How Big is the Issue of Dilution in Cannabis?

The cannabis market has been one of the most interesting and exciting markets to watch and participate in throughout the past two years or so. With the changing industry has come new sets of laws as well as new ways for companies to produce liquid cash. With Canada and many states in the U.S. leading the charge for marijuana reform, will stock dilution be a problem for the industry this coming year?

One thing that is quite undeniable is the fact that the end of the 2018 year was quite rough for not only cannabis but the whole of the stock market. One of the most popular ETFs that tracks cannabis stocks, Horizons Marijuana Life Sciences has reportedly shot down by as much as 45% for the end of the year. There are plenty of reasons as to why this has occurred such as the skeptics of the market and various bouts of speculative news.

One of the main issues in the growth of the market is the time it takes for licenses to be given out so that companies can meet the extremely high demand of the market. Much of these troubles have been reflected in the earnings reports of some of the largest companies in the industry which has contributed to an unsettling feeling amongst investors. Despite all of this, one of the largest underlying reasons for the drop in prices has been share-based dilution throughout the industry.

Dilution in the pot stock market does not come without good reason. One of the main aspects of this at least as far as U.S. and Canadian companies are concerned is the fact that they are unable to receive normal methods of capital funding such as bank loans. This means that companies have turned to alternative ways of producing income such as bought-deal stock offerings. For those who don’t know, this is when sales of common stock are sold further in order to raise more capital for the company. With starting marijuana businesses being so capital heavy, the need for money is undeniably present.

While this may sound all well and good, these alternative capital growth methods have ended up diluting stocks more than anyone could have thought. Despite their year end numbers, share-based dilution shows that the majority of the companies in the industry are in fact down as far as share prices go.

The only solution to this, and the one that so many have been fighting for is high level marijuana reform. At least in the U.S., this means dismantling current systems of marijuana prohibition such as its federal Scheduling.

If the drug is able to be delisted or at least dropped down below its current rating alongside heroin and other dangerous drugs, companies may be able to receive loans and other banking services from federally insured institutions. This, however, can only come in time as the industry overall is still very much in its infancy. All said, it seems as though the 2019 year will be transformative for the world of cannabis, all we have to do now is sit back and wait.