SEC Alerts Public On Marijuana Investments, Fraud Risks

As the legal marijuana industry continues to expand, investors have taken notice and have sought to capitalize on the emerging market. With over 30 states choosing to make marijuana legal in some form, many industry insiders predict that the rest of the states will follow suit. It should come as no surprise then that scammers and con artists have attempted to take advantage of potential investors by making false claims and promises. In fact, the United States Securities and Exchange Commission (“SEC”) recently alerted the public on investment schemes involving marijuana-related companies. Let’s take a look at some common investment schemes, and some of the ways that you can protect yourself from illegitimate offers and promises.

Investor Fraud

Fraudulent brokers and advisers might lure investors into a scam by pointing to media coverage concerning the legalization of marijuana when promoting marijuana investments. While the media coverage may be accurate, there are a few telltale signs to look out for that may alert you to a possible fraudulent scheme:

Unlicensed and unregistered sellers. It is important to do your research (due diligence) before making any investment. Only do business with licensed and registered investment professionals. A quick and easy way to check the status of an investment professional is by doing a search on Investor.gov or Financial Industry Regulatory Authority (“FINRA”) BrokerCheck.

Guaranteed returns. No investment is guaranteed to produce a return – that’s why every investment inherently contains at least some level of risk. Anyone promising a guaranteed or high rate of return with little-to-no downside risk is likely attempting to scam you or is misrepresenting the investment opportunity. For example, if someone says that you could invest on a conservative, low-risk basis but generate annual returns comparable to stocks, this is a red flag. In fact, it is against FINRA rules for a securities broker to make promises and unfounded predictions of the future performance of a security.

Unsolicited offers. Be cautious of anyone reaching out to you online or by phone through unsolicited means to get you to invest in an opportunity. According to SEC, these methods are commonly used by fraudsters. Relatedly, if you are advised by a securities broker or financial advisor to purchase what appears to be a legitimate investment, then it is incumbent on those professionals to disclose investment risks and ensure that their recommendations are suitable for you.

Market Manipulation

Another common tactic used by con artists is market manipulation. This often occurs by someone’s intentional release of inaccurate of misleading information about a company. This misinformation can cause the stock price of an issuer to change dramatically. Some stocks are easier to manipulate than others. Often smaller, less prolific companies are the target of market manipulation as there is less public information about them, making it easier to spread false and misleading information. Moreover, smaller companies might be thinly traded, and a small number of trades could result in the false appearance of market demands.

A few useful tips on how to spot market manipulation:

• Trading suspension. Check whether the SEC recently suspended trading of the company’s stock
• Changes to company name or type of business. Research the company to see if it has abruptly changed its name, industry, or business plan multiple times
• False press releases. Press releases that seem implausible may indicate that the company’s stock is being hyped solely to drive up its stock price

As with any investment, it is important that you do your research and due diligence prior to investing. In other words, don’t solely rely on the representations made by the financial professional who solicits your investment. The SEC houses information on most publicly traded companies, so be sure to read any reports that have been issued surrounding them.

Critically, marijuana is still illegal under federal law and this legal complication may impact the viability of investments concentrated in the marijuana sector. This is not to say that investing in marijuana stocks is bad; however, it does mean that marijuana stocks might be unsuitable for certain investors.