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Marijuana-Related Investment Fraud

The debate surrounding marijuana legalization in the United States continues to rage. While the federal government has not enacted any legislation to change the government’s prohibitionary stance on the drug, some states—most notably Colorado—have gone so far as to legalize the substance for recreational use. Some other states have at least decriminalized marijuana, or now allow its growth or use for some limited purpose. Indeed, even Florida, this year, enacted a medical marijuana law permitting its use for patients suffering from certain of illnesses and conditions.

With increased availability of a new product, however, comes greater ability for investors to make money. And with greater ability for investors to make money, comes a greater risk of fraud.

Agencies Warn of Risks

Earlier this year, Forbes published a story about the “first pot stock billionaire,” who himself admitted that much of his fortune was illiquid and more the result of speculation than actual market worth. Comparing marijuana stocks to the dot-com boom of the late 90s and early 00s, the article highlighted many of the risks that often attend investments in new and uncertain industries. Especially when investing in non-publicly traded securities of the penny stock variety, investors can be at risk for heavy losses.

But market volatility is not the only potential danger in the nascent marijuana investment market: in May, the SEC published an Investor Alert for marijuana investments.

“Fraudsters,” wrote the SEC, “often exploit the latest innovation, technology, product, or growth industry—in this case—marijuana—to lure investors with the promise of high returns.”

Because many of these companies are small or local in scope, they may not be subject to federal or state reporting requirements. With little information publicly available about a company’s prospects, schemers can more easily propagate misinformation.

On August 5, 2014, the SEC charged four penny-stock promoters, alleging that they manipulated the prices of several companies to create the appearance of an active market where there was none. While, according to the SEC, these companies had little or no actual business, those accused made over $2.5 million in unlawful profits. And two of these companies were marijuana-related.

FINRA, too, recently issued its own Investor Alert about marijuana stocks. It illustrated the dangers by describing one company’s efforts to promote itself, issuing over 30 press releases in six months and sending spam emails that claimed the stock “could double its price SOON” and that it was “poised to light up the charts!” All this, even though the company had yet to turn a profit or, seemingly, formulate a comprehensive business plan.

Illegality Still a Concern

In addition to the risks of fraud, the SEC importantly emphasizes that the substance remains federally prohibited (and illegal in many states, in some form or another).

“If you are considering investing in a company that is connected to the marijuana industry,” the agency warns, “be aware that marijuana-related companies may be at risk of federal, and perhaps state, criminal prosecution.”

If you think that you might have been the victim of fraud relating to marijuana investments, or investments of any other type, do not hesitate to contact attorney Gregory Tendrich, P.A. today.

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