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Some of Aphria's medical marijuana plants grow in their greenhouse in Leamington, Ont., May 26, 2014.

GEOFF ROBINS/The Globe and Mail

The stock market is no place for the medical marijuana industry – at least until companies can show investors they won't get burned – according to one of the largest Canadian growers operating in the new sector.

Executives at privately owned Tilray, based in Nanaimo, B.C., say there is too much regulatory uncertainty and not enough clear financial data to predict with any level of certainty where the industry will be several years from now.

That lack of clarity – reminiscent of the early days of the dot-com sector – leaves the door open for investors to be taken by promises of lofty profits and growth, which will only hurt the credibility of an industry trying to establish itself.

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"I know some are legitimate players, but there's no data, there's no metrics. This is a new industry, a new regulatory environment. The mechanics aren't completely fleshed out yet," said Christian Groh, partner at Privateer Holdings Inc., the venture capital firm that owns Tilray.

"The demand [from investors] is there – we all understand that. But you're talking about basic business fundamentals that aren't even established yet. And for people to go out on an exchange and to put out press releases, or to say they're going to do something, it's disingenuous. … Quite frankly, I think it hurts the industry."

They are the first comments from a company inside the industry voicing its opposition to going public, at a time when dozens of firms have been pursuing initial public offerings, reverse-takeover listings, or selling shares in the over-the-counter market to capitalize on appetite from investors looking to get in early.

Canada moved to new regulations in April, allowing for licensed production and sales of medical marijuana, which lets users with prescriptions buy from producers who are licensed by Health Canada. That change has resulted in a rush of companies looking to get into the space, and a surge in medical marijuana-related stocks popping up.

Tweed Inc. became the first Canadian company to do an IPO in April, with a facility based in Smith Falls, Ont. Meanwhile, Aphria, a Southern Ontario firm headed up by the former chief executive officer of vitamin giant Jamieson Laboratories, has plans for a forthcoming listing. While Tweed is traded on the TSX and Aphria expects to list there, smaller firms trading on junior exchanges and in the over-the-counter markets have raised concerns.

Last month, a Canadian securities watchdog issued a warning about firms claiming to be in the medical marijuana business, urging investors to be wary, though it did not name names. "In many of these cases, just the announcement of intent to develop a medical business has resulted in an immediate rise in a company's stock price," Canadian Securities Administrators said in a statement.

"Investors should be aware that companies cannot legally conduct a medical marijuana business without a licence from Health Canada, and that there is likely significant time and cost required to obtain such a licence."

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The Canadian warning came after the U.S. Securities and Exchange Commission froze several stocks trading on the over-the-counter or "pink sheet" market this year, and the Financial Industry Regulatory Authority warned about "pump and dump" schemes surrounding penny stocks.

"A lot of these companies are doing it for the wrong reasons and we just philosophically don't agree with it," Mr. Groh said.

There have been 30 deals and stock listings in the medical marijuana sector in Canada and the United States in 2014, according to a report by PricewaterhouseCoopers LLP.

Mr. Groh said Privateer has no desire to raise money on the public markets and is instead looking to acquire firms with legitimate operations. Seattle-based Privateer has its roots in the tech sector as a venture capital investor, but Mr. Groh said the firm prefers the private equity model for the medical marijuana industry, and is looking to acquire and help operate the businesses in which it invests.

Sources close to the industry said Privateer offered to take a significant stake in Aphria but was rebuffed. Mr. Groh would not discuss names, but said Privateer is seeking further investments in Canada. The name Tilray was selected by the same branding company that helped name the Starbucks coffee chain. The company, which operates a 70,000-square-foot facility in B.C., is looking to open or acquire a second, larger facility in Canada as it ramps up production.

Companies looking for growth in the medical marijuana business are generally pursuing a dual strategy: For now, the firms are setting up to supply the high demand expected in the coming years for medically prescribed marijuana. Longer-term, they are also gambling on the possibility that it could one day be legalized for recreational use, similar to alcohol.

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But as the industry looks to gain credibility as Canada formalizes the regulations governing the medical side of the business, Mr. Groh said the sector can't afford to have controversies involving stocks that are not credible, forcing regulators to issue warnings. "It's already a taboo industry enough," Mr. Groh said. "This is just another [problem] that makes it more complicated."

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