By Nataliya Nemtseva, Spring 2014 Student Intern
Recent legalization of marijuana in two more states has caught interest of some businessmen and more marijuana-related companies are starting to surface. But while some see it as a legitimate business opportunity, others see it as an opportunity to make a quick buck off unsuspecting investors who haven’t done their homework.
Getting Investors Hooked
FINRA recently issued an alert reminding investors to be cautious of marijuana-related stock scams. These scams often begin with aggressive solicitation of potential investors through various media channels, emails and texts, tweets and press releases. The pitches may suggest access to inside information, exaggerate market or company performance and express confidence in promising profits, such as claims that stock prices are bound to go through the roof.
Blow the Scam Out of the Water
Do not be deceived by the stock promoters’ enthusiasm and promises of “high” returns. While making these forecasts to the public, some companies have been only in the beginning stages of business planning and are actually reporting continuous losses. In these situations, substantial gains may be made, but not by you. Rather these gains may come at your expense. Scammers often try to buy the stock cheap, then drive the price up by creating interest in the stock through deceptive or misleading pitches, only to sell their stock at a profit. Once they sell their stock, the price drops down and investors’ shares become worthless. This illegal practice is commonly known as “pump and dump.”
Search High and Low
To avoid finding yourself in this situation, take your time to research the company, its management and the stock promoter. The company’s financial documents may paint a very different picture than the one being presented to you or even appearing in the press. Do not take anyone’s word for it. Conduct your own investigation. Check the company’s financial reports for losses and disclosures of risks. Some reports may be filed with the SEC (but do read them carefully and critically). Also, check if any of the executives have a criminal record. Further, think about who the investment offer came from. Any reason that person would have your interest at heart? What role does this person play in this company and what he or she may have to gain?
Additional Risks to Consider
- There may not be an established market where you can readily sell this stock.
- While it looks like more states are moving towards legalizing marijuana, remember that use of marijuana remains illegal under federal law. This incongruity creates some uncertainty that may negatively impact marijuana-related business down the road.