The devil is in the data. How else do you explain the fact that $23.3 billion was invested in the marijuana penny stock market last year -- almost as much as the $24.1 billion total of angel investments over the same period.
The popularity of marijuana companies aka Green Rush is easy to explain -- the legal cannabis industry is one of the fastest growing industries in the U.S. which expanded 74 percent to reach $2.7 billion in 2014 and is set to reach $10.2 billion in five years. Since a lot of companies in this field choose to go public, it made it easy to promote them to every-day investors.
On the contrary, angel investors represent a very limited group of people who have to match the accredited status and, if they satisfy criteria imposed by the SEC, are allowed to invest in privately held companies. According to the latest data I have, less than 3 percent of accredited investors invest in young privately hold ventures comprising of a bit more than 200,000 people.
Talking of the SEC, thanks to their recently enforced Reg A+ that allows businesses to raise up to $50 million from everyday investors in the form of a mini-IPO, I believe we are moving towards intelligent markets and Intelligent Private Offerings (my own invented version for the IPO abbreviation). But do markets like intelligent decisions? Well, it depends on which side of the equation you are on.
The data quoted at the top of this article illustrates that the desire to make money differs from the desire to make easy money. The first one motivates people to produce goods and services at a profit and it is often called entrepreneurship, the second motivates people to buy pot stocks.
The lavish amount invested in the marijuana penny stock market ultimately got lost by hopeful investors: thanks to insanely accelerating "pump-and-dump" schemes which were apparently provoked by the push for the legalization of the drug across the country.
Why one would ever buy sketchy stocks which are trading with a big red "STOP" sign on its page because the company is not providing financial information to potential investors is not my concern. Neuroscientists in their recent studies have proved that we are not genetically equipped to think logically or even independently: such thinking must be learned and "overwritten." Therefore it is one's choice to work diligently on wising up.
My concern is that the investment game is not a fair game since not everybody plays by the same rules. Marijuana investors who lost tens of billions last year felt victim to a classic "pump-and-dump" theme -- a term that describes a fraudulent activity which encourages investors to buy shares in a company in order to inflate the price artificially, and then selling one's own shares while the price is high.
And this is what really worries me. What I have come to realize is that this "pump-and dump" theme is the very nature of practically all new pre-IPO high-tech companies' offerings. Just think about it for a moment -- the company X has raised Y amount of money from angel investors (=accredited investors) and venture capitalists, who usually come in at the later stages.
Because of little or often no revenues, traditional quantitative valuation methods are of little use so valuations are largely determined based on qualitative elements. What does X do? It assumes the eventual selling price of the company (usually in 5 years period) which is then divided by the investors anticipated ROI to arrive at a current valuation -- and ultimately hires the investment bank to do an IPO.
The goal of the investment bank, which usually has up to six months, is building a demand for the shares and hype things up among large institutional investors. Once the company is public with the inflated by the investment banks value, the institutional investors in anticipation of decreasing hysteria (and as a result -- drop in the stock process) as well as initial investors quietly unload the shares leaving everyday investors with the downside.
For the past three years I've been writing a lot about why in a modern society we need to allow everyone to invest in private companies so I don't want to beat around the bush.
My hope is that the new Reg A+ which allows the raising of capital from both accredited and un-accredited investors, will be used wisely and intelligently. And from what I see, one of the most diligent ways will be to present the investment opportunity to your own customers, before even pitching it to the VCs and angel investors. Unless -- you need a professional guidance and mentorship as much as capital -- in this case you've got my blessing.
And remember -- you don't have to think outside of the box. Just think. There is no box.
Victoria Silchenko, Ph.D. is an alternative funding expert, Founder & CEO of business consultancy Metropole Capital Group and Producer of the Alternative Funding Forum. She is also an Adjunct Professor on "Entrepreneurial Finance" at CalLutheran University. LinkedIn: www.linkedin.com/in/victoriametropolecapital/, Twitter @MetropoleGlobal