Who’s Making Money Off the Marijuana Gold Rush?
On August 20, the Financial Industry Regulatory Authority — or FINRA — issued an alert to investors warning them about potential scams associated with marijuana-related stocks. The agency stated that: “With medical marijuana legal in almost 20 states and recreational use of the drug recently legalized in two states, the cannabis business has been getting a lot of attention — including the attention of scammers.”
Specifically, FINRA warned about the well-known ‘pump-and-dump’ scheme, in which “fraudsters lure investors with aggressive, optimistic — and potentially false and misleading — statements or information designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial success (the pump). Once share prices and volumes reach a peak, the cons behind the scam sell off their shares at a profit, leaving investors with worthless stock (the dump).”
The warning was timely. The conversation surrounding the legalization of medical marijuana in the United States has been thrust into the spotlight, and, inevitably, as the the nation moves toward some federal-level referendum on the drug, the private sector has begun digging in, bracing for practical legalization (some would argue this has already happened).
But it is important to point out that while it is absolutely true that investors should always have their guard up and be particularly rigorous in their approach to penny stocks and marijuana stocks, not every company in the space is a pump-and-dump scheme. Investors should be able to tell the difference between a viable investment candidate and a scam by examining company fundamentals, reporting history, transparency, and management. Who is in charge? What type of company have they built? Are they square with the SEC? Are they audited? And are they trying to hide anything?
Let’s take a look at a couple of companies in the space.