In light of a recent Gallup poll that showed most Americans feel marijuana should be legalized, the commercial value of the drug is being evaluated more seriously than ever before. With marijuana being recognized as one of America’s most valuable cash crops, the speculation of massive profits has escalated in light of 20 states and the District of Columbia legalizing medicinal marijuana and two states — Colorado and Washington — legalizing recreational use.
As a result, the risk of investment fraud in commercialized marijuana has spiked. As marijuana is posed to become the next “big thing,” investors are positioning themselves to market potential opportunities in the virgin industry. “There will be significant financial returns for people who are smart,” said Brendan Kennedy, CEO of Privateer Holdings, a Seattle company that intends to be a big investor in the legal marijuana industry, to NBC News. “They see the opportunity. They see the inevitability. They see the Berlin Wall of cannabis prohibition being toppled.”
With marijuana-related stocks — such as Medical Marijuana, Cannabis Science, Growlife, GreenGro Technologies, Hemp and Medbox — being sold over-the-counter, investors are seeing opportunities in the decriminalization of the drug. However, the potential for market manipulation, for example — these companies usually sell their stocks at pennies per share, have market values of less than $150 million and typically do not have liquid securities, which makes share resell difficult and makes stock trades infrequent — makes investment in these companies risky, to say the very least.
“Many investors have made a quick buck betting on legalization via marijuana stocks over the past year,” wrote Alyssa Oursler of InvestorPlace. “Still others, though, have watched their investment fall flat following a big-time February spike.”
Marijuana as an investment scam
The possibility of hitting it big on one of these penny stocks, however, has driven adventurous or misinformed investors toward new marijuana companies as they open for trading. This is leading to a rash of con artists who are exploiting the novelty of the commercial marijuana business to create scam companies for stealing investment capital.
According to a press release from the Financial Industry Regulatory Authority (FINRA):
“Like many investment scams, pitches to invest in potentially fraudulent marijuana-related companies may arrive in a variety of ways—faxes, email or text message invitations to webinars, infomercials, tweets or blog posts … [The] offers almost always contain hallmarks of ‘pump and dump’ ploys. Specifically, 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).
“One company, for example, promoted its move into the medical cannabis space by issuing more than 30 press releases during the first half of 2013. These releases publicized rosy financial prospects and the growth potential of the medical marijuana market. The company was also touted on the Internet through the use of sponsored links, investment profiles and spam email, including one promotional piece claiming the stock ‘could double its price SOON’ and another asserting the stock was ‘poised to light up the charts!’ Yet the company’s balance sheet showed only losses, and the company stated elsewhere that it was only beginning to formulate a business plan.”
FINRA — an independent non-government organization authorized by the U.S. Security and Exchange Commission to be a not-for-profit regulator of American-backed securities — recently issued a Marijuana Stock Scams alert in an attempt to mitigate the toll of this scam. “Anytime something has cachet and people are paying attention to it, there’s the chance that people with evil intent will take advantage of that,” said Bill Beatty, director of the securities division in Washington state’s Department of Financial Institutions.
“The bitter irony is that there’s actually some legitimacy with the marijuana business — even for recreational purposes,” wrote James Brumley for InvestorPlace. “But the industry isn’t yet big enough nor legitimate enough to muster and sustain triple-digit gains in just a few days. Although it’s likely that most buyers of these stocks within the past week plowed into them calling it an ‘investment,’ the fact is it was a ‘trade,’ prompted by fear of missing out. There’s just little to nothing to miss out on yet.”
The possibility of commercial cultivation
While the Justice Department’s announcement to default to state laws in marijuana enforcement offers hope for commercial marijuana cultivation, the fine reality of this situation is that it is illegal by international law. The Single Convention on Narcotic Drugs of 1961 prohibits the production and supply of marijuana, unless utilized for research or medical treatment. As the federal government officially does not recognize any medicinal use for marijuana — it contends that the pain-relieving qualities of marijuana come psychosomatically or from the “high” received from consumption of marijuana’s psychoactive component, THC, neither of which are exclusive to marijuana — a future administration could choose to enforce full restrictions on marijuana, cracking the industry.
(As a side note, researchers have found that there are many compounds beside THC in marijuana that have the potential to fight pain or act in a medicinal sense, including at least one found to be cancer-fighting.)
