A perennial piece of investment wisdom is to “buy low, sell high.” However, if financial regulators have their way, investors will be a bit more cautious when it comes to the stock of companies that make people high.
The Financial Industry Regulatory Authority has issued an investor alert warning about potential scams related to marijuana stocks. Medical marijuana is legal in about 20 states, and recreational use of the drug has been legalized in two states.
As a result, stock touters have been using social media, text messages, webinars, tweets and blog postings to attract investors to put their money in shares of cannabis companies. An online search finds most of these companies sell for cents rather than dollars, have a natural level of risk and are often used in scams.
“Investors considering investing in a heavily touted, thinly traded company should question why a total stranger would tell them about a really good investment opportunity. In reality, there is likely no true opportunity,” said Gerri Walsh, FINRA’s senior vice president for investor education.
The investor alert suggests many of the marijuana-laced investment pitches are simply “pump and dump” ploys. Fraudsters lure investors with aggressive, optimistic statements or information designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial profit.
Once share prices and volume reach a peak, the cons behind the scam sell off their shares at a profit, leaving most investors with worthless stocks.
“One company, for example, promoted its move into the medical cannabis space by issuing 30 press releases during the first half of 2013. These releases publicized rosy financial prospects and the growth potential of the medical marijuana market. The company was also touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock ‘could double its price SOON’ and another asserting the stock was ‘poised to light up the charts!’ Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan,” according to the consumer alert.
Some companies involved in the medical marijuana industry are praising FINRA for cautioning investors about potential scams.
“Unfortunately, there are companies and individuals that prey on investors looking to enter this fast-growing market. We want these fly-by-night operations out of our industry and support any regulatory authority in calling attention to this problem,” said Dr. Bruce Bedrick, CEO of Medbox, a developer of automated dispensing and storage systems for medicine and merchandise.
FINRA suggests that investors approached with pot stock pitches should try to research the touted companies and its executives. For example, the CEO of one company purported to be in the medical marijuana business spent nine years in prison for operating one of the largest drug-smuggling operations in U.S. history.
The former CEO of a similar company was recently indicted for his role in a multimillion dollar mortgage-backed Ponzi scheme.
Bottom line, no matter what is being pitched, investors need to know the viability of the company not from the person touting it, but by checking with resources at FINRA, the Securities and Exchange Commission, state regulators and even the FBI.