The recreational and medical cannabis industry is booming, and start-ups are sprouting like grass. With the legal pot market expected to grow from $2.3 billion this year to $10.2 billion by 2018, according to a study by ArcView Market Research, there’s no shortage of investors willing to gamble their capital on the chance of mountain-high marijuana returns.
The US Securities and Exchange Commission advises these investors to slow their roll. In the last two months it has suspended trading for five penny stocks of companies involved with cannabis, prompting a warning to the public about the legitimacy of marijuana-related investments and the likelihood of scams.
“Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud,” Elisha Frank, co-chair of the SEC Enforcement Division’s Microcap Fraud Task Force, said in a statement.
But a commentator on the emerging cannabis sector who calls himself the Wolf of Weed Street believes that three of the companies named by the SEC are legit businesses and have been for some time.
“GrowLife, FusionPharm, and CannaBusiness are like the OGs of marijuana stocks,” he said, speaking to VICE News on the condition of anonymity. He disclosed that he holds stock in FusionPharm, which the SEC suspended trading on last week.
FusionPharm and GrowLife manufacture equipment that can be used by marijuana growers. CannaBusiness is a real estate management company. Among the various reasons given for the suspension, the SEC acknowledged questions about the accuracy of information about finances and operations, and potentially manipulative transactions.
“GrowLife was one of my first pot stocks,” the Wolf said. “They’ve got seven brick and mortar shops, and do equipment. The SEC halted trading for stuff that was going on between the shareholders, and from what I know did not ask for any materials from the company.”
None of the companies listed by the SEC returned requests for comment.
Penny stocks — common shares of small public companies, also known as microcap companies, that generally trade below $5 and are quoted “over-the-counter” by dealer networks rather than listed on a national exchange — are highly volatile and often manipulated by stock promoters.
They are easily susceptible to pump-and-dump schemes in which double-dealers exploit growing industries by swindling unsuspecting investors with promises of a cash bonanza based on fabricated financial projections. The stock prices are artificially boosted by false or exaggerated profitability claims, and the schemers then sell their shares at considerable profit.
The SEC also warned of the risk of investing in an industry that flouts federal law.
But Matt Kumin, an attorney who has handled clients ripped off by sketchy cannabis penny stock companies in the past, told VICE News that it was “unlikely” investors in such companies would be prosecuted because the government “lacks the enforcement priority and resources to do so.”
“Everyone’s jumping in to make a buck, and the SEC’s actions are a logical consequence of the hyper-capitalism that’s in the cannabis industry,” he said. “Often the lack of business acumen of those unfamiliar with the complexities of financial markets contributes to problems when raising money via stock issue, much like the high-tech industry in the 90s.”
The Wolf acknowledged that some companies in the industry are most likely fraudulent.
“Some companies on the market deserve to be halted,” he said.
Experienced players also regard charlatans as an inevitable by-product of growth.
“One of the major challenges because we’re growing so rapidly is that we’ve become the target of penny stock hustlers,” said Steve DeAngelo, executive director of Oakland dispensary Harborside Health Center.
DeAngelo noted that scammers have sometimes quoted his public comments in their promotional materials without permission and entirely out of context. He thinks that the SEC’s crackdown will actually help the industry, which has long operated covertly.
“The industry needs credibility,” agreed Troy Dayton, the CEO of the ArcView Group, an investor network for the cannabis industry. “We need to be able to protect the public from people who are misleading them.”
Justin Hartfield, a co-founder of Weedmaps.com and a manager at Emerald Ocean, a venture capital firm focusing on the cannabis industry, expects the SEC’s alert to have a chilling effect on marijuana penny stock investors. It’s unlikely to dampen VC interest, however.
“There’s a huge opportunity,” Hartfield said, “There are more than 130 publicly-traded companies on the market, many of which have a solid foundation and are making revenue in legal ways. But it can be risky out there.”
The Wolf’s enthusiasm is unbounded.
“Cannabis is a virgin market, and it’s going to go the way of the stock,” he said. “We’re all Lewis and Clark and this is the dot-bong era.”
Follow Max Cherney on Twitter: @chernandburn
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