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).
When you buy low-priced shares of a small company (e.g., you buy a stock that trades in the “over-the-counter” (also called OTC) market), you likely are 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:
Even in the absence of fraud, microcap stocks are among the most risky:
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:
When investing in unregistered offerings, also consider these risks:
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 is a microcap company that 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 SEC.gov 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:
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
Contact the SEC on SEC.gov:
Visit Investor.gov, the SEC’s website for individual investors.
Follow OIEA on Twitter @SEC_Investor_Ed.
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.