Feds Warn That Investing in Cannabis Companies Is Still Risky Business
Shares in Canadian marijuana firms are exploding on the U.S. stock market, but regulators believe the sector is rife with potential scams and manipulation.
Published on September 7, 2018

Photo via bfishadow

In just over a month, Canada will open the doors on the world's largest adult-use cannabis market, and investors all across North America are scrambling to invest in the lucrative new sector. Cannabis stocks have exploded on both the U.S. and Canadian stock markets as the legalization date draws near, but U.S. regulators are warning that fraudulent operators may be using the excitement over this new investment boom to scam unwary investors out of their hard-earned cash.

Although the majority of U.S. states have legalized marijuana in some form, federal law still prohibits financial institutions from handling funds connected with illegal drugs. This prevents American cannabis companies from going public on the stock market, but Canadian businesses that don’t operate south of the border aren’t subject to these restrictions. Several of the largest Canadian canna-businesses are now deciding to sidestep their local stock markets and take a shot at American finance.

This February, Toronto-based Cronos Group, one of the largest players in the Canadian market, became the first cannabis company to ever list on NASDAQ. Canopy Growth saw its market share increase by 100% after alcohol giant Constellation Brands invested nearly $200 million in the company. Constellation just increased its stake in Canopy by another $4 billion this year, causing yet another spike in its share price. Tilray, another major Canadian canna-business, has also seen its market value triple since July.

Investing in the Canadian cannabis industry seems like a sure bet, but the U.S. Securities and Exchange Commission (SEC) is warning investors that not every cannabis stock is legit. “Scam artists often exploit ‘hot’ industries to trick investors, including by making false promises of high returns with low risks,” the commission explained in a recent statement. “If you are thinking about investing in a marijuana-related company, you should beware of the risks of investment fraud and market manipulation.”

The SEC is warning investors to look out for several hallmarks of investment fraud, including unlicensed, unregistered sellers; guarantees of high rates of return on investments; and unsolicited offers made via email or social media. The agency also warns that “fraudsters may manipulate stock prices (for example, causing them to rise or fall dramatically) by spreading false and misleading information about a company.” Smaller cannabis “microcap stocks” may also be “more susceptible to market manipulation than stocks of larger companies,” the statement notes.

Just this week, the SEC busted a company for defrauding investors with a cannabis-related scam. Texas-based Greenview Investment Partners L.P. and its founder, Michael E. Cone, allegedly raised over $3 million by promising 24% annual returns from cannabis-related investments. The company allegedly cold-called investors and told them that Cone was a successful investor in the cannabis industry, and that the company had a former DEA agent on staff. According to charging documents, Cone used the money raised in the scam to buy designer clothes and luxury cars.

So if you’re looking to grow an investment in legal reefer, be sure to do your research first!

Chris Moore
Chris Moore is a New York-based writer who has written for Mass Appeal while also mixing records and producing electronic music.
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