Investors in small cannabis companies lost $23.3 billion in 2014 because shady stock promoters are capitalizing on the slow tide of legalization in the US by manipulating the penny stock market with "pump and dump" schemes.
Penny stocks are stocks in small companies that trade for less than five dollars apiece. They're quoted and traded on dealer networks like OTC Markets because they don't meet the requirements to be traded on more formal exchanges like the New York Stock Exchange. They're also extremely volatile. Shady stock promoters capitalize on this volatility by convincing others to buy stock in worthless companies to increase their value temporarily—the "pump"—before selling them—the "dump"—leaving naive investors holding the bag.
In 2014, pot companies had the most drastic ups and downs for penny stocks according to data analyzed by Openfolio, a social network for investors to share which stocks they're trading. This indicates that pumping and dumping marijuana stocks has accelerated to a pretty insane degree.
"These stock promoters are unknown, and they intend to be"
According to the data, which Openfolio shared with Motherboard, stocks in Medical Marijuana Inc., an umbrella company that sells cannabis-based wellness products, are down 94.4 percent since their peak price in 2014 and investors lost a total of $1.7 billion. My Marijuana Canada, a company that grows and distributes medical weed, slid down a money ladder and is currently down 72.93 percent from its peak.
As a whole, penny stocks for marijuana are down 88 percent from their peak in the last year, while other penny stocks fell an average of 45.2 percent. As a result, the total dollar amount lost by investors is in the tens of billions.
"The volatility is mostly due to the novice investors who are flooding into the stocks on the promise that they'll find riches with the decriminalization/legalization of marijuana," Simon Burns, an Openfolio representative, wrote in an email. "In reality, few public marijuana companies are well positioned to capture this growth.
Your basic pump and dump scheme tends to target new industries with a lot of hype. And hype is what legal pot has in spades. In the last three years, several states have legalized recreational pot smoking. Just this week, Alaska hopped on the big, kush-laden legal weed bandwagon, following in the footsteps of Colorado and Washington state. Today, Washington, DC, legalized recreational toking.
But who is convincing novice investors to put their money in pot company penny stocks, when only a handful of states have legalized recreational herb?
"These stock promoters are unknown, and they intend to be," said Burns. "They're behind the scenes of these companies running email marketing scams, trolling forums and releasing disingenuous, promotional press releases. From what we see, marijuana penny stock promotion leads to stocks going up on days that there was is no reason for these stocks to rise. This rise can be directly attributed to new investors the promoters have convinced."
In May of 2014, the US Securities Exchange Commission (SEC) issued a number of trading suspensions for small pot companies after receiving an influx of complaints from traders suspecting pumping and dumping. Following that, the Financial Industry Regulatory Authority, a private company that regulates brokerage firms, issued its own warning to investors. In November of 2014, the SEC formally charged four men with undertaking a pump and dump scheme for marijuana penny stocks.
Pumping and dumping marijuana stocks has accelerated to a pretty insane degree
OTC Markets has also taken steps to ensure that investors aren't fooled into buying a pumped stock.
"Many of these stocks have been overvalued and we always caution investors about investing in overvalued securities," OTC Markets director of corporate communications Saskia Sidenfaden wrote in an email. "That said, if we discover a stock is subject to stock promotion without adequate information, we do place a Caveat Emptor [Latin for "let the buyer beware"], skull-and-crossbones, label on the security that appears on our website and is distributed on market data feeds reaching investors, broker-dealers, and clearing firms."
Sidenfaden also noted that stocks in Medical Marijuana Inc. are currently freely trading on the site since the company provides quarterly and annual financial filings. Weed Inc., a company that saw an 83 percent drop in penny stock price in 2014, however, is trading with a big red "STOP" sign on its page because the company is not providing financial information to potential investors.
How did we get to this point, where investors lost tens of billions of dollars over the course of a single year to sketchy investments pumped up by scammy promoters? Simple naivety, it seems, and the will to believe that a legal pot utopia in the US is nearer at hand than it really is.