The SEC issued an investor alert today regarding marijuana-related investments. The alert noted that the SEC is receiving a growing number of investor complaints relating to  investments in marijuana companies.

SEC

Pursuant to those complaints, the commission has issued temporary trading suspensions for the common stock of five different businesses claiming to be involved in the production of marijuana-related products:

  • Fusion Pharm Inc (OTCMKTS:FSPM)
  • Cannabusiness Group (OTCMKTS:CBGI)
  • Growlife Inc (OTCMKTS:PHOT)
  • Advanced Cannabis Solutions, Inc.
  • Petrotech Oil & Gas Inc (OTCMKTS:PTOG)

The Investor letter said trading in these companies was suspended because of questions regarding the validity of publicly-available information about the operations of these businesses. The trading suspensions were also related to reports of potential illegal activity such as unlawful sales of securities and market manipulation in at least two of the companies.

The investor alert also highlighted that those intending to commit fraud often exploit the latest innovation, technology or growth industry such as marijuana to take advantage of naive investors. Furthermore, given many smaller marijuana-related companies are not required to report with the SEC, potential investors will typically have very little reliable information about  management, products, services or finances. Lack of verifiable information makes it easy for fraudsters to spread false positive or negative information about a marijuana company and take advantage of unsuspecting investors.

SEC: Marijuana-related companies face risk of criminal prosecution

The SEC investor alert also highlighted that marijuana-related companies may be at risk of federal or state criminal prosecution. The note pointed out that the Department of Treasury recently issued new guidance that should be considered before investing in a marijuana company: “[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.”

Micro cap stocks are innately more risky

The investor alert also warns investors that micro cap or penny stocks are inherently more risky than larger stocks listed on the major exchanges. Microcap stocks are particularly vulnerable to fraud and other illegal investment schemes because there is usually very little real information regarding micro cap companies.  The SEC warns investors to avoid investing in companies that show signs of potential micro cap fraud such as:

  • SEC trading suspensions
  • E-mail and fax spam hyping a stock
  • Insiders own (or are selling) a large number of company shares
  • False or highly exaggerated press releases.