Twenty-two states have medical marijuana laws, with Florida poised this November to become the 23rd and the second-largest market after California. Two states have legalized recreational marijuana, with Alaska and Oregon set to join Colorado and Washington this election. By the end of 2016, there could be eight legalized marijuana states and over half of the fifty states could have medical marijuana laws. As industries go, the marijuana business is predicted to grow faster than the demand for smartphones.
As Mark Twain once said, “When there’s a gold rush, it is a good time to be in the pick and shovel business.” But before you jump into the new “pot-com era”, remember that the gold rush also led to mining swindles, ghost towns, and fool’s gold. There is a lot of money to be made in the marijuana market but you need to be smart about your investments.
Recently, the US Securities & Exchange Commission (SEC) and the Canadian Securities Administrators (CSA) issued warnings about the trade in stocks for marijuana-related firms. In May, SEC suspended the trading of stock in five marijuana-related firms. SEC believed the publicly-available information about these companies lacked accuracy. In the case of two of the companies, SEC accused them of illegal sales of securities and market manipulation.
Today, CSA warned investors about the rush of new marijuana-related firms trading stock after Health Canada moved to commercial production of medical marijuana on April 1. “Investors should be aware that companies cannot legally conduct a medical marijuana business without a license from Health Canada, and that there is likely significant time and cost required to obtain such a license,” CSA said in the statement.
Both US & Canadian agencies warn investors to be on the lookout for many warning signs in a marijuana stock. In the US, many of these firms are trading over-the-counter (OTC) where there is less reliable information about the company. The biggest warnings are reserved for the practice known as “pump and dump”, where a company boasts about itself to create demand for the stock (the “pump”) and once the price reaches a peak, the company sells its shares at a profit (the “dump”) leaving investors with worthless stock.
The US Financial Industry Regulatory Authority (FINRA) has posted an alert warning about potential marijuana stock scams. FINRA gives an example of a medical marijuana company that issued over 30 press releases in the first half of 2013. The company claimed the stock would double in price soon, yet the company’s balance sheet had never shown a profit and was only beginning to form a business plan. FINRA and SEC make the following suggestions to anyone seeking to invest in marijuana stocks:
- “Why Me?” – Why is a total stranger offering you this hot stock tip?
- “Talk is cheap.” – Be skeptical if a company has more press releases than profit.
- “Who’s the boss?” – Research the officers of the company. Did they do prison time? Have they been indicted? Have there been any articles or profiles on them?
- “Where’s the trades?” – Most marijuana stock isn’t traded on the NASDAQ or NYSE, but on the OTC “penny stocks” that don’t have the strong reporting and auditing requirements of the big stock exchanges.
- “Check the SEC.” – Most companies file reports with the SEC; look them up and read them.
- “What’s your name?” – Be wary of frequent name changes or business-model changes by a company.
- “Who’s the seller?” – Verify that your investment salesperson is licensed and registered with FINRA and SEC.
- “Spam spam spam…” – Be wary of stocks promoted with a great deal of email and fax spam.
- “An inside job!” – Watch out for companies where the insiders own most of the company stock.
- “Guaranteed returns!” – No stock can guarantee that it will provide returns on investment.
- “Buy right now!” – If the investment is touted as a “limited time only” opportunity, take some time to check it again.
- “No income requirements.” – If the stock is unregistered with SEC, it usually is limited to accredited investors only and the seller should be asking about your net worth.