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Regulation and Compliance > Federal Regulation > SEC

Don’t Get Smoked by Marijuana-Related Investments, SEC Warns

By Melanie Waddell

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The Securities and Exchange Commission warned investors Friday about the potential for fraud in microcap companies that claim their operations relate to the marijuana industry, and it suspended trading in Denver-based FusionPharm Inc., which claims to make a professional cultivation system for use by cannabis growers among others.

FusionPharm is the fifth such company in which the SEC has suspended trading within the past two months. Other marijuana-related companies in which the SEC recently suspended trading are Irvine, Calif.-based Cannabusiness Group Inc., Woodland Hills, Calif.-based GrowLife Inc., Colorado Springs-based Advanced Cannabis Solutions Inc., and Bedford, Texas-based Petrotech Oil and Gas Inc.

Also on Friday, the SEC issued an investor alert warning about possible scams involving marijuana-related investments, noting that fraudsters often exploit the latest growth industry to lure investors with the promise of high returns.

“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,” the SEC’s alert says. “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.”

Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, which prepared the investor alert, said in a statement that “we know from experience that fraudsters follow the headlines.”

Given the attention that marijuana-related companies have attracted recently, Schock said, “we urge investors to exercise caution when looking at investments in this space. Always thoroughly research the company – and the person selling the investment – before making a decision.”

The SEC notes that the Enforcement Division’s Microcap Fraud Task Force “scours the microcap market and proactively identifies companies with publicly disseminated information that appears inadequate or potentially inaccurate.” The SEC has the authority to issue trading suspensions against such companies while the questionable activity is further investigated.

According to the SEC’s order in FusionPharm, the trading suspension was issued “because of questions that have been raised about the accuracy of assertions by FusionPharm” concerning the company’s assets, revenues, financial statements, business transactions and financial condition.

“Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud,” said Elisha Frank, co-chair of the SEC Enforcement Division’s Microcap Fraud Task Force, in a statement. “Wherever we see incomplete or misleading disclosures, we act quickly to protect investors.”

The SEC explains that it can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.

The alert also notes that even in the absence of fraud, microcap stocks are among the most risky because:

  • 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 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.

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Check out SEC Enforcement: Advisor Barred for Hiding Astrology-Based Investment Strategy on ThinkAdvisor.

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