With laws against cannabis consumption easing in several states, U.S. securities regulators are warning about the rising risk of marijuana-related stock scams.
The U.S. Financial Industry Regulatory Authority (FINRA) is reissuing an investor alert warning about possible stock scams in the wake of increased attention for pot-related businesses.
It notes that, in early January, new laws regarding the legalization of marijuana for medical and recreational purposes went into effect in a number of states. Medical marijuana is now legal in almost 20 states, and recreational use is legal in two states; and, as a result, “the cannabis business has been getting a lot of attention — including the attention of scammers,” FINRA says.
At the same time, media coverage of the issue has also increased, as has investor interest in shares of marijuana-related companies, FINRA says. “In some cases, volumes for the stock of otherwise thinly traded, marijuana-related companies increased dramatically — and prices became quite volatile,” it reports.
With the increased attention, the regulator is reissuing an alert “to warn investors not only about the potential for fraud in this arena, but also to reiterate the risks of investing in thinly traded companies about which little is known.”
Regardless of industry sector, any so-called ‘hot’ stock “can burn your portfolio,” it says. “Rather than getting swept away, take time before you invest to learn more about the company, its products or services and the people running it. And be sure you carefully assess the company’s prospects for success.”
It warns investors about pump-and-dump schemes that try to lure investors with potentially false and misleading statements designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial success.
Next: Avoiding stock scams
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Avoiding stock scams
To avoid potential marijuana-related stock scams, FINRA advises investors to question why a total stranger would contact them with “a really great investment opportunity”, and it stresses that they must consider the source of any such promotion.
“Do your research… Proceed with caution if you turn up recent indictments or convictions, investigative articles, corporate name changes or any other information that raises red flags,” it says. “For example, the CEO of one thinly traded, yet heavily touted, company that purports to be in the medical marijuana business spent nine years in prison for operating one of the largest drug smuggling operations in U.S. history.”
It also cautions investors about stocks quoted over-the-counter, which doesn’t have to meet any listing standards, and may not have a liquid market.