SEC Warns About Deceptive Marijuana-Related Investments
As a growing number of states legalize marijuana for medicinal and recreational purposes, the “green gold rush” is luring investors with the promise of high returns.
Fraudsters are manipulating some marijuana stocks
A recent Securities and Exchange Commission (SEC) complaint against a marijuana company, however, highlights the potential risks involving investments in marijuana-related companies.
California Company Charged With Sham Transactions
The SEC in March charged California-based marijuana company Medbox with touting bogus earnings that resulted from sham transactions with a shell company.
According to the SEC, Medbox claimed to sell vending machines that could dispense marijuana on the basis of biometric identification in medical dispensaries. But Medbox founder Vincent Mehdizadeh allegedly created New-Age Investment Consulting—a shell company—to conduct illegal stock sales, the proceeds of which were used to boost Medbox revenue.
Medbox reportedly touted record revenues in press releases, even though 90 percent of the company’s revenue was from bogus transactions with New-Age.
“As alleged in our complaint, investors were misled into believing that Medbox was a leader in the burgeoning marijuana industry when the company was just round-tripping money from illegal stock sales to boost revenue,” said Michele Wein Layne of the SEC’s Los Angeles Regional Office.
Medbox shares sold for as high as $98 in the first quarter of 2013 but came crashing down following an audit.
The company has since changed its name to Notis Global, Inc.
Beware Microcap and Unregistered Company Stocks
Twenty-six states and the District of Columbia now have laws legalizing medicinal or recreational marijuana. While legalization measures have been lauded by advocates, they have also provided fertile ground for investment schemes in the booming legal marijuana market, which grew 25% in 2016 to $6.7 billion.
Research a marijuana-related company before investing in it
The SEC recently issued an investor alert warning about marijuana-related investments. The Florida Office of Financial Regulation also named marijuana industry investments as one of its “emerging threats.”
Particularly risky, says the SEC, are marijuana investments in microcap stocks and unregistered stocks.
Microcap stocks are typically issued by new companies with low market capitalization and without a proven track record. Microcap stocks trade in the “over-the-counter” (OTC) market.
Although companies that trade in the OTC market may register their securities with the SEC, information about them can be hard to come by. This lack of information makes microcap stocks vulnerable to fraudulent investment schemes.
Microcap fraud red flags include:
- The SEC suspends public trading of the microcap security
- Spam emails recommending the stock
- Company insiders own a large amount of the stock
- Exaggerated press releases
Penny stocks are one type of microcap stock. “Pump and dump” penny stock manipulation schemes are common among small cannabis companies. In 2014 alone, pumping and dumping marijuana penny stocks cost investors more than $23 billion.
Even riskier than microcap stocks are unregistered securities, especially those that:
- Promise high returns
- Are unsolicited
- Pressure you to “Buy Now” in a limited time offer
Most marijuana stocks don’t trade in major exchanges
Being cautious about microcap and unregistered stock investments is prudent in all industries—not just the marijuana industry. But legal marijuana presents unique risks because it is new and growing fast.
Investors should always research a marijuana-related company and its key players before investing in it. Fraudsters are often repeat offenders. For example, the businessman who founded Medbox has previously been convicted of intend to defraud.
It’s equally important to look into the track record of your investment adviser and advisory firm for any misconduct, as past bad behavior is a strong predictor of future misconduct.
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