The marijuana industry is growing at an incredible rate, which is exactly why investors have flocked to marijuana stocks over the past couple of years. In North America, according to ArcView, the legal weed industry is expected to grow at a blistering 26% per year through 2021. Just a few years from now, we could be looking at an industry capable of almost $22 billion in annual sales. That's not something investors will turn a blind eye to.

Investing in U.S. marijuana stocks is inherently risky

Yet, the weed industry is also an incredibly risky place to put your money to work. In the U.S., marijuana remains a Schedule I substance, meaning it's wholly illegal right alongside of LSD and heroin. This classification makes it really difficult for pot-based businesses to access basic financial services, and makes it impossible to take normal corporate income tax deductions. Meanwhile, medical researchers are buried in red tape, curbing their efforts to produce benefit-versus-risk analyses that lawmakers on Capitol Hill so crave.

A judge's gavel next to a pile of dried cannabis buds.

Image source: Getty Images.

What's more, Attorney General Jeff Sessions recently announced that he and the Department of Justice would be rescinding the Cole memo, which is a loose set of rules that legalizing states followed in order to keep the federal government off their backs. These rules ensured that cannabis grown within a state stayed in that state, and that adolescents didn't gain access to pot. It essentially opens the door for state-level prosecutors to bring charges against marijuana businesses, should they choose to do so. 

Investing in the U.S. is a very risky proposition at the moment, which is exactly why investors looking to take advantage of the green rush have turned to Canada. Most Canadian pot stocks have soared as the medical market, legal since 2001, has blossomed under the oversight of Health Canada, and the country prepares for what looks to be a legalization of recreational weed by July 2018.

But there's a pretty big catch when it comes to "preparing" for the legalization of adult-use pot: Most cannabis companies aren't consistently profitable. That means they've relied on bought-deal offerings -- selling common stock or convertible debentures directly to institutions or an investor prior to the release of a prospectus -- to fund their expansion projects. In doing so, they've ballooned their outstanding share count. As this share count rises, it can dilute the value of each existing share.

This Canadian pot stock is expanding at a rapid rate

Perhaps no marijuana stock is guiltier of diluting its shareholders at a quicker pace than Aurora Cannabis (ACB -4.85%).

A person holding a cannabis leaf in an outdoor grow farm.

Image source: Getty Images.

Aurora has been nothing short of a busy bee of late. It's in the process of constructing its flagship growing facility known as Aurora Sky, which is expected to be completed by midyear. This 800,000-square-foot facility will be highly automated and consequently help push costs down and yields up. The company anticipates yielding 100,000 kilograms of dried cannabis annually once it's fully operational.

Aurora Cannabis has also acquired a 40,000-square-foot facility in Quebec, and has made a handful of investments in cannabis-based businesses.

In addition, it's in a heated hostile battle with the board of CanniMed Therapeutics (NASDAQOTH: CMMDF), which it's currently attempting to acquire for up to approximately $425 million. Aurora suggests that combining their two businesses would yield in excess of 130,000 kilograms of dried cannabis a year, as well as substantially lower costs. 

Aurora Cannabis' financing deals are diluting its shareholders at a mind-numbing pace

As a result of its cash needs for Aurora Sky, its Quebec acquisition, its handful of investments, and its ongoing hostile bid for CanniMed, Aurora has been regularly turning to bought-deal financings for capital. If there is good news, it's had absolutely no trouble securing the cash it needs to make investments. Aurora noted recently that it had more than $400 million in cash and cash equivalents (i.e., investments) on hand -- the most in the industry. But this capital likely comes at a future cost to its shareholders.

A magnifying glass hovering over a balance sheet.

Image source: Getty Images.

Since the end of its fiscal first quarter, reported in November, Aurora has announced:

  • An accelerated warranty expiration date on Nov. 15, 2017 for what it expected would yield more than $40 million 
  • The conversion of the remaining balance on an outstanding debenture totaling $60 million ($75 million Canadian) on Nov. 16, 2017 
  • The completion of $92 million in financing ($115 million Canadian) via special warrants convertible into 6% unsecured convertible debentures on Nov. 28, 2017
  • An expected bought-deal offering of unsecured convertible debentures worth $160 million (200 million Canadian dollars), or up to 15% more if institutional investors underwriting the deal choose to take it 

Every single instance here points to the eventual ballooning of Aurora Cannabis' outstanding share count. Between mid-2014 and Nov. 8, 2017, Aurora's Canadian listing showed an increase in outstanding share count of more than 2,200% to 375.4 million shares. Just imagine what these convertible debentures will do in the years to come to its share count.

Do I blame the company's management for going the bought-deal financing route? Not one bit. Bought-deal financing is the most common method of raising capital in Canada for the pot industry. Plus, with up to $5 billion in recreational weed sales on the line each year if adult-use sales are given the green light, Aurora would be smart to try to lock up as much market share as possible.

However, investors have to understand that this constant barrage of dilution is going to weigh on the value of Aurora's shares. Even if it doesn't impact their value now, it will in a couple of years when those debentures begin to convert to common stock.

Long story short, I believe there are far more attractive marijuana stocks to consider at this point that aren't primed to beat the pulp out of their shareholders through dilution in the years to come.