Securities regulators in the United States have issued a warning against stock offers from small marijuana-related businesses. At the time of this writing, five microcap companies involved in cannabis production have already been suspended by the Securities and Exchange Commission. All these companies have been shut down within the past few months, the latest being the Denver-based Fusion Pharm Inc. This particular company was in the business of selling cultivation systems specifically intended for use in marijuana production.
The warning against these companies comes in the wake of widespread cannabis legalization in the United States. To date, 20 states and Washington DC have already legalized the use of marijuana for medical purposes, with two states – Colorado and Washington – having gone the step further and legalized the recreational use of marijuana. The first Colorado shop to offer marijuana legally for recreational purposes opened its doors to the public in January.
Lori Schock, who is the head of the Office of Investor Education and Advocacy of the SEC, especially cautioned investors against falling for medical marijuana-related schemes, citing concerns that the commission had with regard to questionable practices of these organizations. Among the issues that the SEC found with Fusion Pharm involved inaccuracies with the company’s assertions of assets, financial statements, and revenues. The SEC also raised questions about some of the company’s business transactions and its financial condition.
The warning against marijuana-based companies is especially timely, given the high profile that such companies have enjoyed over the past few years. While the legalization of marijuana is seen by many as an important step toward acknowledging its potential in the treatment of many diseases and health conditions, it has also given rise to concerns of increased risk for investors looking to cash in on the medical marijuana boom. Elisha Frank, who is a co-chair of the microcap task force of the SEC enforcement division, said that the changes in the laws regarding the medical and recreational use of marijuana has brought about numerous new opportunities for fraud, particularly with regard to penny stock offerings. However, Frank did say that action is quickly taken on incomplete and/or inaccurate disclosures, as a means to protect investors.
The latest warning issued by the SEC is the second time that a government agency has highlighted the risk associated with investing in marijuana-related businesses. A similar warning was issued by the Financial Industry Regulatory Authority in August 2013. The organization, which is tasked with overseeing the brokerage industry, cited several examples of marijuana-related schemes involving “pump-and-dump” methods, and also of companies operated by individuals with records of criminal convictions.
Among the companies that were recently shut down by the SEC, most were questioned for inaccuracies regarding how their descriptions of their operations. Some companies were also questioned for illegal activities such as manipulation of the market and the unlawful sale of marijuana. In the wake of the widespread legalization that has swept throughout the country, the SEC has intensified efforts to track fraudulent activity in the microcap investment field, which has traditionally been a high-risk investment sector.