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Over the past year, Canadian-listed cannabis stocks have been the biggest driver of new business for the OTC Markets Group, which trades over-the-counter stocks in the United States. There are now 52 cannabis companies with secondary listings on the OTCQX market, and around 150 with secondary listings on the lower-tier OTCQB market. While the primary market for most of these early-stage and U.S.-focused marijuana firms is the Canadian Securities Exchange, billions of dollars worth of retail investor trades are happening over-the-counter in the U.S.

Despite being the lowest rung of the U.S. public markets, OTC Markets has taken a stricter approach to manipulative stock promotion – a practice endemic in the cannabis space – than Canadian markets and provincial securities regulators. Almost every time a cannabis company has been forced to retract a misleading statement or issue a mea culpa around paid promotion, it has been at the request of OTC Markets.

Cannabis Professional spoke to Cromwell Coulson, CEO of OTC Markets, and Jason Paltrowitz, director of OTC Markets Group International about their experience with cannabis stocks and policing paid promotion. Here are some highlights from the conversation, edited for clarity.

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On corporate governance

Mr. Coulson: Being public shouldn’t be painful. These are early stage companies, so we don’t expect them to have the corporate governance infrastructure that you would find in an Air Canada or an American Airlines. But we do want them to have an independent audit committee, we do want them to have a certain number of independent board members, we do want to make sure they’re having annual general meetings, that they’re soliciting proxies, and those types of things. We add on top of that an additional layer around promotion.

That’s not saying promotion is bad. But certainly where you have anonymous paid promotion or other promotional activity that we feel is detrimental to vibrant public markets, we take an approach that requires the company to disclose that promotion. If they weren’t responsible for it, they disclose they weren’t responsible for it. If they were responsible for it, we make them disavow it, if we think it’s egregious and not in the public interest.

On stock promotion

Mr. Coulson: We think promotion needs to change. We think regulators need to require more transparency around promotion. We believe that if Google gets paid $5 a click for the term “pot stocks,” and TD Ameritrade only gets $4.95 to do a trade, Google shouldn’t be sending people to anonymous, misleading websites. But we can’t do [anything about it] because we’re not a regulator. We can put transparency out there, and we’ve been putting a lot more information in the market, helping people connect the dots, but we’re not about deciding who is good and who is bad.

We want to make stock promotion a respectable profession, and we believe the online world creates a huge opportunity. If you think about cannabis or crypto or mining: these are small companies, big institutions are not going to be buying them. Companies that aren’t the big companies on the S&P 500, they need to connect with a community of investors that believe in their cause. Promotion should be something that we can figure out if we set standards.

What’s the reputation of Canadian junior exchanges?

Mr. Paltrowitz: Canadian markets have a history of resource stocks, very similar to Australia. It’s that speculative, very early stage, hole-in-the-ground stock, that comes with a lot of “advisers” around it. That’s where promotion grew up. That’s kind of how you sold a hole in the ground for gold, and I think on the venture markets, the Vancouver [Stock Exchange], it was just kind of the way things were done, and it was accepted almost, and so people looked the other way.

I think that’s changing, and I certainly think we’ve played a part in that, because we have been more strict. We will have companies come to us and say, ‘well we’re not doing anything wrong or violating the rules in Canada. As a secondary market you should just take our Canadian rules.’ And we say, ‘no, we have an obligation to protect the investors here in the U.S.’

Is the cannabis industry uniquely promotion-prone?

Mr. Paltrowitz: I don’t think cannabis is any different, certainly from a Canadian perspective, than the resource industry in Canada. It’s the same guys in many cases, they’re just on to the next thing. Some of the resource promotion you see, and some of the people you meet at PDAC [the Prospectors & Developers Association of Canada trade show] or VRIC [Vancouver Resource Investment Conference], these really low-end “investor relations” firms, it’s the same thing. I don’t know that cannabis has reinvented bad promotion.

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In many cases it’s not the company’s fault. It’s the CEO or the management team that needs to raise money, that feels really good about their business, but they don’t know where to go or where to turn, and they’re not knowledgeable enough about the capital market structures, and so sometimes they fall prey to bad investor relations firms, or bad ideas or bad financing. Where you find vibrant venture markets, where you find a vibrant entrepreneurial culture, you will find people that prey on unknowing management teams. We have it here: look at the Gold Bugs and the Silver Bugs; you’ll find it in Australia, very similar stuff. So I don’t want to give the impression that this is a Canada thing. It’s a venture market thing.

On the Canadian Securities Exchange

Mr. Paltrowitz: You will also find it is not a CSE problem. If you were to look at the TSX-V maybe not in the cannabis space, because they don’t have as many listings we see the same issues in promotion there as well. And so we certainly think the regulators should look more broadly at all markets with promotion.

Is it harder to police promotion with the internet?

Mr. Paltrowitz: There’s a lot more information, because there are a lot more ways to go about it. But it’s actually made it easier to police. Because you can get on Twitter, you can get on Instagram, you can get on whatever social channel, you can get RSS feeds for the name of the stock. We have a compliance team in DC that basically sits there and gets these things fed to them, through the power of the internet and technology. In the old days, you put out a piece of paper or newsletter that you would just mail to certain people to say that a stock was going to skyrocket. Those things are hard to get. Now all those things are online and it just gets delivered to your inbox.

How strict should you be around promotion?

Mr. Paltrowitz: Part of this is a learning experience for everyone. These guys don’t have experience, and unfortunately there are some bad actors in the investor relations space, so it’s incumbent on us to help companies learn to be public. These can be one of those teachable moments. You will find that in many cases they say, “it wasn’t me, we hired an IR firm.” OK that’s great. Well you hired an IR firm who did something they probably shouldn’t have done in the best interest of your company, so you resolve it that way.

Mr. Coulson: If you’re running a smaller company in a public market, you have to give them a chance to learn to be bigger companies; they’re going to fall, they’re going to stumble, they’re going to do wrong things, and they’re going to make mistakes. At the end of the day they’re going to realize that if they don’t provide consistent straightforward disclosure to the market, the market will punish them, and the press will punish them.

On the risks of the cannabis industry

Mr. Coulson: Cannabis is a really interesting sector, because we know where it’s going to be in ten years: it’s going to be a big business across the United States, but it’s not there yet. There are things that need to be done and there are entrepreneurs who need capital. They’re trying to land-grab, but they’re in a quasi-regulated state. It’s a challenge for securities markets and investors should know that this industry has high risk.

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Merrill Lynch did a business-to-business internet index around 2000 of the 20 largest business-to-business internet companies. I think only one is still around. The rest either went bankrupt or were gobbled up. We’re going to see this in this industry: a ton of volatility and some big names that think they’re going to become the next big thing are going to turn out to be

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