The Real Fake News: Stock Promoters Target Cannabis Companies
After MedMen Recently Admitted to Leveraging Stock Promoters, Here is What Investors Need to Know
Guest Post by Todd Fromer, Managing Partner at KCSA Strategic Communications
Recently, MedMen admitted to using stock promotion tactics. They aren’t the first and won’t be the last. In fact, the cannabis sector has become a breeding ground for stock promotion and misinformation quite simply because of a few reasons, such as there is no significant institutional investor ownership yet in the sector. As a result, public cannabis companies find themselves fighting for the same limited retail investor dollars. This is where stock promoters prey. Additionally, cannabis companies who are just launching or ramping up revenue can feel pressure to compete with those who are currently the industry leaders can fall victim to dubious stock promoters who cut corners with false promises via websites with little organic traffic or reputation.
Stock promoters tend to move from one hot new industry to another that share these same characteristics. Not surprisingly, in the past, some of the other sectors these stock promoters have infiltrated include bitcoin and blockchain. For example, late last year, two blockchain CEOs were charged by U.S. regulators in a $27M scam to defraud investors. Another breeding ground for this kind of stock promotional activity is with early stage micro-cap pharmaceutical companies who are in phase 1 or phase 2 trials for orphan drugs.
In each of these instances, the CEOs of the companies would like to see their stocks appreciate and receive some investor attention. However, they well know they cannot get analyst coverage from the institutional Wall Street brokerage houses due to their low market capitalization, no or low revenues and low trading volume. This situation can sometimes lead the CEOs of these companies to make the wrong choices about how to go about achieving these desired objectives.
What does this mean for investors?
- Investors should always look for stories from “real”, reputable industry media and not “fake” media. It’s alright to be suspicious. Have you heard of the publication before? Are other articles being written about ‘brand name’ companies or is there a focus on a specific sector?
- Does the article indicate that someone paid for it? Does it have an author? An actual person’s name? Now, very credible publication’s like The Economist don’t list author’s names, but most do. If companies only have articles written on them by no-name publications or appear in articles on no-name websites, like-wise it would be wise to be cautious. Just because something appears in print does not mean it is necessarily to be believed!
- Is it too good to be true? Then it most likely is. If you are reading stories about public companies that claim to have “explosive” or “dramatic” revenue growth or they are primed to be the next “Apple,” don’t fall for it. Ask yourself if any corporate lawyer worth their salt would allow its client to make such dramatic claims. Look for companies that provide absolute numbers, not just growth rates. Remember, it is very easy to grow dramatically from a very small base of revenues… and a million bucks really ain’t what it used to be!
What does this mean for CEOs of companies in these sectors?
While it is tempting to write a check to someone who promises you appreciation in your stock and increased investor attention, it is the responsibility of the CEO to be very skeptical of such a promise and inquire how this will be accomplished.
As a CEO of a company in an emerging industry, you need to realize that, when there is an absence of any significant institutional investor interest, these kinds of promoters will try to prey on you. However, you also need to understand that what they are offering you is less than a zero-sum game. There is a very real risk to your company’s reputation, your company’s stock price and possibly, your company’s business longer term. The best thing to do in these types of situation is to decline the services of any such stock promoter, especially those who promise a specific impact to your share price in a specific time-frame and who has partnerships with no-name websites or “fake” media. Instead, opt to do the prudent thing and eschew them and stick with established major media and the more established Investor Relations firms that follow best investor relations practices.
As the cannabis sector continues to gain momentum it’s critical that both investors and company management remain vigilant. It is all too easy to get wrapped up in false promises and quick fixes but there are truly no shortcuts.
Todd Fromer is a Managing Partner at KCSA Strategic Communications, one of the nation’s top cannabis communications firms, and oversees the firm’s investor relations practice.
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