The Securities and Exchange Commission today cautioned investors about the potential for fraud in microcap companies that claim their operations relate to the marijuana industry after the agency suspended trading in the fifth such company within the past two months.
The SEC issued an investor alert warning about possible scams involving marijuana-related investments, noting that fraudsters often exploit the latest growth industry to lure investors with the promise of high returns. “For marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company’s management, products, services, and finances,” the SEC’s alert says. “When publicly available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors.”
Spearheaded by its Microcap Fraud Task Force, the SEC Enforcement Division scours the microcap market and proactively identifies companies with publicly disseminated information that appears inadequate or potentially inaccurate. The SEC has the authority to issue trading suspensions against such companies while the questionable activity is further investigated.
As the markets opened today, the SEC suspended trading in Denver-based FusionPharm Inc., which claims to make a professional cultivation system for use by cannabis cultivators among others. According to the SEC’s order, the trading suspension was issued “because of questions that have been raised about the accuracy of assertions by FusionPharm” concerning the company’s assets, revenues, financial statements, business transactions, and financial condition.
“Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud,” said Elisha Frank, co-chair of the SEC Enforcement Division’s Microcap Fraud Task Force. “Wherever we see incomplete or misleading disclosures, we act quickly to protect investors.”
Other marijuana-related companies in which the SEC recently suspended trading are Irvine, Calif.-based Cannabusiness Group Inc., Woodland Hills, Calif.-based GrowLife Inc., Colorado Springs-based Advanced Cannabis Solutions Inc., and Bedford, Texas-based Petrotech Oil and Gas Inc.
Under the federal securities laws, the SEC can suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met. More information about the trading suspension process is available in an SEC investor bulletin on the topic.
“We know from experience that fraudsters follow the headlines,” said Lori J. Schock, director of the SEC’s Office of Investor Education and Advocacy, which prepared the investor alert. “Given the attention that marijuana-related companies have attracted recently, we urge investors to exercise caution when looking at investments in this space. Always thoroughly research the company – and the person selling the investment – before making a decision.”