Because of the potential for a government crackdown, it is unlikely that marijuana can be a commercial cash crop in the traditional sense. Typically, growers tend to run small operations and sell their crops to known buyers, limiting exposure to the outside. This culture of community anonymity was bred from decades of political opposition and fear of arrest and seizure, and is unlikely to change unless a major course change in federal policy — such as withdrawal from the Single Convention — occurs.
Canada as a model
This, however, has not stopped many from hedging their bets. Many companies are looking to Canada, whose passage of the Marihuana for Medical Purposes Regulations [ed. note: “marihuana” is the standard spelling in health and penal law in many jurisdictions] in June established the government licensing of commercial producers of medical marijuana. This effectively banned small producers under the pretense that it will ultimately lower the government’s administrative fees for the national medical marijuana program. The regulation also banned home growing.
While both patients and doctors dislike the move — which is thought to raise prices, reduce quality and force doctors to be the administrators of federal drug policy because the regulations would mandate a doctor’s prescription for medicinal marijuana — commercial growers love the idea. “Eventually, we are going to evolve it to a true medicine,” said Brent Zettl, the CEO of Prairie Plant Systems, which has held the lone government contract to grow the marijuana dispensed by the federal government, to the Globe and Mail. “We are going to be providing some choice for patients in more of a personalized medicine way, giving them more than just one brand, giving them five or six if necessary.”
“Up to this point, we’ve been competing with the street,” he said. “I think it will be a great day when I don’t have to play with somebody who doesn’t have to play by the rules, which I have had to do for the last 13 years.”
Genetically modifying marijuana
While there have been no significant indications to suggest the imminent arrival of Big Ag-style marijuana cultivation in the United States, there have been some troubling red flags.
For example, one multi-million dollar project of Monsanto, the world’s leading genetically modified seed producer, has concerned “RNAi” — RNA interference or post-transcriptional gene splicing. RNAi works by inhibiting specific genes on messenger RNA from producing a specific protein, which affects the cell’s gene expression. By doing this, RNAi can be used to alter the defining characteristics of an organism without altering the organism’s DNA. While Monsanto doesn’t appear to be engaged in marijuana seed manipulation, the mapping of the DNA sequence of Cannabis sativa, the proliferation of “feminized” marijuana seeds — seeds that are only capable of bearing female or flower-bearing plants — and the presence of “autoflowering” strains — plants that will blossom regardless of lighting conditions — seem to offer that possibility. (Currently, most modifications are done through chemicals or controlled environmental stress by the grower.)
Meanwhile, the University of Central Florida has a patent application pending for a technique to genetically manipulate Cannabis sativa and opium poppies toward increasing biomass, parasite resistance and active chemical potency.
The Daily Smoker, a marijuana advocacy website, explained the commercial possibility of Cannabis ruderalis — the most commonly available strain of “autoflowering” marijuana:
“For the cannabis grower and user whom is used to Cannabis sativa and Cannabis indica, the pure Cannabis ruderalis plant is not very interesting. The THC% of the Cannabis ruderalis is low and the yield per plant is significantly lower than of the sativa’s and indica’s. Commercially speaking this plant is not very attractive, and therefore it is hard to find the seeds of the pure Cannabis ruderalis.
“However the Cannabis ruderalis most definitely boasts some great benefits, of course mainly her autoflowering property. By crossing the Cannabis ruderalis with sativa and indica strains many cultivators have created interesting hybrids which boast benefits from both sides of these families.”
While it is unclear if commercial cultivation of marijuana will ever happen in the United State, it’s safe to assume that someone somewhere will try to benefit from the possibility. As Paul Waldman for The American Prospect indicated, the legalization of marijuana — if and when that may occur — may be more a factor of commercialism than is apparent now:
“So let’s imagine it was legalized federally, and large-scale growing and sales went corporate … When Big Cannabis is marketing its product, it will take the path of far less resistance: not reversing cultural understandings of the drug but playing on those that already exist. Pot will be sold as a vehicle of youthfulness and rebellion, a (now totally legal!) way you can stick it to The Man and proclaim your individuality. After all, for almost a half-century that’s the way they’ve been marketing almost everything to us, from cars to soft drinks to computers. Why should marijuana be any different?”