HILARY BRICKEN ~ Above The Law ~
In Spring 2014, the Securities and Exchange Commission suspended trading in several publicly traded marijuana companies, including FusionPharm, Inc., Cannabusiness Group, Inc., GrowLife, Inc., Advanced Cannabis Solutions, Inc., and Petrotech Oil and Gas, Inc. In addition to those suspensions, the SEC issued a warning regarding investments in publicly traded marijuana-related stocks.
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Though we have no opinions about these specific marijuana companies, we do have an opinion regarding publicly traded pot stocks in general: BE CAREFUL.
According to the SEC, it “suspended trading in these companies because of questions regarding the accuracy of publicly-available information about these companies’ operations. For two of the companies, the trading suspensions were also based on potential illegal activity (unlawful sales of securities and market manipulation).” The SEC actually filed federal charges for market manipulation against four of GrowLife’s promoters and a securities fraud class action lawsuit by GrowLife investors followed soon thereafter.
Whenever there is a change in laws like what we have seen in Washington and Colorado (and to a lesser extent in Oregon and Alaska), the vultures begin to circle and the stock market is no exception. The Feds are having a field day targeting marijuana companies because these companies have shown a predilection for making incomplete or misleading disclosures. As early as August 2013, the Financial Industry Regulatory Authority began commenting on marijuana penny stock pump and dump scams and “instances of firms being run by people with criminal records.”
Despite the fact that the bubble has already arguably burst for marijuana stocks, there are still many publicly traded “pot companies” trading at frothy levels even though they are generally not well positioned to compete in the marijuana marketplace. In fact, it would not be an exaggeration to say that for every one publicly traded marijuana stock, there are ten far more advanced and economically sound privately held companies. The Seattle Times just yesterday wrote an interesting story about Diego Pellicer, a Seattle-based, over-the-counter pot company that just issued its first regulatory filing. The Seattle Times put it best:
The Top 5 Things You Don’t Want to Say when introducing a new public company might be:
No. 5. We’ve received a subpoena from the U.S. Attorney.
No. 4. We’ve only got one real paying customer.
No. 3. We’re not sure when we can actually collect any money from that customer.
No. 2. We’re lending money to keep that customer running.
No. 1. We’re not sure what the U.S. Attorney wants, but in the worst-case scenario, our officers could be imprisoned and our investors hosed.
Too many publicly traded companies are more focused on pumping their share prices up than on competing in the marijuana marketplace, and the herd mentality of investors seems to encourage this. The basic logic is that marijuana is booming so therefore any and all marijuana businesses must be booming as well. Investors that aren’t very familiar with the industry will buy shares in the most visible publicly traded companies because that is the only relatively easy way to cash in on the boom.
Not a good idea.
Just because a company is listed over-the-counter does not necessarily mean that it is up to no good. But companies trading over-the-counter are not subject to the strict reporting and transparency requirements of stock exchanges like NASDAQ or NYSE, and there is no denying that the over-the-counter market has been a breeding ground for fraudulent pot companies. Just as I previously urged that you do your due diligence before making a private marijuana investment, I urge you to do the same before you invest in any publicly traded marijuana company.
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