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Investor Alert: Marijuana-Related Investments

The SEC’s Office of Investor Education and Advocacy is issuing this Investor Alert to warn investors about potential risks involving investments in marijuana-related companies. 

The SEC has seen an increase in the number of investor complaints regarding marijuana-related investments.  The SEC recently issued temporary trading suspensions for the common stock of five different companies that claim their operations relate to the marijuana industry:

The SEC suspended trading in these companies because of questions regarding the accuracy of publicly-available information about these companies’ operations.  For two of the companies, the trading suspensions were also based on potential illegal activity (unlawful sales of securities and market manipulation).

Fraudsters often exploit the latest innovation, technology, product, or growth industry – in this case, marijuana – to lure investors with the promise of high returns.  Also, for marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company’s management, products, services, and finances.  When publicly-available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors.

Risk of Prosecution for Marijuana-Related Companies.  If you are considering investing in a company that is connected to the marijuana industry, be aware that marijuana-related companies may be at risk of federal, and perhaps state, criminal prosecution.  The Department of Treasury recently issued guidance noting: “[T]he Controlled Substances Act (“CSA”) makes it illegal under federal law to manufacture, distribute, or dispense marijuana.  Many states impose and enforce similar prohibitions.  Notwithstanding the federal ban, as of the date of this guidance, 20 states and the District of Columbia have legalized certain marijuana-related activity.”

Marijuana-related investments may be sold in unregistered offerings and may take many forms, including microcap stocks (low-priced stocks issued by the smallest of companies) such as penny stocks (the very lowest priced stocks). 

Microcap Stocks

When you buy low-priced shares of a small company, you may be investing in penny stocks or microcap stocks.  Microcap stocks are particularly vulnerable to fraudulent investment schemes because there is often limited publicly-available information about microcap companies.  Be cautious if you see red flags of potential microcap fraud such as:

  • SEC trading suspensions (the SEC has suspended public trading of the security)
  • E-mail and fax spam recommending a stock
  • Insiders own large amounts of stock
  • False or exaggerated press releases

Even in the absence of fraud, microcap stocks are among the most risky:

  • Information about microcap companies can be extremely difficult to find, making it less likely that quoted prices in the market reflect full and complete information about the company.
  • Many microcap companies are new and have no proven track record.  Some microcap companies have no assets, operations, or revenues.  Others have products and services that are still in development or have yet to be tested in the market.
  • The stock prices of microcap companies historically have been more volatile than the stock prices of larger companies.  Since low-priced stocks trade in low volumes, any size trade can have a large percentage impact.
  • The stocks of microcap companies are often quoted in the over-the-counter (OTC) market, including on Global OTC ATS, and OTC Link ATS, among other venues.  Many of these companies do not meet the minimum listing requirements for trading on a national securities exchange, such as the New York Stock Exchange or the Nasdaq Stock Market  

Unregistered Offerings

Check the SEC’s EDGAR database and contact your state securities regulator to find out whether the marijuana-related company has registered its securities offering with the SEC or a state securities regulator.  If the offering is not registered, exercise extreme caution if you spot any of these red flags of potential investment fraud:

  • “Guaranteed” high investment returns.  If someone promises you a high rate of return on your investment, it likely is a fraudulent investment scheme.
  • Unsolicited offers, including through social media.  A new post on your wall, a tweet mentioning you, a direct message, an e-mail, a text, a phone call, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding an investment “opportunity” may be part of a scam.
  • Pressure to buy RIGHT NOW.  Fraudsters may try to create a false sense of urgency or pitch the investment as a “limited time only” opportunity.
  • No net worth or income requirements.  To comply with federal securities laws, many unregistered offerings are limited to accredited investors and the seller should ask you about your net worth or income. 

When investing in unregistered offerings, also consider these risks:

  • You may lose your entire investment.
  • You may not be able to sell the stock easily, and you may have to hold your investment indefinitely.
  • The company may not make information about its business or financial condition publicly available.

Research the Company

As with any investment, make sure you understand the marijuana-related company’s business and its products or services.  Carefully review all materials you are given and verify the truth of every statement you are told about the investment. 

Pay attention to the company’s financial statements, particularly if they are not audited by a certified public accountant (also called a CPA). 

If the company files reports with the SEC, review the most recent reports

If the marijuana-related company’s securities are traded in the over-the-counter market and the company does not file reports with the SEC, ask your broker for the “Rule 15c2-11” file (the federal securities laws may require your broker to have certain information about the company). 

If the marijuana-related company is offering securities in an unregistered offering, read the offering memorandum or private placement memorandum (also called PPM), and pay particular attention to any risk factors noted.  Review the terms of any subscription agreement or other agreements for the investment.

Search to see whether the SEC has taken any action against the company or anyone associated with the company.

For more information about how to research an investment, read our publication Ask Questions.

Research your Broker or Investment Adviser

Research the background of the individuals and firms offering and selling you these investments, including their registration/license status and disciplinary history:

  1. Search the SEC’s Investment Adviser Public Disclosure (IAPD) database.
  2. Search the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck database.
  3. Contact your state securities regulator

Additional Resources

SEC Litigation Release: SEC v Fortitude Group and Strategic Global Investments

FINRA Investor Alert: Marijuana Stock Scams 

Investor Alert: Advertising for Unregistered Securities Offerings

Investor Alert: Don’t Trade on Pump-And-Dump Stock Emails

Investor Alert: Social Media and Investing – Avoiding Fraud 

Microcap Fraud Spotlight  

Microcap Stock: A Guide for Investors 

Department of the Treasury Financial Crimes Enforcement Network Guidance regarding BSA Expectations Regarding Marijuana-Related Businesses

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The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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