American Green Stock could become a cautionary tale of what not to invest in. The story of how it gambled on its dream of building a resort in the desert is a good lesson on the cost of miscalculation in running a cannabis-related business.
Last August 2017, the penny stock turned heads when it chose to invest in the town of Nipton based on its vision of turning the area into a cannabis cultivation and product hub. By March 2018, news broke out that the company had already transferred assets in the amount of $7.73 Million to Delta International Oil & Gas. The deal included a proviso assigning to Delta a debt in the amount of $3.73 Million in addition to the company receiving from Delta at total of $4 Million in secured convertible preferred stock. These kinds of stock benefit the holder with a 5% annual dividend.
It was a good dream. But all dreams come to an end, they say. It began with a plan to turn Nipton into a mecca for cannabis business. Yes, the cannabis industry does hold much promise. The penny stock company saw the enormous potential and took the dive. The small town in California near the Nevada border reportedly has a total population of 15 to 20 people. Had American Green’s plans worked out, the town could have seen a boom that would bring flocks of people and businesses all connected to the cannabis industry. It was reported that the purchase was made for $5 Million to achieve the goal of making Nipton a “Pot Town”. Founded in 1905, Nipton became a train stopover for speculators looking for gold in the desert and for folks raising and trading cattle.
After some time, the company probably realized it was in too deep and found itself struggling with its head just above the water. To give credit where credit is due, the penny stock took the risk — but paid for it in the end. Finding itself in a financial quandary, it had to run to Delta for rescue. After Delta’s acquisition, plans were made to transform the place into an “80-acre cannabis-themed resort”.
Is this normal behaviour for a company engaged in the cannabis industry? It is a penny stock, after all. A “penny stock”, according to the Securities and Exchange Commission, is any company that has shares valued at less than $5. In the past, the term ‘penny stock’ was used to refer to companies with shares that go for less than a buck. In general, penny stocks are considered to be for high risk tolerance investors, or those who can afford to lose big by risking to potentially gain a high reward. Based on stock market performance, gains from penny stocks takes months or even years to realize.
Slicing through the thick investment lingo, what happened simply means that American Green Stock had just bailed on Nipton and Delta is now the new owner of the assets, as well as the liabilities. Only time will tell if Delta can really service the debts it has incurred out of the deal.
This development is a far cry from the hubris that one could read from the company’s literature about its erstwhile investment. From its own website, www.americangreen.com, the company states that it runs a “state-of-the-art cultivation facility in Phoenix, Arizona”. The site also provides information about how the company is involved in “the sale or creation of several apps supporting cannabis and small businesses.” In addition, the company reports that it has an apparel shop in the Amazon marketplace and an online store for cannabidiol (CBD) that is derived from organic hemp. A tab on the website also leads the reader to a specific page on Nipton. On the new page, one will see text in large font that banners: “American Green welcomes you to Magical Nipton…established in 1905, revitalized in 2017”. The word “revitalized” most likely refers to the American Green’s purchase of the town. The company refers to Nipton as the “New Wild West”.
Business gurus could easily say, “Well, that’s the nature of business. It’s all a risk. Who risks nothing, gains nothing, right?” Seasoned investors can riposte and say that penny stocks are simply just “too risky” especially for those who are new in the stock market. Most penny stocks post very little information that can be used by the investing public to make a decision about taking a calculated risk. No information, no risk to be calculated.
Existing rules also do not require penny stocks to fulfil certain standards in order to remain active on the stock exchange. For example, if a penny stock’s value falters at the major stock exchange — they have options to pull out and migrate to one of many smaller exchanges. Without these standards, investors can find to adequate protection against the risk.
May penny stocks or so-called micro-capital stocks also have a short history, if any at all. Some of these companies are very wet behind the ears, so to speak. Others have been in the market for only a few months. Worse, some are in the red and will bring investors down with them to a state of bankruptcy.
Penny stock liquidity is also a major concern. Low liquidity means that investors will find it hard to sell and cash-in on the stock. It will be very hard if not impossible to find buyers for stocks that have zero liquidity. The only way forward is to probably radically downgrade the price to just get breakeven or even swallow a percentage of loss to the stock value. Known as “pump and dump” to trading insiders, some in the exchange may even manipulate stock prices and put on a hype only to sell the stocks later for a profit.
Thus, penny stocks like American Green Stock are considered to be “highly speculative investments”. The SEC together with the Financial Industry Regulatory Authority or FINRA have set in place certain rules to protect the investing public against such speculative investments.
By law and industry regulation, there are sales practice requirements that must be fully complied with by brokers. Via an approval process, a customer or buyer needs to sign an agreement with the broker-dealer for such a transaction. Part of the process is the act of checking whether the buyer or customer is suited for a certain investment product to include criteria such as investment experience and financial state prior to the investment. This reduces the risk of the buyer to over-exposure due to poor investments. The broker-dealer is also required to issue a disclosure document to explain the risk of penny stocks. Informing the buyer about current quotes or prices is also required and is referred to as bid offer quotation disclosure. Moreover, a broker-dealer is also required by regulation to inform the buyer or customer on how much he or she is making out of the transaction. This is called the compensation disclosure. Another important requirement is called the monthly account statements through which a buyer or customer is informed about details of the stock such as recent bids and prices, to name a few. These are only some of the details that a stock investor must know before getting penny stocks.
The weed industry is still very new and laws and regulations are still in a state of flux. Uncertainty remains because marijuana is still considered illegal at the federal level. While a number of states and countries have legalized medical and recreational use of marijuana, it is an entirely different matter when it concerns investing in penny stocks that are not even listed in national exchanges such as the NASDAQ. Penny stocks are traded in over-the-counter (OTC) markets dubbed “Pink Sheets”. As part of a decentralized OTC market like OTC Link LLC or OTC Bulletin Board, restrictions become very limited. There are at least 10,000 penny stocks listed in the OTC market for investors to choose from, coming from a range of industries to include companies that have businesses in metals, pharmaceuticals, and mining. To a novice or the uninformed, the OTC market can be a dizzying maze that with no way out except bankruptcy.
So, is it still advisable to invest in penny stock companies like American Green Stock? It depends. As mentioned in the earlier part of this article, penny stocks are seen as highly speculative. Perhaps the most basic guideline to follow is to first do extensive research and study how to buy stock from companies that have a good reputation and a history of good business practice.
To be fair to the penny stock, there are some people who made good on this investment product. CNN reported about an investor named Tim Grattani who risked his $1,500 in penny stock. In one trading session on his computer, Grattani gained a total of $8,000 in just ten minutes. Today, his investment portfolio is valued at more than $1 Million. Another example is Tim Sykes who used $12,000 for day-trading in penny stock while in college and was able to make millions out of it.
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