Over-the-Counter ("OTC") Marijuana-Related Business ("MRB") Securities Risk Acknowledgment
1. Risks Associated with Investments in MRBs
Investments in MRBs present unique and potentially significant risks and are not appropriate for all investors. As with any investment, you should exercise caution and perform thorough due diligence before investing in any MRBs, including by carefully reviewing any available offering materials or financial information filed by the company and verifying the truth of every statement you are told about the MRB. The following are just some of the risks involved in transacting in the securities of MRBs. You should take time to understand all of the risks of investing in MRBs for yourself before you invest.1
- U.S. Federal and State Laws. Although a majority of U.S. states and territories permit at least some form of state-legalized marijuana distribution and/or consumption, the manufacture, distribution, and use of marijuana in the U.S. remains prohibited under federal law as part of the Controlled Substances Act (the “CSA”) as well as under certain U.S. states’ laws. While the Federal Government has so far refrained from enforcing the CSA against state-licensed MRBs, the Federal Government and/or states which have similar laws could elect to reverse course, which could cause the disruption or cessation of MRBs’ operations, which could negatively affect the value of your investment, including the total loss of your investment. Regulatory suspensions and trading halts might also occur, which might result in an MRB security that you own becoming temporarily or permanently untradeable without notice from any regulator, self-regulatory organization, or Morgan Stanley Smith Barney LLC (the "Company"). Employees may also be subject to additional restrictions on investing in MRBs by their employers, including, for Federal employees, possible restriction of certain security clearances.
- Valuation Risk. In addition to the illegality of MRBs under Federal law and the laws of certain U.S. states, several other factors may also negatively affect the value of MRB investments, or make it difficult to value MRBs, which may cause MRB stocks to trade at significantly lower multiples than other types of securities. Many MRB securities are not registered with the U.S. Securities and Exchange Commission (the “SEC”), and thus those MRBs may not make regular or complete public financial filings. As a result, information about MRBs may be difficult to find, making it less likely that quoted prices in the market reflect full and complete information about the company. Many MRBs are nascent companies with limited or no proven track record, which may also make valuation difficult. As with any investment, you should exercise care and perform thorough due diligence before investing in any MRB.
- Issuer Capital Constraints and Tax Status. MRBs’ inability to access capital through traditional chartered banking institutions and disparate corporate tax treatment may contribute to or result in MRB securities trading at relatively depressed multiples. Because of their status under Federal law, MRBs generally cannot transact with Federally chartered banks or take advantage of regular corporate tax deductions that other types of businesses leverage routinely, such as the ability to deduct expenses from income for tax purposes. This may compromise their ability to raise capital, fund operations, obtain debt financing at reasonably competitive rates, and/or grow their businesses organically or through acquisition, and ultimately affect their value and profitability. Therefore, before investing you should assess the financials of MRBs, giving consideration to the potential financial constraints, tax burdens, and heightened expenses they may face and the effect of such factors on an MRB’s bottom line.
- Risks of Transacting in Over-the-Counter (“OTC”) Securities. MRBs trade in the form of low-priced and microcap securities or penny stocks, which may carry additional, significant risks applicable to OTC securities in general. Regarding the risks to OTC securities in general, these include the risk of lower liquidity, higher volatility, and trading and execution risks stemming from the lack of regulatory price protection for OTC securities and suspension of other trading rules and controls otherwise applicable to exchange-listed securities, which may increase the likelihood of fraud and manipulation in such products. Red flags or indicators of fraud in OTC securities may include, but are not limited to, a lack of publicly available financial data, a lack of real business operations, unexplained increases in stock prices or trading volume, and/or frequent changes in company name or type of business. Please note that like other OTC securities, MRBs may be restricted to the Expert Market if issuers fail to publicly file financial reports and other company information. You should consider all the risks before investing in MRBs, including that greater volatility and less liquidity may contribute to larger, faster, and more frequent price swings, which in turn may result in larger, faster, and more frequent losses than might typically occur with other types of investments, including the loss of your entire investment.
- Unknown Risks. You understand that the Company cannot predict or describe all of the special trading risks that could arise while transacting in MRBs. Accordingly, you agree NOT to hold the Company, its affiliates, or their officers, directors, or employees responsible for any risks you undertake by transacting in such products, regardless of whether such risks are described herein or in the product’s offering materials.
2. Account Holder/Authorized Agent Acknowledgment
By choosing to transact in any MRB security, you understand and acknowledge that:
i. You have reviewed the product offering materials for any MRB securities in which you plan to transact.
ii. You understand the risks associated with transacting in MRB securities, including the loss of your entire investment, are acting as a self-directed investor, and, accordingly, are capable of making your own investment decisions.
iii. Although the Company permits customers to transact in MRB securities via its trading platforms and mobile applications, the Company does not provide any investment advice nor make any recommendations or solicitations regarding MRBs or MRB-related securities. As such, you have not relied, nor will you rely, on the Company or its representatives for any information or guidance in determining the appropriateness of the product for you and your account.
iv. This acknowledgement applies to all past, present, and future MRB transactions you choose or have chosen to enter for all accounts that you either beneficially own or over which you exercise or have the right to exercise trading authority. Failure to provide this acknowledgement may result in your being prohibited from transacting in MRB securities in the future.
1Additional information regarding risks of transacting in MRBs can be found on the SEC’s website, available at https://www.sec.gov/oiea/investor-alerts-bulletins/ia_marijuana.html and https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_marijuana.