The Alabama Securities Commission is cautioning investors about schemes and risks associated with marijuana-related investments.
Investments in marijuana business ventures are becoming more prevalent and are receiving increased media coverage. Scammers frequently use the latest “hot product” on the market to drive up interest and lure investors to get in on the “ground floor” of the next huge investment opportunity to convince investors to hand over money for risky or outright fraudulent marijuana ventures.
Common marijuana investment schemes:
- Reverse Merger Scam: The marijuana company’s promoters buy the stock of a publicly traded company that has no assets or current operations. The promoters use the public listing to create a false sense of security surrounding the marijuana business, and unscrupulous brokers collect commissions selling the stock to investors.
- Pump & Dump Schemes: A “Pump & Dump” scheme occurs when scammers use misinformation or tout an investment to pump up the price of a security and then dump their shares when the price gets high enough to turn a profit, leaving innocent investors holding with potentially substantial losses.
- Crowdfunding Schemes: Marijuana-related companies may try to use new crowdfunding rules to raise capital from a broad base of investors using the internet. Even without any fraudulent intent from promoters, these investments tend to be in risky, undercapitalized start-ups.
- Jurisdiction-Specific Illegal Marijuana Schemes: Scammers may make promises about insider information concerning a new law or regulation that will legalize marijuana in a jurisdiction where it is currently prohibited. Investors may be encouraged to “get in now,” buying low and making huge profits when a new law or regulation is enacted. In reality, there may not be any new laws or regulations pending, allowing the scammers to take the money and run.
Given the rapidly changing laws concerning marijuana, even an investment in a legitimate marijuana business may have extra risk.