The Positives and Pitfalls of Paid Stock Promotion

In February, OTC Markets flagged Awakn Life Sciences for a possible pump-and-dump scheme. While Awakn denied the claim, more questions have been raised about other psychedelics companies that may be paying for stock promotion.

It’s not an illegal practice, according to the U.S. Securities and Exchange Commission. Companies are free to pay for stock promotion – so long as they disclose that’s what they’re doing.

“Such disclosures are necessary to permit investors to consider the personal motivations of the author so they can make informed investment decisions,” Michele Wein Layne, director of the SEC’s Los Angeles regional office, said in 2022.

Paying for Psychedelic Promotion

The goal of stock promotion is simple: Get information to potential investors to convince them to invest in a given stock. It can include something as simple as personal testimonies or as complex as major video productions.

Some psychedelic companies, such as Cybin (NYSE American: CYBN) and MindMed (Nasdaq: MNMD), paid a third party, Departures Capital, to promote them via YouTube. Those videos state that Departures “may or may not have been compensated by the companies discussed in the video.”

In the case of Cybin, the video clearly states that Cybin paid $1,500 for the video, and it is sponsored content.

“We conduct a broad range of investor outreach and engagement activities with the goal of educating these communities on the important work that we are doing to improve patients’ lives,” Doug Drysdale, CEO of Cybin, said.

Departures includes a disclaimer that its site is not intended to give investment advice.

SEC Position

“If a company pays someone to publish or publicize articles about its stock, it must be disclosed to the investing public,” said Stephanie Avakian, acting director of the SEC’s Division of Enforcement, in 2017.

That disclosure, however, isn’t always obvious to the general public. It might not appear at the point of promotion, such as a newsletter or email promotion, but the expense of stock promotion will often get buried in the marketing lines for company filings.

Where companies get themselves into trouble is when they don’t provide a clear notification that it’s paid promotion.

“Payments for the promotion of securities – including securities offered pursuant to the Reg A exemption – must be fully and accurately disclosed,” the SEC’s Layne said.

The federal agency reminds investors to beware of investment research websites or articles that seem to provide unbiased commentary on stocks, as they may be a part of an undisclosed paid stock promotion. The commission also warns investors about the risks of investing in Reg A securities offerings.

To Promote or Not to Promote

MindMed spent $8 million on brand promotion, which might include stock promotion, but that isn’t made clear in its financial filings. Green Market Report asked the company whether it had promoted the stock, but the company didn’t respond.

But not all companies are in favor of the tactic.

Field Trip Health’s Ronan Levy spoke about stock promotion on a YouTube video with podcaster Brom: “Truthfully, other  companies – I won’t name names – spend a fortune on promoting their stocks. We don’t want to play that game. We know it can be incredibly exciting to chase market sentiment and amplify your share price, but there can be a great reckoning.”

The same podcaster interviewed Bruce Linton, a board member for MindMed who made his name as the co-founder of Canopy Growth (Nasdaq: CGC).

A year ago, Linton said he was against promotion and only believed in earned media. He also noted that most readers only see the headlines and the disclosures on stock promotion often happen at the bottom.

“You can pay these letter writers in stocks and options. I hate them,” he said.

Linton suggested that investors should ask potential targets about their stock promotion activity – in particular, how much they spend on the practice.

“Any company that spends over $100,000 a year on it, don’t invest in them,” he said.

MindMed was already paying for stock promotion by the time Linton joined the board, but that doesn’t mean he agrees with the move.

“If you want to increase the price of your stock, increase the demand for it,” he said.