As marijuana becomes more and more lucrative, a new investor alert warns of an increase in marijuana stock scams.
As the legalization of marijuana — for medical or even recreational use — increasingly appears inevitable across the U.S., more and more Americans have begun to express interest in investing in the emerging ganja industry, which is projected to be worth about $9 billion in the next five years.
The Financial Industry Regulatory Authority (FINRA), however, which describes itself as the largest non-governmental regulator for all securities firms doing business in the U.S., issued an investor alert last week warning Americans about an increase in marijuana stock scams.
Enchanted by the prospect of finding financial success through investments in the plant and its psychoactive properties, FINRA warned that many con artists are enticing potential marijuana-industry investors with false and misleading information about stock in the budding industry.
Some marijuana-related organizations have applauded FINRA’s warning. Bruce Bedrick is the CEO of the West Hollywood, Calif.-based firm Mexbox Inc., which sells kiosks that dispense marijuana. He applauded FINRA’s decision to warn of marijuana stock scams, saying, “There are companies and individuals that prey on investors looking to enter this fast-growing market.
“We want these fly-by-night operations out of our industry, and support any regulatory authority in calling attention to the problem … We are in a period that is like the Gold Rush,” he said, adding that he’s in the business for the long haul.
“A lot of people think this is just, throw a few plants in the ground, raise them, sell them and make a lot of money,” said Tom Marty, a Colorado-based accountant whose clients have invested in marijuana. “It’s actually quite difficult to turn a profit in this industry.”
In FINRA’s alert, the organization shared an example of one unnamed company that “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. From the alert:
“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.”
According to the investor alert, the fraudulent offers are sent to interested investors via faxes, email, text message, infomercials, tweets and blog posts. Some even go so far as to send invitations to webinars.
“Investors considering investing in a heavily touted, thinly traded company should question why a total stranger would tell them about a really great investment opportunity,” said Gerri Walsh, FINRA’s senior vice president for investor education. “In reality, there is likely no true opportunity.”
Walsh recommended that “investors should always find out whether the promoter is licensed using FINRA BrokerCheck, and check out the investment using the Securities and Exchange Commission’s EDGAR database of company filings.”
When asked which marijuana-related companies attracted FINRA’s attention due to suspicious activity, Walsh declined to answer, citing FINRA policy to not discuss potential cases.
But Bruce Perlowin, CEO of the Las Vegas-based Hemp Inc., which sells hemp vitamins, candles and sexual enhancers, said he thinks the “absurd” warning is about him. Perlowin claimed he is being targeted because he formerly sold marijuana illegally and ran one of the largest marijuana smuggling operations in the history of the U.S. “That’s not a negative, nor is it something I’ve ever hidden,” he said while talking about his experience.
While stock in Hemp Inc. jumped from 1.5 cents to 10 cents in February, Perlowin insists “these are real products,” saying, “I’m the biggest investor in hemp out of my own pocket.”
Scams aside, investing in the marijuana industry is generally a risky endeavor.
As a report in the Chicago Tribune summed up,
“It’s hard to find a bank. It’s difficult to find insurance. The plants are finicky. Security systems are expensive. Good, trusted employees are hard to find. State laws change at the whim of legislators and regulators. And, of course, because the drug remains illegal under U.S. law, federal agents could swoop in at any time, shut the operation down and put its owners in jail.”
Michael Mayes is the CEO of the Chicago-based marijuana consulting and technology company Quantum 9, who also operates two marijuana cultivation centers and three dispensaries in Colorado. He said several potential investors he spoke with believe investing in marijuana has an immediate, large payoff. The reality, Mayes said, is that “if you’re swinging for the fences, you have to know you might strike out.”
Despite all of the known risks, there are hundreds of investors eager to spend thousands — in some cases millions — to get involved in the marijuana market. For example, Privateer Holdings, a Seattle-based company, is the first company in the U.S. to invest openly in the medical marijuana industry. So far the organization has raised about $7 million from its investors.
Though 20 states have passed legislation legalizing the use of medical marijuana, and two states — Colorado and Washington — have also legalized the use of recreational marijuana, the drug remains illegal federally, even for medical use. If legalized nationally, reports from Bloomberg Industries estimate the marijuana industry could be valued between $35 to $45 billion a year.
Part of the appeal in investing in marijuana, especially now when national prohibition remains in place, is that many expect the financial payoff to be similar to the one that resulted after the prohibition of alcohol ended in the U.S. in 1933.
Despite marijuana’s illegal status federally, there are a few online bazaar’s that discreetly sell and mail drugs to buyers around the world, including customers in the U.S. Some groups even uses the U.S. Postal Service to send the drugs.
One of those websites, Silk Road, draws an estimated 60,000 visits daily and grossed $1.2 million a month in the first half of 2012. Since the group has expanded its product offerings, estimates from Forbes have the organization raking in between $30 million to $45 million a year.
Another online drug seller, Atlantis, reported in June that it had accrued more than $500,000 in culumlative transactions in June alone.