Following its move to suspend a fifth microcap company that claims to be engaged in the emerging marijuana industry, U.S. securities regulators issued a warning to investors about the risk of fraud in the space.
The U.S. Securities and Exchange Commission (SEC) cautioned investors about the potential for fraud in microcap companies that claim their operations relate to the marijuana industry, noting that it has now suspended trading in five of these companies within the past two months.
“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.”
The SEC says that fraudsters often try to exploit the latest growth industry to lure investors with the promise of high returns. And, the burgeoning marijuana business in the U.S. fits the bill right now as various states have started to relax prohibitions on the drug.
“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. “Wherever we see incomplete or misleading disclosures, we act quickly to protect investors.”
The SEC says that its Microcap Fraud Task Force scours the market to sniff out companies that are publicly disseminating information that appears inadequate or potentially inaccurate. It then has the authority to temporarily halt trading in these companies while it undertakes further investigation. Under the federal securities laws, the SEC 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.
“We know from experience that fraudsters follow the headlines,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, which prepared the investor alert. “Given the attention that marijuana-related companies have attracted recently, 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.”
On Friday, the SEC suspended trading in Denver-based FusionPharm Inc., which claims to make a professional cultivation system for use by cannabis cultivators among others. The agency says that 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.
Other marijuana-related companies in which the SEC recently suspended trading include Cannabusiness Group Inc., GrowLife Inc., Advanced Cannabis Solutions Inc., and Petrotech Oil and Gas Inc.