Good news This article besind being a good news but importantly put question on the honesty of those claimed there was/is no manipulation. This is a well known issue in the cannabis sector and no doubt all insiders are aware of it. Yet, the request of investigation in our petition got ignored by a threatening language.
Don't forget the fool who claimed there was/is no manipulation
new article
Globe & Mail July 19, 2020
Proposal to ban short selling ahead of deals to shake up junior markets
MARK RENDELL CAPITAL MARKETS REPORTER
A move to bring Canadian short-selling rules in line with United States securities law could
reverberate through Canada’s junior capital markets as regulators look to limit a controversial
trading strategy used to finance high-risk companies, notably in the cannabis industry.
Earlier this month, an Ontario government task force recommended banning a sophisticated
short-selling technique used by hedge funds active in Canada’s small-cap public markets. Short
selling is a bet that a company’s share price will drop.
In anticipation of a financing deal, a hedge fund will short a company’s shares, then buy into the
deal to cover the short position, acquiring a block of newly issued shares at a discount to the
market price.
The technique allows funds to earn a quick profit with relatively little risk and makes it easier for
investment bankers to find lead buyers for speculative deals. Critics, however, allege the
technique often pushes the boundaries of securities law, as investment bankers, company
insiders and hedge funds work together to facilitate the short position.
“If this type of short selling is done, and it’s done intentionally with the knowledge of an
unannounced transaction that they plan to purchase on, then there is an extremely good chance
that it would be violating existing insider trading rules and market manipulation rules,” said
Cindy Tripp, a former managing director at GMP Securities and member of the Ontario Capital
Markets Modernization Taskforce, which is overseeing a review of the province’s securities laws.
“We were pretty surprised by stakeholders speaking to us about this sort of being routine and
being accepted in certain market segments,” she said. “We were also struck at how much
potential pressure there is on issuers to go along with this practice in order for them to raise
capital.”
In a wide-ranging report published two weeks ago, the task force suggested prohibiting
investors from participating in a financing deal if they have previously shorted the same
securities. In practice, this would likely involve a restricted period ahead of a deal, similar to
what exists in U.S securities law, Ms. Tripp said.
Canadian rules already prohibit insider trading. However, it can be difficult for regulators to
prove that a market participant intended to break the law, Ms. Tripp said. “The task force is
looking at this in a simple way: How do we simply stop this behaviour?”
The change could have a significant impact on deal-making in speculative sectors such as
junior mining, cannabis and psychedelics, industry insiders say. It would make it more
expensive for hedge funds to trade around deals and could force investment bankers to rethink
how they source capital for high-risk companies.
This kind of transaction has a long history in Canadian junior markets, which are dominated by
speculative resource extraction companies, and it became widespread during the cannabis
financing boom from 2015 to 2018 as hedge funds recycled hundreds of millions of dollars
through multiple deals.
“There’s sort of this broker, hedge fund complex that was built up over the past many years,
precannabis,” said Keith Merker, former chief executive officer of cannabis company WeedMD
Inc. “It was, ‘I’ll scratch your back, you scratch mine, and we can do a lot of deals and make a
lot of money.‘”
Mr. Merker said he supported the move to limit shorting into deals. At the same time, many
speculative companies won’t get funded, for better or for worse, if hedge funds can’t execute
these trades, he said.
“On the back of that capital that was quite frankly recycled through the [cannabis] industry time
and time again, there was a lot of infrastructure that was built. Some of it’s great infrastructure
and it’s going to be the backbone of the Canadian industry going forward, and some of it
probably shouldn’t have been built,” Mr. Merker said.
Richard Carleton, CEO of the Canadian Securities Exchange, said the task force
recommendation is a direct response to what happened in the cannabis space. He did not,
however, think that the rule change would have much of an effect on small-cap markets in the
future. The cannabis sector was uniquely fertile ground for investment bankers and hedge funds
to deploy this strategy on a marketwide scale, he said.
“You had to have a sector that was liquid, because you had to be able to take on a short
position of $40-million to $100-million,” he said. “And you had to have an exuberance over the
valuations such that management didn’t really care that somebody had been shorting the hell
out of their stock and driving the price down, because they just sort of thought this is just the
give-and-take and it will rebound.
“It may be the only circumstance in my 32-odd years in the capital markets where all of those
conditions were present to be able to make it work,” he said.
Ms. Tripp said the proposed rule should help deter inside trading and market manipulation in
junior markets. As to whether it will damage small-cap fundraising, she said that other task force
recommendations should help offset the effect of the short-selling proposal. These proposed
changes include expanding who qualifies as an accredited investor, removing the four-month
wait period after a private placement and making it easier for companies to premarket deals.
Two of the Comments:
tdotkewibol
This move is long overdue. The shorting of junior stocks and the issuance of cheap warrants is nothing short of a death spiral that is nothing short of a massive shift of wealth from retail investors to hedge funds who never risk anything in the building of a business.
If investment firms want to participate in profit-making then they should share in the risk to a greater extent than they have and actually bet on a stock going up versus tanking out and printing more paper to finance these deals that dilute shareholders into oblivion.
rickschlosser
I don’t think the problem is shorting stocks. There is more going on here.
Usually when a ‘bought deal’ happens it is for a price lower than a stock is currently trading for. So the brokerage is letting the hedge funds know the deal is happening before the news is released. This allows the brokerage to assist the hedge fund to short the stock before the news is released and the price falls.
The brokerage ‘loans’ stock to the hedge fund to sell (shorting), then once the news is released and the share price falls, the brokerage sells the stock from the bought deal at the lower price back to the hedge fund so the hedge fund can replace the stock they borrowed and cover their short, pocketing the difference.
The issue is that the brokerages are letting the hedge funds know about the bought deal before the news is released. This is where the ‘insider trading’ occurs.
The problem isn’t the short. It is the information they are using to make the trade at a guaranteed profit.