then it really drops off going to the Toronto Venture Exchange.” One expert recently told a media organisation.
However, the paid promotions which these companies have been indulging in are not illegal. But some companies have come under the scanner for not disclosing such promotions. According to reports, the reason many of these overnight hits and misses come to Canada is the availability of a large number of zombie shell companies that can provide easy market access.
“It’s not that our listing standards are lower, but they’re tailored to those companies that are still in that venture stage and growing,” Brady Fletcher, who heads the Toronto Venture Exchange told an agency reporter.
[pullquote align=”normal” cite=”Brady Fletcher (TSX Venture Exchange)”]“It’s not that our listing standards are lower, but they’re tailored to those companies that are still in that venture stage and growing,”[/pullquote]
Using reverse-take-over (RTO) methods also makes it hard. They are backdoor shortcuts that take a company to listings.
A reverse takeover (RTO) is a type of merger that private companies use to become publicly traded without resorting to an initial public offering (IPO). Initially, the private company buys enough shares to control a publicly-traded company. The private company’s shareholder then uses its shares in the private company to exchange for shares in the public company. At this point, the private company has effectively become a publicly-traded company. An RTO is also known as a reverse merger or a reverse IPO.
Experts feel like Canada remains one of the few places where RTOs are still widespread. In 2011, the U.S. Securities and Exchange Commission brought out new rules that made it harder for private companies to use them. The U.K.’s Financial Services Authority also curbed usage of RTOs.
However, for Canadian marijuana stocks, this has been a great way to access the hot market. According to leading media reports, the combined market value of Canada’s marijuana stocks has soared to $20 billion, while the 19-plus blockchain and bitcoin-related firms are worth about $3 billion.
A reverse takeover means that the company takes a back door into an exchange; however, it could also mean that the exit can become just as bad.