The Financial Industry Regulatory Authority, Inc — FINRA — has issued an alert warning investors to be on the lookout for marijuana stock scams. The alert points out that all the attention business opportunities surrounding marijuana legalization have been getting from the media has led to a frenzied “hype” situation, and that a number of pump and dump and other stock scams related to purported marijuana businesses have already been reported.

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FINRA statement on marijuana scams

FINRA described the current situation in the overview of its statement. “With medical marijuana legal in almost 20 states, and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention—including the attention of scammers. FINRA is issuing this alert to warn investors about potential scams associated with marijuana-related stocks.”

Tips to avoid stock scams

The consumer fraud experts at FINRA offer several tips to help you avoid marijuana stock scams.

Do your research — It is essential to do your due diligence research before you make any investment. This rule holds true whether you are buying penny stocks or bluechips like General Electric Company (NYSE:GE) or Apple Inc. (NASDAQ:AAPL). Making an investment solely off the basis of an advertisement is highly unwise.

Consider the source — Companies, and the promoters they hire for PR purposes, are not always honest. They misrepresent or even just plain fabricate revenues or other important financial data. It’s always important to get your information from a regulatory filing or trusted third party such as a licensed investment adviser.

What market does the stock trade in? — Stocks that trade on the New York Stock Exchange and NASDAQ have to meet a relatively high regulatory burden, and stock scams are very rare in stock on the major indices. Nearly all stock scams involve companies quoted on an over-the-counter (OTC) quotation platform like the FINRA-operated Over-the-Counter Bulletin Board (OTCBB) and the platform operated by OTC Markets Group, Inc. The regulatory standards for these penny stocks are significantly less stringent, which makes them much more susceptible to pump and dumps and other scams.

Who wrote the sales document you saw? — FINRA offers advice on checking out the source of the stock tip you received. “A legitimate investment salesperson must be properly licensed, and his or her firm must be registered with FINRA, the SEC and a state securities regulator—depending on the type of business the firm conducts. To check the background of a broker or investment adviser, use FINRA’s BrokerCheck.”